“America is on the verge of stagflation,” shouted a recent headline from Business Insider. Forbes ran an article in March entitled “Stagflation warning signs emerge in the U.S. economy.” Is it possible for a franchisee to succeed in an economy stuck in stagflation? This article will discuss what stagflation is and how franchise owners can prepare their businesses to weather the storm if it arrives.
Know thine enemy
What is stagflation? Simply put, stagflation is an economic condition in which rising inflation and rising unemployment occur simultaneously. This situation is difficult to manage with the usual tools economists have at their disposal. For example, to combat inflation, the Federal Reserve Bank (the Fed) may raise the Federal Funds Rate, which leads to higher borrowing costs and lowered investment in business, thus slowing down the economy.
High inflation tends to occur when unemployment is low, and the competition for employees leads to increases in wages. When inflation occurs while unemployment is high, however, raising interest rates are likely to make unemployment worse, so the Fed’s hands are somewhat tied, making stagflation hard to manage.
Why is stagflation a risk now?
Anyone who grew up in the U.S. during the 1970’s and the OPEC oil embargo with its resulting oil crisis has experienced stagflation. Then, the cause was an energy shortage brought about by members of OPEC (Organization of Petroleum Exporting Countries) refusing to export oil to the United States, leading to a quadrupling of oil prices. The shortage of energy supplies coupled with skyrocketing energy prices put downward pressure on economic growth, leading to higher unemployment – the perfect recipe for stagflation.
Today, worries about possible stagflation stem from concerns about the effects of tariffs on prices and business growth. Tariffs, which are effectively a tax on imported goods, tend to be passed on to the consumer in terms of higher prices for finished goods, which fuels inflation. But businesses also face higher expenses from tariffs when they buy imported items necessary for operating their businesses, such as equipment and computers. These higher costs can cause businesses to cut jobs or postpone expansion, driving up unemployment.
Outlook for franchisees
So, what would the future look like for franchisees if the U.S. moves into stagflation? With higher unemployment, overall discretionary spending is likely to go down, which tends to negatively affect the restaurant industry. People with less to spend generally eat out less. Quick serve restaurants (QSRs) may get some uptick in business, however, as diners choose less expensive options for eating away from home. Off-premises (carryout, drive-thru, and delivery) orders may increase their upward trajectory even more as diners opt to eat at home rather than dining in. It will be interesting to see if customers shift to picking up their own meals rather than paying delivery fees as a means of economizing.
In a stagflation scenario, tariffs will cause franchise operators to face higher prices for any food or supplies that are imported. As the inflationary spiral continues, even prices for domestic items could go up, putting downward pressure on the operation’s bottom line.
Effects on hiring
Akin to the old joke, “Even a broken clock is right twice a day,” there is some good news for restaurateurs should stagflation occur. The perennial staff shortages that have plagued the industry will likely ease as unemployment rises.
Operators may find that they have more, and better, candidates to choose from when filling their staff rosters. Additionally, employees may be more likely to stay at their current job for a longer period as other options become less available.
Preparing for possible stagflation
Franchise owners can take several steps to help survive and succeed in a stagflation economy:
- Keep an eye on cash – With expenses likely to rise quickly, it’s important not to become overextended. Owners may want to put acquiring new stores on hold for a bit and instead focus on remodeling or upgrading existing locations.
- Manage menu prices – Setting menu prices always involves walking a fine line. Price increases would be difficult to avoid in a time of stagflation, but keeping prices within reach of cash-strapped customers should be the goal.
- Optimize loyalty programs – The 2025 Diner Trends Report from TouchBistro showed that loyalty program membership is on the increase, having jumped to 48% in 2024, up from 36% two years earlier. The primary reason customers sign up? Access to discounts and coupons. Optimizing loyalty programs to bring in repeat customers more often can help offset stagflation-induced drops in traffic.
- Consider discounts for cash – Credit card swipe fees can add up. In recent survey by the National Restaurant Association, 70% of respondents said they would not use a credit card if there were a discount for cash. Consider offering cash discounts to save on credit card fees.
- Keep the atmosphere positive – Remember that people eat out not just for convenience, but also as a way to unwind from a stressful day, enjoy time with family and friends, and have fun in an upbeat atmosphere. If stagflation arrives, guests will welcome the opportunity to visit a friendly place where they are greeted with smiles. Keeping staff focused on top-notch customer service can help keep traffic coming through the doors and drive-thrus.
Wrap-up
Fed Chairman Jerome Powell said in an April 4 speech, “While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.” Four days later, President Donald Trump announced a 90-day pause on tariffs (except for those against China). With trade negotiations going on between the Trump administration and many other countries, it is unclear what the timing and amounts of actual tariffs will be at the end of those 90 days.
With any luck, tariffs will have less of an impact than feared, and stagflation may not materialize. In case it does, a savvy franchise operator would be wise to get ready for higher prices and higher unemployment. With the right preparation, a business can still survive and succeed despite stagflation.
Alicia Chandler is president of Indianapolis-based First Franchise Capital Corporation (“FFCC”), a First Financial Bank company, which provides customized financial solutions for multi-unit quick serve restaurant franchisees of best-in-class concepts nationwide.
