Whether its stability during uncertain times or the leverage of scale against rising costs, the franchising sector has gained significant footing in COVID’s wake. According to the IFA’s Economic Outlook Report released in March, franchise job and unit growth are well outpacing 2019 levels. Moreover, service-based industries and quick-service restaurants are projected to experience higher expansion than all other sectors. The IFA estimated quick-serve franchises would lift by 2.5 percent, bringing the total from 192,057 units to 196,858. In 2020, the figure was 183,543. It was 188,402 the following year.
To delve deeper into the trend, QSR touched base with some of the members of this year’s Best Franchise Deals Council—a collection of industry experts picked every calendar to help comprise our signature annual report, which will be published on September 2.
Here were some of their thoughts on the state of franchising, the challenges, opportunities, and what’s coming next.
Note: If viewing on desktop, please click the arrows in the photo to proceed.
CEO/managing partner, Fish Consulting
What, in your opinion, is driving this recent expansion?
The central benefit of quick service has been speed of service at low (or competitive) pricing. However, the growth of this segment is no longer solely based on these principles. Higher quality menu items, innovative concepts and technology have been THE underlying factors of this segment’s exponential growth—to the detriment of the fast casual and casual dining space. Once seen as simply drive-thrus offering burger and fries, consumers can get chef-crafted menu items quickly and at a great price. Quick-serves are dominating consumers’ dining choices across all dayparts.
In what way is restaurant franchising evolving most of late, and out of COVID?
Every industry has had to look inside themselves and change the way it operates in order to be relevant among its stakeholders. Restaurant franchises are no different. While collaboration with franchisees was always a central component to success, it has become increasingly more important as consumer tastes are changing, supply chain challenges grow and immense food innovation occurs across segments and brands. Large multi-unit, multi-brand franchisees want to be more involved in all aspects of the business. It is no longer acceptable to defer to a small FAC to represent franchisees’ interests and goals. Consolidation, PE involvement (at the zee and zor level) and an increasing competitive landscape will dictate and deepen the need for franchisee collaboration.
Founding partner and CEO, Cadence Franchising
Your thoughts on the growth?
I agree with the IFA’s statements on the size of the franchise economy exceeding pre-pandemic levels. The nature and category of our franchise lead management services provides us with real-time access to the volume of inquiries and completed applications from interested entrepreneurs and investors (the potential franchisees), and a unique perspective on the reasons for the success of franchising after COVID. In particular, we witnessed a drastic decline in franchise inquiries and application volumes throughout 2020 and early 2021, followed by a sharp incline in investor interest throughout 2022 till now. Naturally, the increase in application volumes led to a rebound in franchise sales, contributing to the expedited growth of many quick service restaurant systems.
What’s driving that upside?
Looking back, the major focus of restaurant franchisors in the 5–10 years pre-pandemic was improving the end-customer experience; and rightfully so. Brand values were brought to the forefront and a dedication to delivering an exceptional in-restaurant dining experience was prioritized by many companies. Loyalty programs were created, and beautiful apps were developed to strengthen relationships with customers. Innovative technology was developed and leveraged wherever possible. In my opinion, a disproportionate level of focus and innovative thought was directed toward the franchise sales experience of most brands. The downtime throughout the pandemic presented an opportunity for franchisors to allocate resources to sales process refinement. Brands with savvy, forward-thinking executives and development teams, focused on modernizing their sales systems and improving the buyer experience. Those that spent their time and money on facilitating an exceptional buying experience for their potential franchisees, mirroring the outstanding in-store experience they’ve created for their customers, are reaping the benefits. Many franchise systems are expanding their networks faster after the pandemic because of wise investments in new technologies for their sales teams during it.
And what’s changing now?
Not only are we witnessing faster growth—it’s better growth. Technology-driven sales processes led to deeper engagement from prospects, leading to advancement from more qualified buyers, setting the stage for more successful franchisees. Those successful franchisees led to a better brand story to tell all of the others, and more referrals. It’s a chain reaction sparked by ambitious development teams and made possible by powerful (and affordable) technology in the form of cloud-based franchise development software.
