COVID solidified quick service as a category nimble enough to take the technological leap, while also delivering on a support model for franchisees. It’s a dynamic that helped build loyalty and goodwill from operators as investments paid off and they kept the doors open during one of the most chaotic periods on record. As noted, once the landscape shifted, hosts of quick-serves were able to retain sales or even gain market share.
It’s going to reshape the base. “Technology fees as part of the franchise agreement within the sector is a topic to be watching as we head into 2023,” Gagnon says. “Shockingly few brands collect these fees as part of their FDD, but this will be a must-have for the future. The evolution of technology is going to require constant reinvestment to stay competitive in the marketplace. Companies that collect technology fees on an ongoing basis won’t need to put plans on hold to improve the customer experience while they search for funding to innovate.”
Stan Friedman, a 30-year franchise executive, veteran franchisor, and president of FRM Solutions, says leading bands are standing out due to adjustments and forward thinking just like what Gagnon mentioned. In other terms, whether brands met post-COVID requirements and cascaded those learnings down to operators, is a question prospective franchisees now seek out.
“More frictionless transactions and fewer touchpoints means online ordering and eliminating the need for someone to physically answer phones to take orders,” he says. “It’s a win for the operator in terms of labor, a win for the consumer—not needing to touch money, sign a credit card receipt, etc.”
Friedman believes the pandemic sped changes already coming. “And those who are really winning today,” he says, “are the brands that had the foresight to embrace these technological advances, prior to COVID, as opposed to making mad dashes toward less efficient solutions by virtue of necessity just to stay in the game.”
Graham Chapman, EVP of account services at 919 Marketing, refers to today’s leaders as franchise concepts “built for the modern-day customer.”
“These brands are usually led by forward thinking innovators who are ahead of the curve, especially from a marketing perspective,” he says, referencing product placements in popular Netflix shows and influencer campaigns.
“Of course, any brands that were early adopters of drive-thru models with a service-minded touch, i.e. Chick-fil-A’s new drive-thru model [express lanes], and have found creative ways to make Olo/delivery apps work without destroying margins are in a great spot,” Chapman adds. “However, an age-old principle is more relevant than ever today—a great franchise deal is awarded, not sold. Franchisors thrive only when they are growing sustainably and awarding locations and territories to qualified candidates who fit the brand and its culture.”
The makeup of franchising
There should be plenty of movement as the market resets. Among the top 50 quick-serves in 2020, the total number of franchised units fell 2 percent. However, franchisors’ share of unit ownership lifted from 13 to 15 percent. Meaning, operators stepped in at times to take back sagging operations. Those units could be flipped. Yum! said it anticipates $100 million in refranchising proceeds this year alone. High multiples and eager buyers led to significant amounts of deal activity during COVID. Private equity was aggressive. Wendy’s and Taco Bell franchisee Delight Restaurant Group reported a 92.2 percent growth in sales, primarily through acquisitions of units. Flynn Restaurant Group had $3.7 billion in revenue in 2021 after it completed a $552.6 million purchase of 937 Pizza Hut and 194 Wendy’s stores from bankrupt operator NPC International.
What’s next? Rabobank believes deals of this nature led to a shakeout of sorts for U.S. franchisees, “which is expected to result in greater consolidation of the landscape.” The company credited the uptick in deal activity to a confluence of challenges; higher returns, buyers’ cash levels, and recent growth trends.
Valuations in 2023/2024 are unlikely to be as attractive. Margins are tightening due to rising prices, instability in commodity complexes is increasing, and the cost of capital is climbing.
“I would say the economy is on everyone’s mind at the moment, specifically inflation and the government’s next moves,” Oswiecinski says. “This directly affects franchising with regarding to tightened lending, access to and cost of capital for prospective franchisees. This means brands that have the majority of their new franchisees using SBA loans may need to temper development expectations. Brands that have a product/services tied to essential human needs will fare better.”
The same goes for brands that are more inflation-resistant, or higher-margin business models with a smaller portion of the P&L tied up in labor and real estate expenses, he says—concepts differentiated enough in the market to have pricing power.
“Outside of labor challenges, the biggest topic to monitor has to be the economy in general,” Chapman reiterates. “Will the economy just endure a short dip or is a crash on the horizon? How do international conflicts/trade battles impact supply chain/distribution? If the economy does, indeed, crash will that actually be a good thing for quick-serves offering cheaper food, and often the comfort food options many folks turn to in an economic depression?”
As usual, setbacks will present opportunity for some and final straws for others, and that’s especially true of an entrepreneurial world like franchising. “Overall, though, as we saw in the last recession and during other periods of volatility, some people will use these external circumstances as an excuse to not make a change, while for others it will be an inflection point that prompts them to take the leap into something they’ve been wanting, but putting off, like franchise/business ownership,” Oswiecinski says.