Advertising Assignment I

Journal of Business and Behavioral Sciences

Volume 31, No 2: Fall 2019

135

FAST FOOD CHICKEN: TO FRANCHISE OR NOT?

Ed Dittfurth

Steve Gerhardt

Sue Joiner

Tarleton State University ABSTRACT

As small business entrepreneurs decide to open or pursue a small business, one

important option available to most entrepreneurs involves whether or not to

purchase a fast food “franchise” or “licensed” business. An increasing number of

small businesses started during the last 30 years have involved some form of

franchise or licensing business. One major reason small business owners choose

to become franchisees or licensees is these small business models is that it allows

individuals to operate as if they were much larger enterprises or corporations with

hopefully better profit margins and lower risks than initially starting a business

from scratch.As one analyzes franchisee and licensee businesses, it appears there

are a variety of similar fees and monthly expenses related to all these businesses.

However, a large majority of potential entrepreneurs are still confused over what

fees are actually required and what sort of monthly profits one should expect. It

also appears a large number of fees and monthly expenses in the fast food industry

are based on the original McDonald’s Corporation fee structure started years ago.

Important insights can be gained by analyzing the concepts employed by

McDonald’s franchising with regard to fees and expenses as we accomplished in

earlier papers and presentations at the ASBBS Annual Conference in February

2011 (Volume 18, Number 1) and in February 2015 (Volume 11,Number 1 ).

Franchise/license fees, security fees, base rent fees, percent rent fees, service fees,

and royalty fees, not to mention the various purchase cost options and expected

annual revenues, all come into play when analyzing potential expected business

profits from fast food restaurants. In this paper, we will look specifically at the

fast food chicken industry targeting Chick-fil-A, Kentucky Fried Chicken (KFC)

and Chicken Express restaurants for bottom-line insights. Hopefully, in this paper

while analyzing the fast food industry’s monthly fees, expenses, and expected

revenues, we will be able to make enlightened comparisons and conclusions about

potential bottom line profits for chicken franchisees, as well as provide a general

model to analyze any fast food restaurant’s monthly bottom line potential.

Key words: Fast food chicken, McDonald’s, Chick-fil-A, Chicken Express, KFC,

Franchise

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INTRODUCTION

Caves and Murphy (1976) defined a franchise as “one lasting for a definite or

indefinite period of time in which the owner of a protected trademark grants to

another person or firm, for some consideration, the right to operate under this

trademark for the purpose of producing or distributing a product or service” (p.

572). This allows small business potential owners the opportunity to operate a

successful business while minimizing risk.

Numerous times when small business entrepreneurs are considering the fast food

industry or attempting to become a franchisee or licensee, the question of fees and

bottom line profits are a major concern. In earlier published papers with the

American Society of Business and Behavior Sciences, we have investigated and

made comparisons of the fees, purchases, expenses and the projected annual

revenues of various fast food restaurants all in comparison to McDonald’s model

of franchising. Table I lists key researched financial data for KFC, Chicken

Express and Chick-Fil-A restaurants along with baseline McDonald’s data. In this

table you will see different monthly fees, different projected annual revenues as

well as the differences in initial purchase expenses. These differences are key

financial indicators for us to analyze and consider in looking at bottom line profits

of our individual chicken franchises which could also be applied to any franchise

or license type of restaurant. We will use the researched data on franchises and

licensed companies (Table I) to determine generic profit and loss (P&L) statements

which reflect bottom line profits.

For our data analysis and comparison, we will use basic descriptive statistics to

summarize and present data comparing the franchise model of McDonald’s to

serve as a baseline while looking at the fast food chicken franchises. Kentucky

Fried Chicken (KFC), Chicken Express and Chick-fil-A will be three franchises

we analyze in the fast food chicken. We will use a systematic comparison of 1)

monthly franchise fees, 2) common industry expenses, and 3) projected annual

revenues of these three different restaurants to figure monthly bottom line profits.

This methodology will present opportunities for potential owner/operators looking

into in these types of businesses to make solid decisions on what works best for

their future financial success based on the data collected and the model presented

for each of our 3 selected fast food chicken restaurants. Past and present literature

searches and reviews on “franchising” and “licensing” offers little if any

substantial data for comparisons of bottom line profits or monthly P&L’s. This is

the area that we hope to address with our research in this paper.

