The Efficiency Differences Between Franchisee-Owned and Franchisor-Owned Full-Service Restaurants Across U.S. States

The Restaurant Industry

Franchising plays an important role in the U.S. Restaurant Industry. According to the 2012 U.S. Economic Census, franchise restaurants numbered almost 151,000 or about one third of all full¹ and limited-service² restaurants in the U.S. Franchising is much more prevalent in the limited-service sector with about 122,000 or 54% of the total number of limited-service restaurants, which numbered about 225,000 in 2012.

This compares with 29,000 or 12.5% of the total number of full-service restaurants which numbered almost 231,000. The map below illustrates the geographic distribution of full-service restaurants in the U.S. The number by state ranged from 554 in Wyoming to just over 28,000 in California.

The Number of Full-Service Restaurants by State 2012
(Scroll over a state to highlight details)

Despite the role played by franchise restaurants, there is little information available on the efficiency³ of full-service franchise restaurants compared to full-service non-franchise restaurants. Our post therefore examines the effects of franchising on the efficiency of full-service restaurants at the state level. We do this by using a series of Data Envelopment Analysis models to measure the aggregate efficiency of restaurants at the state level. We first examine all full-service restaurants and follow by comparing the efficiency of non-franchise restaurants with franchise restaurants. Finally, we examine the difference in efficiency of franchisee-owned restaurants and franchisor-owned restaurants.

Data released in the 2012 Economic Census for Accommodation and Food Services was used in our analysis. Full-service restaurants comprise establishments primarily engaged in providing food services to patrons who order and are served while seated (i.e., waiter/waitress service) and pay after eating. These establishments may provide this type of food service to patrons in combination with selling alcoholic beverages, providing carry out services, or presenting live nontheatrical entertainment.

Based on our analysis of the aggregate performance of full-service restaurants at the state level, we find a statistically significant difference between the mean efficiency of franchise and non-franchise full-service restaurants, with non-franchise full-service restaurants slightly more efficient than franchise full-service restaurants (Two-tailed p value = 0.03722). We also demonstrate that of the franchise full-service restaurants, the franchisee-owned restaurants were more efficient that the franchisor-owned restaurants.

Data Envelopment Analysis

For the purposes of determining the efficiency of the full-service restaurant industry in each state, we used Data Envelopment Analysis (DEA). DEA is a non-parametric linear programming technique that computes a comparative ratio of outputs to inputs for each unit (state in our case), which is reported as the relative efficiency score. The efficiency score is usually expressed as either a number between zero and one or 0 and 100%. A unit (state) with a score less than one is deemed inefficient relative to other units (states). DEA’s main usefulness, however, lies in its ability to generate potential improvements (i.e. achievable targets) for inefficient units and identifying the units to benchmark. DEA modeling allows for the selection of inputs and outputs. For the purpose of choosing a final set of inputs and outputs we examined:

Non-discretionary or uncontrolled inputs (number of restaurants, population and medium household income)
Discretionary or controllable inputs (annual payroll, number of paid employees and number of seats), and
Outputs (value of sales)

Our final model used three inputs; number of restaurants, state population, annual payroll and one output; sales. Detailed statistics for the inputs and outputs for each of the states are found in the table at the bottom of the post. The data set was analyzed under the assumptions of input minimization and variable returns to scale. For an explanation of how DEA has been used to determine the efficiency of individual restaurants, please refer to the articles listed at the end of the post.

Results

The following table shows the relative efficiency scores for the different sectors of the full-service restaurant industry in each of the 51 states. The full-service restaurant industry in twelve states, including California, New York, Texas and Florida was deemed efficient, while in 39 it was deemed inefficient with and average efficiency score of 90.5%.

