Anyone wondering whether inflation has impacted the franchise industry needs only look at the bankruptcy declarations of three major Burger King franchise groups as evidence. With growing pressure on margins and the increased need to control costs, the good news is the industry is finding ways to be resilient and meet the challenges.
Those efforts — marketing to drive more traffic, technology to decrease labor expenses, and remodeling or new construction to improve the customer experience — come with costs, and some franchise owners are looking to financing or construction loans to make them possible. Here’s a sampling of some of the industry’s more interesting efforts to cope with inflation.
Driving volume through marketing
Quick-serve restaurant (QSR) traffic has been falling since 2019, but especially since 2022. As of June 2023, overall QSR traffic was 18.4% lower than the same period in 2019; drive-thru was down 12% and dine-in fell by almost 50%. Check sizes have risen by 40%, however, resulting in level to slightly increased sales.
Even with the traffic decline, studies show there is pent-up demand among consumers. According to the National Restaurant Association, nearly half (46%) of adults surveyed reported they were not eating in a restaurant as often as they would like, and 36% were not getting carryout as often as they wanted.
Many franchisors are driving traffic by offering new menu options. As part of its Reclaim the Flame program, Burger King has added new flavor profiles such as ghost peppers and paprika-spiced burgers to appeal to younger customers. Wendy’s is reaching out to Pumpkin Spice aficionados by offering their Frosty and cold brew coffees with the popular flavor. McAlister’s Deli is adding honey barbecue to its menu in the form of sandwiches, baked potatoes, and nachos as a non-holiday limited-time-offering.
Loyalty programs combined with digital marketing are proving to be a reliable area of growth. Among QSRs, the average check size for loyalty members in 2022 was 6% higher ($14.54 vs. $13.71) for members than non-members. Research shows that QSR loyalty members visit most often on Thursdays and Fridays but redeem their points on other days — as a treat, rather than a substitute for their regular visits. Sending digital reminders to members on their off days helps spur additional visits.
Controlling expenses
On the flip side of increasing volume, franchisors also are working to lower expenses through operational efficiencies. To cut beverage costs and as a response to the dramatic decline in in-person dining, McDonald’s is phasing out its self-serve drink stations, long a beloved perk. They are also designing new store layouts with smaller dine-in facilities. Chipotle is moving to eliminate in-person ordering and indoor dining completely, relying on orders through the app, website, or drive-thru. Other franchises are moving toward kiosk-based ordering to reduce labor costs at the counter. Essentially, franchisors understand that if they must pay more for labor, they need to use less labor to stay profitable.
Remodeling and new construction
A study of 2023 franchise trends showed that more than half (52%) of franchise owners planned to grow their businesses, with 15-21% of franchisees planning to expand or remodel their stores, and 9% intending to open a new location. Remodeling can improve the customer experience, leading to greater loyalty, increased traffic, and higher average ticket sizes, providing an overall positive ROI.
New construction can help franchise owners set up where population growth is occurring. With existing home owners hesitant to sell and take on higher mortgages, new housing in suburban areas is one of the few sectors where growth is happening. As commercial development goes in to serve this new housing, opportunities for new franchises expand.
Paying for growth
All of these efforts to grow QSR franchise businesses come at a cost, so it’s not surprising that 16% to 19% of franchise owners surveyed reported concerns about cash flow. Investments in technology, marketing, and construction all require capital. Franchisees considering applying for a working capital or construction loan in 2024 should start preparing now by getting their documentation in order. Lenders generally require:
- Financial statements for the past two to three years;
- Company tax returns for the past two years;
- Franchise agreement(s);
- Landlord waivers (if applicable);
- Pro-forma financials that forecast the expected future revenue; and
- Personal financial statements that establish the financial character of stakeholders.
Overall, the future of franchising is positive, but to stay competitive, owners will need to keep an eye on controlling costs and managing cash flow, while exercising a creative spirit to bring in more customers.
AUTHOR BIO
Alicia Chandler is president of Indianapolis-based First Franchise Capital, a First Financial Bank company, with customized loan products and services for quick-serve restaurants nationwide.