Dittfurth, Gerhardt and Joiner

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TABLE I

BASE-LINE FEES & EXPENSES

McDonald’s Chicken

Express

KFC Chick-fil-A

Monthly Fees

% Rent

(Royalty)

8-13% of sales 8-12.5% of

sales

*lease

8-10% of

sales

*lease

*royalty 5%

15% gross

sales

50% profit

Service Fee

(Advertising)

4% of sales 4.25% 5% of sales None

Purchasing

Expenses

Purchase Price Varies Varies Varies None-no

equity

% Down of

Purchase Price

25% 10-25% 25% None-no

equity

Franchise Fee $45K $10K $45K $5K

Security Fee $15K None 2% None

Projected Annual

(Revenues)

$1.5-$2

million

$1.5-$2

million

$1.2-$1.3

million

$2-$3

million

Lease

Agreement

20 years 20 years 20 years Year to year

TRADITIONAL McDONALDS’s FRANCHISE --- MONTHLY BOTTOM

LINE

When figuring the monthly bottom line for a McDonald’s restaurant, we are

considering a traditional or stand-alone building. The traditional franchise of

McDonald’s usually includes an ongoing service fee of approximately 4 % of the

monthly sales/revenues of that particular store. This 4% is used for advertising

and marketing. This may also be referred to as the advertising fee. This money is

Journal of Business and Behavioral Sciences

138

used for TV, radio, internet advertising/promotions, as well as other marketing

choices. In addition to this 4%, there is an ongoing “monthly percent rent fee”

(royalty fee) of 8.5% to 13% of monthly revenues due to McDonald’s Corporation

for use of the building which is usually owned by McDonald‘s Corporation. These

fees are shown in Table I. This rent is based on McDonald’s Corporation owning

the land and building for that particular restaurant. These McDonald’s “monthly”

fees and expenses are separately illustrated in Table II. This rent percent/royalty

fee can be reduced in rare cases where the franchisee owns the building. There

may be a few cases where the franchisee owns both the building and the land, but

McDonald’s Corporation usually owns the land and the majority of buildings

where McDonald’s restaurants are located. Hence, McDonald’s has become one

of this country’s largest commercial real estate holding companies, owning

thousands of prime commercial locations throughout the United States. Average

revenues for a traditional McDonald’s are in the neighborhood of $1.5 - $2 million

per year. For this paper, we will estimate the monthly revenue to average around

$150,000 per month ($150,000 x 12 months=$1.8 million) for a McDonald’s.

Table III presents a generic P&L of all the monthly fees and revenues (sales) for

this franchise. After considering McDonald’s monthly service or advertising fee

of 4% and percent rent (8.5%-13%), we used the 4% advertising fee and an

average of 10% for the percent rent to figure monthly bottom line profit for a

McDonald’s (Table III). We then added in industry average expenses for other

items such as labor (25%), food (30%), utilities (5%) and miscellaneous expenses

(5%) to figure an approximate bottom line monthly profit, before mortgage, of

$31,500 (Table III). This is for an average traditional McDonald’s restaurant. In

this example, we also estimate a monthly payment for a mortgage of approximately

$10,000 based on industry averages. This number would vary depending on the

purchase price, term of the loan and interest rate. This would result in a monthly

bottom line of approximately $21,500 to the McDonald’s franchisee and could

increase to $31,500 per month once the mortgage is paid off. Table III illustrates

a generic model/P&L with revenues (sales), franchise fees and other industry

expenses all included, that we can now use, to look at other fast food franchises,

like those found in the fast food chicken industry.

Dittfurth, Gerhardt and Joiner

139

TABLE II

“Monthly Fees” to McDonald’s Based on Monthly Sales (Revenue)

Of $150,000.00 Per Month

Estimated: Monthly Sales/Revenues

150,000.00

X .10

15,000.00

Percent Rent Fee (Figuring 110%)

$15,000.00

Service (Advertising Fee – 4%)

$150,000.00

X.04

$6,000.00

From Monthly Sales of $150,000.00 franchisee pays $15,000 + $6,000 = $21,000.00

To McDonald’s. Four percent is the monthly advertising fee – 2% for National

Advertising and 2% for Regional Advertising.