Efficiency Score Ranking for Full-Service Restaurants Across U.S. States

State	All Restaurants	Non-Franchise Restaurants	Franchise Restaurants	Franchisee-Owned Restaurants	Franchisor-Owned Restaurants
Alaska	100	100	88.2	96	n/a
California	100	100	100	100	100
District of Columbia	100	100	100	100	100
Florida	100	100	100	100	100
Hawaii	100	100	100	100	92
Massachusetts	100	100	82.5	84.4	75.8
Nevada	100	100	100	100	100
New Jersey	100	100	100	98.5	100
New York	100	100	100	100	89.8
North Dakota	100	100	100	100	65.6
Texas	100	100	100	100	100
Wyoming	100	100	100	100	100
Delaware	98.4	95.9	100	100	100
Montana	98.4	99.7	96.8	n/a	n/a
Mississippi	98.4	97.5	100	93.1	99.3
Maryland	98.3	98.4	90.6	89	85.3
Pennsylvania	96.6	98.3	85.7	84.5	80.4
Rhode Island	95.2	94.7	96.3	83.6	71.2
South Dakota	95	95.3	95.8	93.5	100
Illinois	94.1	94.9	89.8	82.2	98.2
West Virginia	94	94.6	86.4	85	88.8
Vermont	92.5	90.4	100	88.2	84
Virginia	92.5	92	97.2	100	73.9
Georgia	92.1	93.4	100	100	82.8
Arkansas	92	92	89.2	91.6	68.9
Connecticut	91.9	93.1	81.7	85	68.7
Wisconsin	91.8	94.2	79.3	81.4	59.3
South Carolina	91.6	93.4	87.6	87.4	73.3
Oklahoma	91.5	92	90.4	89.1	80.2
Ohio	91.5	88.8	100	92.5	100
Idaho	91.3	90.5	85.4	87.2	51.4
Nebraska	91.2	94.3	75.2	72.3	76.2
North Carolina	90.2	90.2	94.2	92.4	82.6
Alabama	89.9	88.7	96.9	100	73.1
Michigan	89.7	91.7	87.9	91.2	68.3
Louisiana	89.4	89	88.9	85.7	91.3
Kentucky	89.2	89.9	93	92	92.7
Kansas	88.6	89.4	89.6	94.1	69.4
Iowa	88.4	90.3	84.6	88.2	63.8
Indiana	88.2	86.7	100	100	100
Oregon	86.8	87.6	82.2	77.4	100
Minnesota	86.5	87	86.1	82	85.9
Tennessee	86.4	85.7	91.7	94.1	83.6
Missouri	85.8	86.9	88.7	86.8	77.8
Maine	85.6	86.1	72.5	75.3	58
New Mexico	85	85.7	78	77.6	73.3
Colorado	84.9	84.7	83.2	81.7	74.9
Utah	84.9	85.5	75.2	76.7	67.5
Arizona	83.8	83.6	84	83.7	72.5
New Hampshire	83.6	83.7	72.9	75.2	71.9
Washington	82.8	82.7	82.8	82.1	78.5
Average	92.7	92.9	90.8	90.0	82.7

Source: Hotel Investment Strategies, LLC based on an analysis of U.S. Census Bureau Data (2012 Economic Census for Accommodation and Food Services NAICS Sector 72)
Please feel free to download the heat-map of efficiency scores for full and limited service restaurants across U.S. states: Efficiency Score Ranking for Full & Limited Service Restaurants Across U.S. States

Using a paired t test we found the difference in mean efficiencies for non-franchised and franchised full-service restaurants to be statistically significant (two-tailed P value 0.0372). The difference in mean efficiencies for franchisee-owned and franchisor-owned full-service restaurants were found to be extremely statistically significant (two-tailed P value 0.0001).

Summary statistics for the DEA technique are found in the following table. The mean efficiency score of 92.7 for all full-service restaurants suggests that the average full-service restaurant is 92.7% efficient compared with the most efficient full-service restaurants. The average efficiency score for the states with an inefficient full-service restaurant sector ranges from 90.7% in the case of non-franchise restaurants to 77% in the case of franchisor-owned restaurants.

Descriptive Data on Efficiency Scores for Full-Service Restaurants Across U.S. States

Variable	All Restaurants	Non-Franchise Restaurants	Franchise Restaurants	Franchisee-Owned Restaurants	Franchisor-Owned Restaurants
Average	92.7	92.9	90.8	90.0	82.7
Standard Deviation	5.6	5.6	8.4	8.3	13.8
Maximum	100	100	100	100	100
Minimum	82.8	82.7	72.5	72.3	51.4
Average Inefficient	90.5	90.7	86.6	86.1	77.0

Source: Hotel Investment Strategies, LLC based on an analysis of U.S. Census Bureau Data (2012 Economic Census for Accommodation and Food Services NAICS Sector 72)

