Restaurants are braving rough waters in 2024. Inflation has eased from its pandemic-era peak. Commodity and labor markets are showing some signs of stabilizing after a volatile few years. But franchisees are still contending with higher input, occupancy, and development costs. Plus, they’re grappling with a consumer base that’s feeling the pinch of price increases and pulling back on discretionary spending in a murky macroeconomic climate. All of that is pushing franchisees to rethink their strategies, prioritize cost efficiency, and explore fresh solutions to maintain growth and profitability. 

The labor situation remains a big headwind, especially in California, where restaurants are still reeling from this spring’s mandated $20 fast-food minimum wage hike. 

“It really comes down to the franchisee, because they’re the one who has to pay for it,” says Sonu Chandi, owner and CEO of Chandi Hospitality, a Northern California-based real estate company and franchise group that operates around 20 Mountain Mike’s Pizza locations. “For us, it was all about studying the numbers and understanding what the impact would be on our individual business. How many hours are we running at this site? What’s the percentage increase going to be there?”

The new wage requirement marks a 25 percent increase from the state’s previous minimum rate of $16 per hour. In some areas where Chandi operates, local jurisdictions already required restaurants to pay more than that, so the actual increase was around half as much. Still, a roughly 12 percent increase is substantial, and it comes on top of elevated food costs that have been ticking upward for a while. 

Occupancy costs are higher, too. Chandi says one of his stores that was set to renew its lease earlier this year faced a nearly 30 percent rent increase.

“We knew that with inflation cutting into our profits, we couldn’t afford that,” he says. “Because we’re also a real estate company, we were able to find a nearby location that ended up being cheaper. Initially, we were a little worried about moving to a site that’s not in a big shopping center, but after looking at the data, we think we’re going to do pretty well there. That’s the kind of stuff we’re doing as a development agent and as a franchisee—being more proactive and shifting as needed.”

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Franchisees are exploring various solutions to manage growing input costs. Some are cutting hours and turning to technology to supplement labor, employing self-order kiosks, automated kitchen equipment, and AI in the drive-thru. They’re also looking to funnel more orders through digital channels, which typically come with higher checks and require less labor by offloading the ordering process. 

Businesses that tried to get ahead of the increased labor costs before the wage hike took effect may find the sailing to be a bit smoother, Chandi says. He made a significant investment to help navigate the challenges last year, establishing a new back-office team in India led by his brother. The move helped bolster the company’s internal accounting and HR capabilities. 

“Now, we’re better situated to be able to utilize that team to review all of the data and help with all of this,” he says. “They’re doing that every day so we can tell our in-store teams, ‘We don’t want to cut your hours. We want to make sure you have a good, sustainable job. We want you to continue growing with us.’ But we have to be realistic and make sure we’re not paying more than we’re earning.”

The new back-office team has also helped build up operational oversight capabilities. That includes a sharper focus on employee training and refining systems and processes to ensure stores are operating at peak efficiency. Equipping general managers with the tools they need to run their restaurants and develop strong in-store teams has been a priority, too.

“We’ve gotten a lot of buy-in from our managers,” Chandi says. “They’ve been working really proactively to help make it all work.”

Many franchisees have found that raising menu prices is the most straightforward solution for offsetting higher input costs. That comes with its own set of challenges in an environment marked by growing consumer cautiousness. Widespread traffic losses indicate that many customers have reached their limit on acceptable restaurant pricing, making it clear that further hikes could drive even more patrons away.

“You have to figure out how much of these costs you can move to the consumer because you can’t move them all,” Chandi says. “We gave anywhere from a 4-5 percent increase, but only on some items, because you can’t do it on all of your items, either. That’s a big challenge in today’s landscape—just managing this and looking at it weekly, bi-weekly, and monthly to make adjustments.” 

Data underscores the delicate balance franchisees are trying to strike. Foot traffic analytics company Placer.ai found that as a result of the wage hike, most quick-serves in California raised prices by mid-single digits to mid-teens. Revenue Management Solutions, meanwhile, found that the state’s quick-service traffic decreased 4.7 percent in the first month after the change took effect, compared to a 1.6 percent decline nationally. Net sales were flat while the quantity per transaction decreased 1.5 percent, a sign that guests were starting to manage their checks more carefully. 