Of course, there are many other reasons for the current success of franchising, but this is the aspect I’ve got my eye on.
Franchise marketing consultant and owner of helloCMO
Same question: Give us your take on the sector’s boom?
While stability and access to capital are significant contributors, several other factors likely drive this growth. One key factor behind the expansion of the franchise economy is the sector’s ability to adapt to changing circumstances. Many franchises quickly adjusted their business models throughout the pandemic to accommodate new restrictions and consumer preferences. This ability to pivot and find innovative solutions has helped them weather the storm and emerge stronger.
Additionally, franchises benefit from established brand recognition and consumer trust, which can contribute to their expansion. Well-known franchise brands have built a reputation for consistent quality, customer service, and a familiar experience. This recognition gives them a competitive advantage over independent businesses, attracting customers and providing a sense of reliability in uncertain times.
The integration of technology has played a significant role in the expansion of the franchise economy. Many franchises have embraced digital platforms, mobile apps, and online ordering systems to enhance customer experience and streamline operations. These technological advancements have improved efficiency, convenience, and overall customer satisfaction, making franchises an attractive choice for entrepreneurs and consumers alike.
How do you see the franchising sector evolving, given that growth?
The restaurant franchise industry has evolved to become more sophisticated and strategic when it comes to scaling, consolidating, and improving operational efficiency. Franchisees have become experts who use technology and market opportunities to drive growth and success in a highly competitive industry. Franchisees are often experienced entrepreneurs with extensive business knowledge, which helps them better understand market dynamics, consumer trends, and financial management. They can identify growth opportunities and make informed decisions about acquisitions and brand expansion.
Franchisees acquiring restaurant brands reflects consolidation within the industry. Through acquisitions, franchisees can streamline operations, standardize processes, and achieve cost efficiencies. Consolidation can lead to brand recognition and market dominance, which allows franchisees to leverage their resources and expand their market share.
Due to the pandemic, consumer preferences and behaviors have changed, and franchisees recognize the need to adapt and meet these changing demands. Acquiring additional brands or diversifying their portfolio allows franchisees to cater to broader consumer preferences, expand their customer base, and mitigate risks associated with relying on a single brand.
President, 919 Marketing
You guessed it, same point. Growth, and lots of it.
Quick-service restaurants are perfectly positioned to thrive in the post-pandemic world, especially those that are innovating to combat rising labor costs while meeting the needs of the modern customer. Customers seem to be gravitating toward four quick-service experiences (in no particular order as percentage of sales varies greatly in different models/food categories): One, third-party delivery; two, drive thru; three, on-site kiosk orders; and four, order ahead pickup. Concepts offering all (or most) of these experiences can operate restaurants with less staff and provide customers with the ordering options variety they prefer. The restaurants who nail that customer experience piece (and ideally, also offer a slimmer real estate buildout and fewer main menu options that can be customized with different sauces/toppings/etc.) are the ones poised for continued growth.
What are some topics to keep an eye on? Have you noticed an uptick in the sophistication of franchise operators and groups through all this?
Private equity investment and multi-unit, multi-brand operators (MUMBOs) are two themes that continue to dominate the restaurant franchising space. I’d agree with the “franchisees are becoming more sophisticated” comment as many are realizing the old adage that applies to most brick and mortar franchise investments: essentially, it’s like real estate investments—you have to own/operate a diverse portfolio of many restaurants to thrive. As labor costs rise and supply chain/real estate challenges persist, it becomes more and more challenging to achieve the financial freedom most franchisees/entrepreneurs desire owning and operating just one restaurant (or even just a few).
President and COO, Franchise Business Review
Why do you think the sector is poised for take-off?
Quick-service restaurant franchising is growing fast for a few reasons. On the consumer side, the quality of food and convenience coming out of the franchise space these days. People are busy and are willing to pay for good food to still take care of their family and enjoy the meal together.
