After battling for months through the COVID-19 pandemic, restaurants could use a fresh start.
Indeed, 2020 was brutal on many levels. But rays of hope exist in the industry. For example, since April, restaurant openings have increased so that the number of new openings in Q3 of 2020 was only 10 percent less than the same period in 2019, according to data from Yelp.
A big reason for many quick serves to be excited is the state of franchising. All signs point to franchises surviving the pandemic better than others, and there is significant potential in franchising moving forward; economic downturns typically lead to more people looking for a second career, and would prefer the safety net of a proven concept. On top of all this, many restaurant companies are preparing to capitalize on the void left by so many independent restaurant closures.
Keith Gerson, president of franchise operations at franchise management software platform FranConnect, says quick serves and fast casuals were especially prepared for the challenges of the pandemic for three reasons: their willingness to work with delivery aggregators pre-pandemic, their reliance on drive-thru and curbside pickup operations, and their ability to quickly pivot early in the pandemic to new solutions.
This side of the industry is particularly prepared to grow through franchising. Dan Rowe, founder and CEO of franchise development company Fransmart, says the lowered costs of expansion are encouraging companies to grow through franchising, leveraging the strategy to especially reach areas that are not suited to corporate-owned locations.
Rowe believes franchisors will likely split their growth evenly between existing multiunit franchisees and new franchisees. “For now, it’s time for smart and strong operators to expand. For the last decade it was tough finding good locations, and if you found them, they were tough to afford,” he says. “Landlords held firm knowing someone else would eventually pay the crazy price, and today those same landlords are all on their backs making crazy good deals. You can open an A+ conversion for half of what it would normally cost to open and get two times the [return on investment].”
FranConnect’s Gerson also sees existing multi-unit operators looking to expand in concentric geographic circles at more favorable terms and real estate choices. However, he predicts a split slightly in favor of new franchisees, in part because he expects there to be newcomers who are already franchising in other industries.
“You may find that it’s going to be more in favor of new restaurant operators coming into franchising because of the fact that so many of them were successful operators but just didn’t have the same kind of brand awareness,” he says. “They didn’t have a reputation that was built and lasted for, in some cases, decade after decade. I think that you’ll have those individuals come over because they know that when you think of a franchise, one of the industries that everybody thinks of is [quick service].”
The massive changes brought about by COVID could also inject new energy into the franchising industry. Wes Barefoot, a consultant with franchising consultancy FranChoice, says that while those who lost their jobs due to the pandemic will look at franchising, employed individuals will also see the need to diversify their investment portfolios. Meanwhile, Gerson says Roth 401(k) rollovers will entice those creating a retirement nest egg to look at new investments like franchising.
However, the three franchise experts all believe that the younger generations will be a demographic increasingly looking at franchising opportunities. Gerson says younger franchisees are drawn by today’s restaurant trends, and the momentum toward smaller, more affordable restaurant footprints allows a lower barrier to entry.
A younger demographic that is more technologically savvy will certainly be helpful for franchisors that use technology to make franchise systems more efficient. And Gerson says the shift to becoming a technology-first franchisor is crucial in the post-pandemic restaurant environment. For example, having a central franchise command center where every franchisee can see performance across the system and compare their numbers becomes a differentiator for a brand that fits perfectly within younger generations’ highly social natures.
“That’s such an advantage of franchising in the [quick-service] segment,” Gerson says. “You’re able, as a community, not to see each other as competitors, but to see each other as allies and to remember that a rising tide lifts all boats. Everybody benefits when their neighbors are doing well.”
For brands looking to step on the accelerator in the coming years, Rowe recommends focusing on the long-term value of franchisees. The real value of a franchisee, he adds, is in the royalties rather than the franchise fees, meaning it’s incumbent on a franchisor to commit to its franchisees to ensure their success.
But while it’s easy to look ahead to the massive potential in franchising, Barefoot says franchisors shouldn’t forget about the opportunities that they can leverage right now within their existing systems—and especially how it could support their desired growth.
“[Franchisors] should be talking to their current franchisees and asking them what they need and what they could have done better during the pandemic,” he says. “By getting in front of this, and having some great stories to sell, they can turn a potential negative into a positive in a prospective franchisee’s eyes.”