With inflation hitting the nation hard, restaurants are feeling a significant impact as guests become more judicious about where, when, and how much they spend. Restaurants themselves are impacted by many of the same pressures – from rising food costs to freight and labor supply. For restaurant businesses positioned for growth, economic uncertainty has the potential to slow the cadence of deal-making.
Yet restaurant franchise organizations continued to see strong franchisee interest post-pandemic, and investors anticipate that these brands will perform well even during a recession or under an inflationary environment. While restaurant franchise owners experience the same inflation challenges as independent restaurant owners, there are unique benefits to franchise organizations in that they possess the strategy, resources and support to withstand economic pressure.
These tools allow franchise restaurants to maintain focus on the guest experience and to build upon brand recognition through developing innovative technology and strategically utilizing loyalty programs to keep consumer interest high, even as prices rise. Fostering a strong relationship with loyal customers can position restaurants for even greater success during times of increased economic stability.
Costs of all resources involved in restaurant operations are rising. While many, if not most, restaurants have increased prices in recent months to mitigate some of the input cost pressures, they are typically passing along only a fraction of the actual increases to guests. For independent restaurant owners, this decreased profit margin can be a serious challenge because they are wrestling with managing their own cost pressures while still delivering value to their guests.
Franchise organizations typically have greater access to resources than independent restaurants, which allows for better purchasing efficiencies as a result of scale. Growing franchise businesses, in particular, have the leverage to work with vendors on securing better contracts given expected future growth. These resources allow more flexibility for franchisees in regard to development timelines, giving them the opportunity to mitigate near-term cost pressures, compare construction bids and manage through supply chain challenges on specific items.
Inflation forces leaders to look critically across all areas of the organization and evaluate sections that can be improved upon to provide the most benefit to franchisees. A greater level of corporate support means access to individuals specifically focusing on these aspects of business, developing strong networks that can thoroughly address each problem area.
Franchise organizations targeting continued growth emphasize creating and benefitting from long-term value creation. This is an important factor in recruiting talented individuals, as a large majority of franchisees are investing with 10+ year horizons and are seeking organizations that have proven they can withstand economic cycles. This is not the first-time inflation has hit the country, and it will not be the last.
Planning ahead is a key to mitigating high levels of uncertainty that can arise. With this in mind, creating a development strategy that both takes into account an inflationary environment while also offering benefits to franchisees is key to ongoing growth.
For instance, franchise organizations with larger networks are able to focus on maintaining attractive unit economics for their franchisees, understanding opportunities to manage initial investment costs from build out expenses to real estate. With rent also on the rise, property expenses are a significant factor in opening a business, and franchises have a significant advantage with site scouting and development support.
Of course, raising product prices rarely results in a positive outcome. Over a long enough timeframe, restaurant owners understand that inflation will lead to fewer guests. This means putting guest expectations at the forefront, prioritizing the experience to maintain a strong customer base. Currently, trends are emphasizing the importance of technology and digital platforms to meet demand, and franchise organizations are utilizing strategies such as LTOs and loyalty programs to provide value and excitement.
The main priority for franchisees is to focus on running high quality operations, building strong teams, and delivering on the value and service expectations of their guests. The bottom line is that happy guests return, and that cannot be overlooked even in an uncertain economy. Keeping menus fresh, exciting and as cost-effective as possible might require more work during inflation due to product sourcing, however ultimately this will keep customers coming back for more.
Franchise brands tend to have more brand recognition, which can be especially useful when customers are more particular about where and how often they choose to dine out. It is likely that when guests choose a quick-service option, they will opt for the restaurants they have either heard of before or previously eaten at.
There is no easy solution for restaurants in the face of inflation, however there are strategies to support ongoing growth while being cognizant of staffing and supply challenges. Because debt is not a significant factor in franchise deal-making, many franchise restaurant organizations are still growing by targeting candidates with a long-term outlook and potentially offering flexibility in development. The high level of resources and support offered by these organizations gives owners a certain peace of mind, providing the ability to seek out the most cost-effective vendors.
Ultimately, the priority of a restaurant should always be the guests, and providing the best possible experience will consistently keep them coming back for more even during challenging economic times. While franchise organizations have greater ability to support their restaurant owners during inflation, it is possible for all restaurants to benefit from reevaluating their strategy and sourcing to withstand economic cycles.