TABLE III

McDonald’s Month Bottom Line (Approximate)

Per Month Sales $150,000

Percent Rent (At 10%) -$15,000

Advertising (4%) - $6,000

Labor (25%) - $37,500

Utilities (5%) - $7,5000

Misc. (Insurance, Repairs, Uniforms) (5%) - $7,500

Total Expenses $118.500

Franchisee Bottom Line (w/o Mortgage) $31,500

Mortgage Payment - $10,000

Franchisee Bottom Line (w/Mortgage) $21,500

At Store Sale: McDonald’s Franchisee gets equity from business sale

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TRADITIONAL KENTUCKY FRIED CHICKEN (KFC) FRANCHISE

KFC’s were started in 1952 in Salt Lake City, Utah. KFC’s current business

strategy has been aimed at international growth while also emphasizing freshly

made products. As of 2017, there were 21,487 KFC’s operated worldwide with

4,570 of these stores in the U.S. These stores saw a 3% growth in same-store sales

in 2017. KFC’s are a part of the larger corporation called Yum Brands. This

brand also includes Taco Bell and Pizza Hut. A large portion of the KFC’s are

traditional stand-alone buildings with smaller satellite KFC units also found in

airports, gas stations, etc. KFC’s are similar to McDonald’s in that there is a legal

franchise agreement lasting 20 years between the franchisee and KFC. This

agreement will state the monthly fees due to KFC. One such fee is an advertising

fee of 5% which is broken down into 2% for national KFC advertising and 3% for

local advertising. This 5% is similar to McDonald’s advertising fee but 1% higher

(4% vs. 5%). Additionally, KFC charges a monthly rent Royalty Fee of 5% of

gross sales/revenue or a minimum of $600 per month for each KFC restaurant.

This Royalty Fee is in addition to any mortgage payment or lease the franchisee

may be paying for the existing building. This is unlike McDonald’s where the

majority of restaurants and land are solely owned by McDonald’s.

In addition to the monthly fees mentioned, there are additional costs in purchasing

a KFC. The actual purchase price of an existing traditional location again varies

and is based on previous sales, location and good-will pricing involved. Like

McDonald’s, KFC usually requires/desires that the franchisee put down at least

25% of the negotiated price of the traditional KFC being purchased from personal

funds. KFC can also charge a security deposit of 2% of the purchase price of the

restaurant. Additionally, KFC, like McDonald’s will charge a $45,000 Franchise

Fee for the franchise agreement for reach specific restaurant. KFC does maintain

the right to charge $2,300 for new franchise training, and there may be some

additional expenses for computer systems, signage and new restaurant equipment.

One significant difference between KFC and McDonald’s is the percent rent or

royalty fee. As stated earlier, McDonald’s charges 8-13% of monthly sales while

KFC charges 5% of monthly sales in addition to any lease or mortgage that the

franchisee may encounter. KFC charges a monthly advertising fee of 5% while

McDonald’s charges 4% of monthly sales. Average projected revenue for the

traditional KFC is $900,000-$1,100,000 per year when figuring fees and profits.

All of the KFC monthly fees and expenses are summarized and compared in Table

I. (www.franchisedirect.com; www.kfc.com; www.franchise-insider.com ) Using

these projected revenues and monthly fees, we can now estimate a bottom line

profit for potential franchisees in Table IV. The average monthly bottom line for

a KFC turns out to be approximately $25,000 per month without a mortgage and

about $15,000 if a mortgage is involved. KFC provides equity in the business to

Dittfurth, Gerhardt and Joiner

141

the franchisee when the business is sold. These bottom line results will be further

discussed in the conclusion.

TRADITIONAL CHICKEN EXPRESS FRANCHISEE

Chicken Express is a growing family owned (Stuart’s) franchisee operating out of

Texas. In 1988 this regional franchise opened its first stores in Mineral Wells and

Benbrook just outside of Fort Worth, Texas. The family owned franchisee began

growing in the 1990’s by opening additional stores in north Texas. Today the

franchisee has branched into Oklahoma and Louisiana and extending east as far

as into Georgia. By the late 1990’s the family franchisee had grown to 60 stores.