The pandemic had people assessing the work they are doing. Whether downsized, or leaving of their own accord, people want more control over their work experience. Several key reasons rank franchising a great option to invest: Desire to be a business owner, control schedule so they can be around their family, or follow their passion more, or contribute and get involved with their local communities.
Give us your crystal ball take.
Franchising has evolved. Coming out of COVID, relationships with franchisees and franchisors are stronger because of what they went through together. Corporate teams showed up to support franchisees through it and became more flexible in trying new things, and implementing quickly to help business owners not just survive but THRIVE. In some systems that collaboration and support of both the franchisees and corporate team side is continuing and great innovation and communication has become the new standard.
The next challenge the industry faces is hiring and retaining great staff. A topic that will benefit from franchisors and franchisees working together to overcome. Franchise owners must be mindful of the culture they are fostering in their stores & with their teams. Implementing AI to tackle tasks to free them up to take care of their people and reduce the number of staff needed to run a location, will help them continue to grow and prosper.
Give us a high-level view.
Post pandemic, it seems that many peoples eating habits have changed, and quick but good food is fueling that opportunity. Customers today (myself include) value good food, and like healthy options, but without the commitment of a full restaurant experience. We are seeing a lot of brands that are recognizing this opportunity and scaling to meet the demand. I don’t see this changing in the future, the quick service vertical will continue to grow and thrive over the next decades.
Good quality and consistent experiences lead to recurring revenue models as customers keep coming back and back. I anticipate a broadening of the market with more international flavors growing quickly in the market. Franchise operators investing in technology to streamline and improve every aspect of their business will be a primary focus of successful quick-service restaurants over the next three years.
Partner, FRM Solutions, managing member, ZorForum, Franchise Today Podcast host and producer, principal consultant, Sensible Franchising
That’s a lot of titles, Stan. I have a feeling you have a lot of thoughts on this subject.
I wear many hats in the franchise world, as a franchisor, ZorForum, a supplier, FRM Solutions, and as a 10-year podcast host and producer, Franchise Today. I contribute too, as a servant leader, to the IFA, as a founding member of its Diversity Institute and Trustee on its Foundation Board. In all of these capacities, I get to talk to a disproportionately large number of restaurant and franchise executives every day, covering a wide range of market segments and categories. Across them all, I have observed a couple of common threads and themes that explain why, according to the IFA’s recent report, the size of the franchise economy in 2023 will exceed pre-pandemic levels, with quick service, in particular, slated to be the fastest-growing category, along with service-based industries, in our post-COVID world. It is evident to me too, why “franchisees are becoming more sophisticated,” namely in their approach to scale and consolidation.
My take is that it has a lot to do with what many call a great “quickening,” or an acceleration of trends recently, tied to the sweeping acquisition of brands, and the clustering of multiple franchise companies under the umbrellas of portfolio companies. This following years of pent-up demand. These portfolio companies, with more sophisticated tools and resources, are quite logically attracting a new breed of similarly, more sophisticated prospects.
And how is it all changing?
Yes, the landscape is certainly morphing, but my belief is that COVID didn’t really change things, as much as actually just speed up the advance of these trends. What I hear most often, is how many of these technological advances of the past few years were really in large part, already in progress. COVID just sped the pace of their development. It took the deep pockets available to larger, better funded, more sophisticated brands and organizations, to fund these advances and deal with the “new normal.” Frictionless transactions, more and easier app integrations, online ordering, third-party delivery, and even the reconfiguration of footprints, to accommodate greater back of the house space, as opposed to large dining rooms, for faster, more efficient food lines to quickly get food out the door, in addition to in-house dining requirements.
OK, so what’s next?
It is only natural that the consolidations of shared services available to these newly created portfolio companies would then lead to more sophisticated franchisees stepping up to fly multiple flags across several brands represented under these portfolio companies. What we have seen and will continue to see, is more of these types of consolidations in the years ahead, before some of these portfolio companies themselves start consolidating and acquiring one another, not just the brands underneath them. In the home services sector, with people spending more time both living and working at home, there was a natural proliferation of service brands banding together and building larger portfolios of complimentary brands under single umbrellas, i.e. the formation of Neighborly, Authority, and Belfor Brands.
