The past year has been challenging for the restaurant industry. As COVID-19 raged across the country, many restaurants were forced to close for public safety. Some never reopened. Many of the restaurants looking to grow through franchising put those growth plans on hold due to the uncertainty surrounding the pandemic.
With over half of eligible Americans fully vaccinated now along with significant pent-up demand, the restaurant industry’s franchising outlook is beginning to turn a corner. The world is different now though, and so is franchising. New opportunities have developed for this (nearly) post-pandemic world, but so have new and unique challenges.
Opportunities: Winners And Losers
The pandemic has been devastating to the restaurant industry, and unfortunately many promising brands were unable to survive brutal shutdowns. Some restaurant brands were better equipped for off-premises sales or able to pivot quickly to new offerings, positioning these brands for potential growth through franchising.
Off-Premises Sales Drive-Thru the Roof—Curbside and delivery are here to stay (for now). Diners have grown accustomed to eating at home and many are still wary about eating indoors. Many quick-service and other concepts that have embraced curbside or delivery options have seen increased or new revenue streams. Many brands have redesigned their store models to accommodate these new eating habits with smaller square footage and curbside/drive-thru access. These hot concepts will be attractive to potential franchisees and may ultimately reduce costs.
Where There’s an App, There’s a Way—When restaurants closed, brands needed to find a way to stay in contact with customers. This accelerated the development of mobile apps and loyalty programs, as well as customers’ use of these programs. Brands that have developed winning technology will be able to drive more sales to their units and will have additional selling points to potential franchisees.
Real Estate: Boom or Bust—The closures of so many restaurants created an excess of available commercial real estate adaptable for restaurant use. With the market less saturated, this has created an opportunity for new brands to thrive with less competition in desirable locations.
Challenges: Not Out Of The Woods Yet
Although diners are venturing out now to their favorite restaurants as the vaccination rates increase, they may be surprised to find difficulty in getting a reservation. Although demand is increasing, restaurants have been faced with a new challenge: labor. Labor shortages and pressures for an increased minimum wage, on top of the liability concerns surrounding COVID-19, have created new challenges for the restaurant industry.
Where Have All the Workers Gone—The biggest challenge facing restaurants in the post-pandemic world is labor. Every restaurant needs workers, creating challenges for brands looking to grow through franchising. Without the needed staff, restaurants are unable to accommodate the demand and achieve pre-pandemic revenues. This coupled with increased demand for wage increases and other legislative action on pay issues, like equal pay statutes and salary history bans, pose a new challenge for growing restaurants.
COVID-19 Precautions (and Liabilities)—COVID-19 has also created a myriad of new legal issues to consider, including whether to require or incentivize staff to be vaccinated, how to manage staff that feels unsafe at work, testing and quarantining protocols when an employee gets sick, and creating a safe environment for customers (to mask or not to mask, that is the question). On top of these legal issues, local and state governments have varying restrictions in place and vaccination rates vary by geographic area, which create challenges for franchisors trying to implement a one-size-fits-all solution.
Additional Considerations For Franchising
The global pandemic was an unimaginable and devastating challenge for the restaurant industry. There were clear winners (quick-serves) and losers (fine dining), and those restaurants that were able to pivot quickly were most likely to survive. Adaptability will continue to be a key to survival going forward. Not only must franchisors move quickly to accommodate new issues that arise, they must constantly communicate with franchisees in this time of uncertainty to effectively manage the system.
There are additional legal considerations as well. For a franchisor that makes financial performance representations (FPRs) in its franchise disclosure document (FDD), there are questions surrounding whether 2020 historical sales, or even 2019 historical sales, are misleading to potential franchisees looking to open a unit today. There is likely to be an uptick in claims that these Item 19 FPRs were misleading as the future becomes hindsight. Additionally, both franchisors and franchisees are reconsidering how force majeure clauses are worded in key contracts (such as leases) as this once boilerplate language becomes a source of litigation. Finally, as delivery options continue to expand, franchisors will need to be mindful of franchisees encroaching on protected territories.
Franchising will continue to be a great way to expand a promising restaurant brand. The pandemic has created new opportunities for this growth as well as some new challenges. Brands that can pivot quickly to this changing environment will be poised for success.
April McKenzie Mason is a partner in the Corporate and Tax practice group at Burr & Forman, as well as managing partner of the firm’s Birmingham office. She counsels businesses through all stages of their life cycle, including representing franchisors and franchisees on all aspects of compliance and franchise relationships. She may be reached at amason@burr.com.