Today the franchisee that began in 1988 has grown to 270 stores. The franchise is

still family owned and privately held by Stuart Enterprises.

TABLE IV

KFC Average Monthly Bottom Line (Approximate)

Per Month Sales $100,000

Royalty Fee (5%) - $5,000

Advertising (5%) - $5,000

Labor (22%) - $25,000

Food & Paper (30%) - $30,000

Utilities (5%) - $5,000

Misc. (Insurance, Repairs, Uniforms) (5%) - $5,000

Total Expenses 75,000

Franchisee Bottom Line (w/o Mortgage) $25,000

Mortgage Payment - $10,000

Franchisee Bottom Line (w/Mortgage) $15,000

At Store Sale: KFC Franchisee gets equity from business sale

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In the first years of existence the Stuart’s expanded the Chicken Express name by

being one of the first fast food chicken delivery businesses. Their slogan was “our

chicken can’t fly, so we deliver”. The delivery business proved very successful in

spreading the word about their quality product. As a result, during the period of

between 1990 and 1994 all franchisees utilized the dine-in, drive-thru, and/or

delivery concept. Now with more stores in more locations the main business

strategy has evolved into drive-thru, dine-in, carhop, and/or catering. Table I show

the fees and expected revenues for the average Chicken Express. Most of these

franchisees have an average monthly royalty fee of 10% with an advertising fee of

4.25% of the monthly revenue. The average revenue per store varies but appears

to be approximately $150, 000 per month. Combining these numbers with average

industry data of approximately 25% for labor, 30% for food/ paper, 5% for utilities,

with an additional 5% for miscellaneous expenses, we can then calculate bottom

line profits as shown in Table V. The Chickens Express bottom line profit of

$31,125 without a mortgage and $21,125 with a mortgage are very similar to what

we see in McDonald’s profits and better than the KFC numbers due to the larger

monthly revenues. Chicken Express also provides equity in the business which

goes with the franchisee when the business is sold. Chicken Express results will

be further discussed in conclusion.

TABLE V

Chicken Express Average Monthly Bottom Line (Approximate)

Per Month Sales $150,000

Royalty Fee (10%) -$15,000

Advertising (4.25%) -6,375

Labor (25%) -$37,500

Food & Paper (30%) -$45,000

Utiliites (5%) -$7,500

Misc. (Insurance, Repairs, Uniforms (5%) -$7,500

Total Expenses $118,875

Franchisee Bottom Line (w/o Mortgage) $31,125

Mortgage Payment -$10,000

Franchisee Bottom Line (w/Mortgage) $21,125

At Store Sale: Chicken Express Franchisee gets equity from business sale

Dittfurth, Gerhardt and Joiner

143

TRADITIONAL CHICK-FIL-A LICENSEE/FRANCHISEE

Chick-fil-A has roots going back to 1946 as a family owned restaurant in Georgia.

Chick-fil-A is currently #8 in total yearly revenues among fast food franchises but

is quickly growing in the U.S. Chick-fil-A appears to be the people’s favorite for

fast food chicken. Presently there are only approximately 1,887 Chick-fil-A’s in

the U.S. compared to 4570 KFCs and 270 Chicken Express restaurants. Even

though they are closed on Sundays, their annual store revenues range an impressive

$2-$4 million per store or average approximately $3 million per store. They place

heavy emphasis on quality and lower calories over speed of service. They are

targeting millennial moms and proving to be very successful with this strategy.

The majority of Chick-fil-A’s are traditional free standing locations. These

restaurants are operated by an individual who is operating the restaurant for Chick-

fil-A on a year to year licensing agreement. Unlike most other franchises, Chick-

fil-A operators serve basically as partners with the Corporation, sharing bottom

line profit, but acquire no equity/ownership in the restaurant. Chick-fil-A’s are not

bought and sold by franchisees since Chick-fil-A retains all equity in the business.

