The pandemic recession has been an economic slump like no other. Not only is the downturn considered one of the deepest since the Great Depression more than 90 years ago, but it also may end up being among the shortest. In fact, it’s already in the rear-view mirror for some American quick serves and franchisees.
For various reasons—not the least of which were off-premises operations that allowed for a quick sales turnaround, government assistance, and relatively easy access to capital—the limited-service restaurant industry began to see growing interest in franchising by the third quarter of last year, with a major gain projected for this year, according to industry statistics.
The International Franchise Association, using FRANdata statistics, projects quick-service restaurant franchise establishments will grow 4.1 percent this year after skidding 6.7 percent last year in the wake of pandemic-induced pressures, including health-related closures.
“When the pandemic hit, we had to hit pause and see what the impact was going to be,” says Jeff Rigsby, the largest franchisee for Bojangles Famous Chicken & Biscuits. Now he’s moving forward again with the addition of new stores in his existing markets, along with a new one: Columbus, Ohio.
Columbus is a microcosm of a flourishing quick-service franchising trend nationally. In addition to Bojangles, brands like Del Taco, Taco John’s, The Halal Guys, and others have announced their intentions to enter the Ohio capital for the first time.
This newfound aggressive expansion from several brands is likely a reflection of the fact that the pandemic exposed the weaknesses of failing brands and rewarded stronger, nimble ones. David Portalatin, food industry adviser at market research firm The NPD Group, says many quick-service companies have in fact expanded their geographic footprints.
Some of the projected franchising growth is the result of plans made before the downturn began, since it can take one to two years from the time a franchise agreement is signed until a store opens. Still, the pandemic’s immediate impact was to call a time out.
“You look back roughly 12 months ago, and you just hoped [your business] would survive,” says Brooks Speirs, vice president of franchise development at Taco John’s, referring to franchisees. “You weren’t thinking of expansion. You were trying to figure out what was happening.”
By last July, he adds, many franchisees realized that they not only would survive in that environment, but they could thrive by taking advantage of their old and new assets in place, including drive-thru windows, mobile ordering with curbside pickup, and delivery options.
At Del Taco, franchisees recorded strong same-store sales gains during 2020’s third and fourth quarters. Taco John’s, meanwhile, enjoyed a record year.
“The [quick-serve] business has proved almost pandemic-proof due to the drive thru,” says Jeff Little, Del Taco’s senior vice president of development. The addition of digital ordering options and delivery made operators even stronger, he adds.
Of course, those tools that helped quick serves during the pandemic were already a part of the industry before COVID, Speirs says. But he adds that the pandemic added new pressure to be innovative and “quicker on the spot.”
With drive-thru business skyrocketing, many brands adjusted their development plans to include more drive thrus and other off-premises opportunities. A few, including Bojangles and Del Taco, have opened or are planning drive-thru-only units. NPD found that drive thrus saw a 19 percent increase in sales this February versus the prior year. Delivery and digital orders both rose over 100 percent, albeit from smaller bases.
“These were pre-pandemic trends that just accelerated,” Portalatin says. “We just leapt five years in the future immediately.”
Quick-service franchisors continue to view existing multiunit and multi-brand operators as the prime targets to open new markets, but they also are seeing increased interest from restaurant professionals who lost jobs during the pandemic.
Italian chain Fazoli’s is another brand experiencing heightened interest in franchising. The company inked as many franchise agreements in just one month this year as in all of 2020 and should open at least 14 units this year, focusing on converting existing restaurant properties.
Like others, Fazoli’s needed to evolve during the pandemic, including its drive-thru lane, which can be slower than many other chains because items are made fresh to order.
“We had to shift our whole philosophy,” says CEO Carl Howard. Employees now are outside at the drive-thru lanes with tablets to take orders, cutting wait times by a minute. And after finding that guests were unhappy that they couldn’t get endless breadsticks as they did in the dining rooms, “we had people in the drive thrus handing out breadsticks,” Howard says. “That was a big win.”
While Fazoli’s embraces converting existing buildings, most brands are looking to build from the ground up, which is more expensive in today’s environment due to higher real estate and construction costs. Some, like Del Taco, are flexible to give franchisees the best option.
Rising construction costs limit the advantages of low borrowing charges. “Interest rates have really been a benefit for us, but the other side of the coin is construction costs are through the roof,” Rigsby says. The cost of materials is soaring, and demand is high for construction crews.
Another big issue that franchisees face as they add units is store labor costs. Unemployment benefits and stimulus checks have kept some workers from returning quickly to restaurants, and there’s plenty of competition to hire those looking for jobs.
This employment crunch is likely to grow as more units open their dining rooms, which typically require several additional workers.
Still, none of this has kept franchisees from looking to grow, including into new markets. For Taco John’s and Del Taco, the limited exposure of quick-service, Mexican-style restaurant chains in a city like Columbus makes it a prime area for growth—just like it would have been without a pandemic. And with the economy improving, COVID cases ebbing, and interest from new and existing franchisees exploding, the franchise world is ready to grow once again.
“The franchise business,” Little says, “is one way to gain control over your life.”