Much of what’s taken shape within restaurant franchising over the past two years has reflected broader realities. Hesitation. Wait-and-see. Lastly, a rush to align with the same restaurants that proved their mettle and ability to pivot. On the same token, some franchisors reported a surge in activity from people looking to start entrepreneurial careers.
Two franchise-heavy organizations, Yum! Brands and Restaurant Brands International, turned in massive growth runs in 2021. The Pizza Hut, KFC, Habit Burger, and Taco Bell owner debuted a net of 1,259 restaurants in Q4, pushing its year-end total to 3,057 net new openings—the most in its history, and, according to CEO David Gibbs, the most ever achieved by a restaurant group. Burger King, Popeyes, Firehouse Subs, and Tim Hortons’ parent achieved net growth of 4.5 percent, finishing the year with 29,456 restaurants compared to 27,025 in the year-ago period.
The 2022 Franchising Economic Outlook, released Wednesday by the International Franchise Association, suggests expansion is going to march on. It estimated franchise establishments in the quick-service industry increased by 2.6 percent last year, and will continue to grow at a rate of 2.1 percent in 2022 to a total of 192,426 businesses.
For reference, here’s how that’s tracked going back to 2018:
- Quick-service restaurants: 194,395
- Full-service restaurants: 32,843
- Quick-service restaurants: 196,794
- Full-service restaurants: 33,160
- Quick-service restaurants: 183,543
- Full-service restaurants: 31,004
- Quick-service restaurants: 188,402
- Full-service restaurants: 32,027
- Quick-service restaurants: 192,426
- Full-service restaurants: 32,819
The important note is 2020 saw quick- and full-service franchise establishments decline 6.7 and 6.5 percent, respectively. Both bounced back to growth of 2.6 and 3.3 percent the following year. And come 2023, they’ll nearly be on par with where the field stood pre-COVID.
The IFA also expects quick-service franchise employment this coming year to grow at 2.2 percent to about 3.8 million. Additionally, franchise output will bump 5.8 percent to a total of $276 billion.
For full service, employment will reach 1.1 million workers and output jump 5 percent to a total of $76.4 billion.
The output is something worth pulling back, too, to get a sense of the recovery.
- Quick-service restaurants: $256.6 (billion)
- Full-service restaurants: $73
- Quick-service restaurants: $267.9
- Full-service restaurants: $76.5
- Quick-service restaurants: $241
- Full-service restaurants: $55.1
- Quick-service restaurants: $261.2
- Full-service restaurants: $72.8
- Quick-service restaurants: $276.2
- Full-service restaurants: $76.4
Again, it’s nearly even with 2019 marks, meaning the restaurant franchise industry is on the verge of a full recovery.
From the employment view, quick-service franchises boasted a workforce of 3,880,612 in 2019. The 2022 projection is 3,810,044. Full-service: 1,116,894 in 2019 and 1,096,149 estimated for 2022.
The National Restaurant Association’s recently released State of the Industry report believes the industry as a whole will earn $898 billion in sales this year—an increase from $864 billion in 2019. Adjusted for inflation, the figure is an 11.5 percent decline compared to three years ago. Anecdotally, 50 percent of operators in the Association’s survey felt sales volumes would increase year-over-year, yet only 40 believed 2020 marks would surpass those from two years ago.
As has been the case from the outset, though, it’s not a straight line across segments. The Boston Consulting Group reported digital ordering now represents 28 percent of all orders compared with 10 percent pre-pandemic. That a shift generally favoring quick-serves that don’t rely on high-margin add-ons like alcohol and appetizers to offset additional labor and fixed costs. The NPD Group noted 75 percent of all transactions today are still taking place off-premises.
It hints to continued strength in counter service (and franchising) as well as more recovery ground to chase across all segments as dine-in comes back. (Here's a look at why dining out is going to make a 2022 splash).
The IFA shared a few consumer trends that it expects to persist or emerge in 2022. Including:
- Higher menu prices due to higher food and labor costs.
- Continuing challenges in hiring and retaining restaurant employees due to labor shortages, driven in part by employees quitting their jobs at unprecedented levels.
- A continuing rise in sales of digital/online orders through take-out, delivery, and curbside pickup.
- Broader distribution of digital menus and table-ordering options for customers.
- Changing restaurant layouts for operational efficiency due to the changing business model. More restaurants are rolling out “ghost kitchens”—kitchens without a storefront, intended to sell food for takeout, pick-up, or through online delivery services—or are building smaller physical footprints, allocating less space for indoor seating while providing more outdoor space, in line with customer preferences (weather permitting). Full-service restaurants are now offering drive-thrus and establishing designated areas for online order pick-up.
- More advanced technology and digital solutions, such as touchless payment systems, contactless in-store ordering options, using AI systems for drive-thru orders, and other innovations, which could all help restaurant businesses increase efficiency and control costs. Looking ahead, automation will make its way into restaurant operations, with robot and drone delivery services becoming more common and robots conducting routine kitchen tasks.
Across all industries, the IFA said 2021’s growth proved higher than expected due to pent-up consumer demand. This, however, accentuated issues in the labor market, supply chain, and with inflation.
“While providing nearly $6 trillion in COVID relief during the first two years of the pandemic were critical for franchise brands, new COVID variants have posed additional challenges for these businesses,” the IFA said. “Unforeseen closures coupled with the hiring and labor challenges have caused uncertainty for local franchise business owners. There is still a need for industry-specific relief, particularly for gyms and fitness facilities, and restaurants which have been not been able to recover at the same pace as other industries.”
In sum, 2022 is likely to see moderated growth after 2021’s rapid increase. Still, franchising could exceed pre-pandemic levels due to access to inexpensive credit, and plenty of cash on household and corporate balance sheets, the company added.
Inflation should decelerate as the Fed potentially raises interest rates and consumers return to normal buying patterns, too.
In 2021, franchise workers reported a 9.2 boost in wage and salary and a 4.7 percent hike in hourly earnings. Job openings remain at near record highs and employers continue to struggle to find qualified workers. This past year saw 6.4 million new jobs, more than any year in history (the unemployment rate fell to 3.9 percent in December, down from 6.7 percent the previous year). Experts believe this will reach 3.5 percent in 2022, the same as pre-COVID.
And yet, total employment is 3.6 million jobs short of 2019.
As has been the headline for some time, strong demand for workers coupled with low supply will fuel wage increases further. Average hourly earnings increased by 4.7 percent in 2021, a trend that is expected to continue in 2022 but at a slightly lower rate of 4.5 percent. “Therefore, labor turnover is exceptionally high as employees change jobs for higher pay,” the IFA said.
“Unlike historical recoveries, those poised to gain the most from an increasing economic recovery in 2022 are those towards the lower end of the economic spectrum, driven in part by franchises hiring many of these entry-level employees,” the company added, a point influenced heavily by restaurants.
Median hourly wage increased the fastest for low-skill workers in 2021 compared to mid-skill and high-skill employees. Strong labor demand also alleviated the unemployment rate for workers with less than a high school diploma, which dropped to its lowest level since July 2019.
“Franchising is most likely the driving force behind such strong job creation, as franchising is an important source of low-skilled employment that does not require a college degree, exactly the sector of the population that received the most labor improvement during the recovery,” the IFA said.