Hence, there are no purchase expenses or percent down payments when serving as

the licensee of a Chick-fil-A. The year to year agreement between Chick-fil-A and

the licensee does, however, involve a $5,000 initial fee which is substantially less

than the $25,000-$50,000 found in most initial Franchise Fees for a 20 year service

agreement. Chick-fil-A’s licensed partners basically sublease restaurants from

Corporation and then serve as managing partners in the restaurant. There are also

no advertising fees since Chick-fil-A maintains control over advertising. We will

now look at a “licensed” Chick-fil-A and note the differences we detect from the

previous “franchised” stores we have analyzed. We will again use the Table I data

for a Chick-fil-A to find our key numbers for revenue and expenses. From Table

I we can see key difference between our franchises (McDonald’s , KFC, Chicken

Express) and our licensed Chick-fil-A, There are significantly higher projected

annual revenues for a Chick-fil-A store along with the significantly higher royalty

fees to include a 50% sharing of bottom line monthly profits. When we compute

an bottom line chart (Table VI) for Chick-fil-A, we used an average store monthly

revenue of $250,000 (based on an annual revenue of $3 million) to put us in line

with the expected annual revenues found at a Chick-fil-A store. Chick-fil-A

charges its licensees 1) 15% royalty on the monthly revenue as well as 2) 50% of

the final bottom line profit. We used the normal industry expenses of 25% for

labor, 30% for food, 5% for utilities, and another 5% for miscellaneous expenses.

Again, there are no advertising fees charged to the Chick-fil-A licensee since this

expense is paid by the corporation. The average bottom line profit to the licensee,

based on the expenses and revenues, turns out to be approximately $25,000 per

month as shown in Table VI. This licensee option does not include a mortgage

cost since the licensee has no equity in the business, with the building, equipment

Journal of Business and Behavioral Sciences

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and décor all being owned by the corporation. These results will be further

discussed in the conclusion.

TABLE VI

Chick-fil-A (Licensee) Average Monthly Bottom Line (Approximate)

Per Month Sales $250,000

Royalty Fee (15%) -$37,500

Advertising (0%) $0

Labor (25%) -$62,500

Food & Paper (30%) -$75,000

Utilites (5%) -$12,500

Misc. (Insurance, Repairs, Uniforms (5%) -$12,500

Total Expenses $200,000

Bottom Line Profit Before Split $50,000

Mortgage Payment -$0

Bottom Line Corp. (50%) $25,000

Bottom Line Licensee (50%) $25,000

At Store Sale: Chick-fil-A Licensee has “zero” equity in business

CONCLUSION

Once you have determined the various per cents of revenue required to be paid in

franchise fees and the projected annual revenues that a normal franchise can expect

to make (as shown in Table I), you can formulate a basic or generic profit and loss

statements to estimate monthly bottom line profits. These franchise fees and

revenue estimates can be obtained through the corporate franchise (Uniform

Franchise Offering Circular – UFOC) for potential franchisees/licensees. This

information can also found through researching corporation franchise websites and

annual reports. In this paper all the fees and revenues were researched and then

displayed in Table I. This type of information can significantly help a potential

franchisee/licensee determine their monthly profit for any fast food chicken

franchise being analyzed.

Dittfurth, Gerhardt and Joiner

145

In this paper we did not consider or discuss the actual costs of purchasing the

franchise which would determine the actual mortgage payment amount. Purchase

prices for franchisees are usually based on a percent of past annual sales/revenues

and usually negotiated between the buyer and seller. For our purchase price we

estimated mortgage payments based on approximations of what we felt were

reasonable numbers for a seven year note. These mortgage payments could also

vary based on the amounts initially put down. When a potential

franchisee/licensee is analyzing and comparing bottom line profits (Tables I-VI),

they can also analyze the impact of the monthly franchise fees, normal industry

expenses and the average monthly revenues. This technique of subtracting the

appropriate corporate fees and common expenses (food, labor, etc.) from the

projected monthly revenues, provides numerous useful insights. The potential

franchisee/licensee can now figure what sort of mortgage payment can realistically

be made, as well as, what sort of food and labor targets need to be set and

established in order to be profitable. A potential franchisee/licensee can now use

this generic model to analyze any fast food franchise to make comparisons and

analyze potential profits.

KFC follows along the guidelines of a typical franchise. They charge a royalty fee

approximately 5% of the monthly revenue and another 5% for national advertising

or marketing of their products. While average monthly revenue for a KFC is

approximately $100,000, this is significantly less than the monthly sales at a

Chick-fil-A (approximately $250,000). You will notice in Table IV, however, that

a KFC franchisee can earn a bottom line profit of approximately $25,000 per

month without a mortgage or $15,000 per month if a mortgage is still in place.