Characteristics of Full-Service Restaurants by State

State	Number of Restaurants	Number of seats as of December 31	Value of sales, shipments, receipts, revenue, or business done ($1,000)	Annual payroll ($1,000)	Number of paid employees for period including March 12	Population
Alabama	2804	234199	2467928	818447	60235	4813946
Alaska	560	43720	529333	168060	7989	730825
Arizona	3882	384095	4085218	1465341	96172	6544211
Arkansas	1940	141962	1392695	457419	35920	2949208
California	28089	2324376	28512017	9423933	548250	38019006
Colorado	4691	427086	4555946	1634848	102253	5186330
Connecticut	3336	248412	2871363	931079	53056	3597705
Delaware	741	76379	844515	265709	17296	916868
District of Columbia	734	97860	1368521	472738	23174	635630
Florida	14747	1442909	17058969	5616507	342226	19341327
Georgia	6720	573496	6443555	2110791	144478	9911171
Hawaii	1204	128755	1968924	595675	32893	1392772
Idaho	1219	81635	790891	267894	20376	1594673
Illinois	9061	792952	8977494	2954577	185476	12878494
Indiana	4419	399612	4036660	1355818	103447	6535665
Iowa	2521	172795	1645029	559487	46104	3074386
Kansas	2090	165884	1622455	551169	45013	2885316
Kentucky	2598	241904	2512586	840348	62168	4383673
Louisiana	2747	244159	2913546	972140	64924	4602681
Maine	1441	99004	1006254	359897	21647	1328101
Maryland	3344	371284	4313967	1395097	85402	5891680
Massachusetts	6110	562020	6591139	2152018	122983	6659627
Michigan	6908	570217	5914359	1945506	144145	9886610
Minnesota	3768	362076	3714755	1274462	88391	5377695
Mississippi	1636	123139	1313236	404068	30964	2982963
Missouri	4559	380020	3870910	1336157	98456	6023267
Montana	1059	74814	774358	244044	17285	1003522
Nebraska	1415	111424	1052007	352086	28315	1854862
Nevada	1730	218655	2865428	981347	48524	2752410
New Hampshire	1258	110859	1135100	414507	24552	1320923
New Jersey	6906	539958	6203769	1829403	108442	8882095
New Mexico	1315	110163	1163991	416149	29155	2083590
New York	18899	1387724	17939912	5751488	293893	19625409
North Carolina	7213	585119	6266053	2050425	147566	9755299
North Dakota	555	51161	510341	178189	12955	701380
Ohio	7248	692797	7430273	2518036	181909	11546969
Oklahoma	2450	197177	2125750	694188	54327	3815298
Oregon	3960	268022	2910284	998632	59793	3893920
Pennsylvania	9315	746699	8295469	2616853	189426	12768034
Rhode Island	1114	87047	984932	318058	19832	1052761
South Carolina	3720	304584	3250899	1053779	75062	4719009
South Dakota	718	51544	491816	167120	13119	832576
Tennessee	4231	402991	4276886	1476646	99547	6450632
Texas	16128	1632185	17939115	5837544	391151	26078327
Utah	1480	126308	1295698	462097	33961	2854222
Vermont	717	43399	450250	160902	10439	625606
Virginia	6336	545945	6044782	1962725	132344	8188656
Washington	5612	431397	4873658	1739750	93704	6890899
West Virginia	1146	84884	934800	304956	23296	1855360
Wisconsin	4979	351192	3375475	1090733	90932	5721075
Wyoming	554	38169	407488	138001	9327	576608

Source: U.S. Census Bureau (Economic Census: Core Business Statistics Series, 2012: Franchise Status for Selected Industries and States: 2012) and Hotel Investment Strategies, LLC

¹ Full-service restaurants comprise establishments primarily engaged in providing food services to patrons who order and are served while seated (i.e., waiter/waitress service) and pay after eating. These establishments may provide this type of food service to patrons in combination with selling alcoholic beverages, providing carry out services, or presenting live nontheatrical entertainment.

² Limited-service industry comprise establishments primarily engaged in providing food services (except snack and nonalcoholic beverage bars) where patrons generally order or select items and pay before eating. Food and drink may be consumed on premises, taken out, or delivered to the customer’s location. Some establishments in this industry may provide these food services in combination with selling alcoholic beverages.

³ Productivity and efficiency are used interchangeably throughout the post. Efficiency refers to the ability to convert multiple inputs into outputs.