Now, back to food, where many ask why quick service is slated to be the fastest growing segment in 2023. Well, the case could be made for the economy having a little something to do with it. As typically is the case when the belt tightening begins, those who feel the pinch, that were predisposed to fine dining, make necessary adjustments downward, to more contemporary casual.
Those in the contemporary casual category may do the same and pivot to fast casual and casual. But there is nobody with a greater opportunity to retain their core constituents, and at the same time make and keep new friends, than those in quick service. But this influx is not just a given and should not be taken for granted. Significant investments absolutely must be made and increased, in technology, marketing, R&D, acquisition, and retention, to effectively compete for the hearts an souls of all those newbies heading into their space. In quick service, there is no taking the customer for granted, for those who intend to put and keep the word “sustainable” in front of “growth.”
There are many other theories that could be posited for this trend in 2023, but taking good care of people, vendors, franchisees and their people, customers. and partners, is the one big thing I hear more about now, than ever before.
Chief Development Officer, Premium Service Brands
Your thoughts on the big topic at hand?
I believe that the observation of the IFA on the growth of the quick-service industry plus service-based industries is spot on. I believe the driver for this assessment is really pent-up demand and the drive to go back to pre-pandemic lifestyles. With various restaurants and businesses shuttering during those times, it has left a void in the market that existing franchise opportunities and new franchise opportunities can walk in and provide for the need. Furthermore, with the pending recession, distribution issues, and inflationary rates, those franchise opportunities that maintained or grew during those times are eager to innovate and get to pre-pandemic unit level economics. Lastly, being a consistent presence in tough times, providing for consistency and reliability, are key opportunities for these brands to stay relevant and experience post pandemic gains that equal those of pre-pandemic outcomes.
The quick-service industry may still take longer due to availability of real estate and the brick-and-mortar model may actually still be fearful (because of pandemic fears), so home service or service-based industries will continue to grow due to the level of investment, the labor market uneasiness, and that one does not need a retail space to operate out of.
Last little note: quick service has a stability that stays consistence, as we always need to eat, and we are continuing to live in a fast-paced world. Slow yourself down and you miss the next opportunity that is out there for you.
Take us home: What’s the future of restaurant franchising look like?
The labor market has adjusted out of COVID and that has made the industry a hot bed for turnover. We are seeing signs at local establishments that read “please be patient and kind to our staff, as they are working multiple shifts.” The restaurant model may then be asked to modify menu items, support, operating hours, to accommodate the lack of labor.
And here are some other thoughts:
Menu offerings: The restaurant model has evolved their menu offerings as well. The distribution drain on products, the global warming causing fires, floods, and not ideal growing season are all impacting and have all occurred, oddly enough, in and around the pandemic. With those types of restraints, operators and restaurants alike may be adjusting their items to provide customers the best price and other options that fit our “on the go” mentalities.
Embracing virtual and augmented reality: To improve the eating experience, certain franchises are exploring the use of virtual and augmented reality technologies. Customers can have a distinctive and captivating experience thanks to the use of these technologies in virtual tours, interactive menus, and immersive marketing campaigns.
Integration of technology: The epidemic brought home how crucial technology is to the restaurant business. Franchises are using mobile ordering apps, online delivery services, and contactless payment methods more and more. Better data analytics and consumer insights are made possible by this technological integration, which also increases efficiency and improves the customer experience.
Focus on delivery and takeout: Due to the emergence of third-party delivery services and the effects of lockdowns during the pandemic, there has been an increased focus on delivery and takeout alternatives in restaurant franchising. To meet the rising demand for off-premises dining experiences, many franchises have improved their business practices. Restaurants can now reach a wider audience without having to maintain actual storefronts thanks to the popularity of ghost kitchens and virtual brands. It’s crucial to remember that these tendencies are prevalent throughout the restaurant sector as a whole rather than being unique to the franchise model.