When the KFC franchisee decides to sell his franchise he will receive whatever

equity he has established in that store and business. KFC franchisees are allowed

to own multiple stores which extremely important to some potential franchisees.

Chicken Express follows the set-up of a typical franchise with regard to fees and

expenses. It is currently only a regional restaurant but with financial numbers that

indicate a bright future. Chicken Express store revenues look very promising for

a regional franchise (approximately $150,000). The franchise fees (10% and

4.25%) along with their industry expenses are in line with their competition as

shown in Table I. In Table V you can see the estimated bottom line profits of

$31,125 per month without a mortgage and $21,125 with a mortgage are better

than KFC and Chick-fil-A once the mortgage is paid off. Chicken Express also

allows multiple store ownership and provides equity in the business when sold.

As mentioned, Chick-fil-A’s monthly revenues ($250,000) are significantly larger

than other competitors in the chicken fast food industry. These revenues are in

light of the fact that Chick-fil-A stores are also closed on Sundays---which

probably also helps reduces employee turnover rates. Chick-fil-A’s monthly

Journal of Business and Behavioral Sciences

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bottom line profits are approximately $25,000 per month (Table VI). This

compares to the KFC number when the KFC franchisee has finished paying off a

mortgage. You will notice in Table V that the Chick-fil-A licensee pays a 15% fee

of top line revenues to the Corporation as well as a 50% of the bottom line. The

Chick-fil-A licensee has no mortgage and no equity in the business since the

corporation actually owns the business. The Chick-fil-A licensee is essentially a

managing partner. Chick-fil-A is rumored to prefer single store licensees who will

be in the store daily and working. It appears that these licensees do very well

financially in light of no owner equity in the business. These are all things to be

considered when looking into the fast food chicken industry.

It appears all of our analyzed companies can be profitable in varying degrees. One

should not overlook the fact that this model does not always reflect true bottom

lines since the amount of time and effort put in by the franchisee/licensee will

significantly impact bottom line success. Potential franchisees/licensees, using

this model, can now consider various variations of revenues and expenses that best

fits their management style. Another fact to be considered is the ownership of

multiple fast food restaurants. One should not assume that each individual store

in a group of multiple stores will perform as well as one individual store as shown

in our bottom line results. Owning multiple stores usually results in reduced

bottom line profits of the individual stores. In other words, owning three Chicken

Expresses will not result in a bottom line of 3 X $31,125. You should expect

something less due to management issues of increased food and/or labor. This is

a similar phenomenon in all franchised/licensed fast food stores. Hopefully, our

simple but yet effective method of analyzing fast food bottom line profits is a tool

for potential franchisees/licensees would consider before purchasing any fast food

business.

REFERENCES

Caves, Richard E. & Murphy II, William F. (1976). Franchising: Firms, markets,

and intangible assets.” Southern Economic Journal, 42, 572-586.

Chick-fil-A franchise. (n.d.). Retrieved from

https://www.franchisehelp.com/franchises/chick-fil-a/

Elango, B. (2007). Are franchisors with international operations different from

those who are domestic market oriented? Journal of Small Business

Management, 45(2), 179–193.

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Gerhardt, S., Hazen, S., Lewis, S. E. (2014). Small business marketing strategy

based on McDonald's. American Society of Business and Behavioral

Sciences, Vol. 10(1), 104-112.

Gerhardt, S., Hazen, S., Lewis, S., & Hall, R. (2015). Entrepreneur options:

Franchising vs. licensing (Mcdonald’s vs. Starbucks and Chick-Fil-A).

American Society of Business and Behavioral Sciences, 11(1).

KFC Kentucky fried chicken franchise. (n.d.). Retrieved from

http://www.franchisehelp.com/

franchises/kfc-kentucky-fried-chicken/

McDonald’s franchise. (n.d.). Retrieved from

http://www.franchisehelp.com/franchises/mcdonalds/

Stuart. (2018). Our Story. Retrieved August 15, 2018, from

http://chickene.com/our-story/

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