Placer.ai’s year-over-year visit trends for chains across the U.S. and California showed a link between price increases and transactions. Before the wage law took effect, California’s quick-service visit trends were slightly ahead of the national average. That changed after the wage hike, with national visit trends surpassing California’s for seven of the eight weeks in April and May. 

That doesn’t mean the challenges are isolated to the Golden State. Nationally, the rise in food-away-from home prices has outpaced that of food-at-home. According to a June forecast from the USDA, food-away-from-home prices are expected to increase by 4.2 percent in 2024, while food-at-home prices are predicted to rise by just 1 percent.  

With menu inflation outpacing grocery inflation, nearly one in eight Americans now consider fast food to be a luxury, according to a survey of more than 2,000 consumers conducted by LendingTree this spring. An intense battle for value has erupted as restaurants refocus on affordability to win those guests back. 

Hamra Enterprises, a Springfield, Missouri-based franchise group operating around 200 Wendy’s, Panera, and Noodles & Company locations, is seeing a growing demand for value across all of its brands, particularly in the fast-casual segment, says CEO Mike Hamra. Pricing is a baseline for delivering on that proposition, but it’s just one piece of a much larger puzzle. 

Ultimately, Hamra says, value is about providing the right experience for guests “from the interaction to the follow through, to making sure that the orders are executed with the speed and accuracy that the customer expects.” That cuts right back to a restaurant’s biggest asset: its people. 

“If you’re not supporting your team members, they’re not going to support your guests,” Hamra says. “And if you’re not supporting your guests and providing those exceptional experiences, people stop coming in. It’s simple math. Transactions start to drop. People come back less frequently or stop coming back at all. That’s where I’ve seen a lot of people get in trouble. They think it’s a P&L problem. They try to cut costs instead of investing back in people. Pulling back on that is the worst thing you could do. The best thing you could do is lean in and invest in people, because that translates back into a great guest experience and supports a business that’s going to succeed long term.” 

Beyond training and development, Hamra says franchisees need to provide comprehensive support and benefits to remain employers of choice in a tight labor market. His company offers tuition reimbursement for those who wish to continue their education and provides an on-site homework program for student workers. Employees are paid to work on their homework for an hour before or after their shift. They’re also rewarded for good grades with bonuses.

Additionally, Hamra Enterprises runs a program funded by employee contributions and company matching to provide financial assistance for extended medical leave, funeral expenses, and transitional housing. It also aids in financing home ownership and covering daycare costs. 

“Competition for the brightest and best employees is pretty fierce out there right now, so it makes a big difference for people when their employer is supporting them not just with a paycheck, but in other areas of their lives that are important to them,” Hamra says, “We typically find that when our support structures are in play, and people are utilizing them and engaging with them, those employees are happier and stay with us longer. They also spread the word about us as an employer to their friends and family, and that makes a big difference in attracting and retaining people.”

The recent uptick in bankruptcies in the restaurant world underscores just how challenging the landscape is. This past year has seen filings from large franchisees for a growing number of major brands, including Burger King, Hardee’s, Wendy’s, Popeyes, McDonald’s, Subway, and Arby’s to name a few. 

Hamra says it isn’t all doom and gloom out there, with successful franchisees looking inward and focusing on the factors they can control to stay on course, he says. 

“We’ve seen these kinds of dynamics happen in the past before, maybe in different ways, and certainly in different combinations,” he says. “It’s part of our industry. We’re used to dealing with headwinds like this and getting on the other side of them.” 

Some brands and franchisees are targeting a turnaround by closing underperforming units. Others are putting a pause on development to focus on maintaining successful locations. Those that are growing are finding the price tag for new stores is still higher than it used to be. 

“Building costs have certainly gone up, too, which makes it harder to pencil out how to make it work,” Hamra says. “Everything costs a bit more to get a brick-and-mortar building up. That’s definitely created some challenges.”

In response, quick-service brands are value-engineering new prototypes to lower investment costs for franchisees looking to build new stores. Franchisors are shrinking footprints and enhancing the efficiency of restaurant designs, enabling operators to achieve the same volume with less square footage. 

Nontraditional locations also offer a cost-effective path to unit growth. Along with opening new streamlined and digital-focused Wendy’s and Panera stores, Hamra Enterprises has opened new units inside of travel centers and hospitals.

Despite the wave of bankruptcies and mounting pressures, success stories and pockets of growth are still emerging. Franchisees seeking to diversify their portfolios and drive expansion are focusing on fast-growing, traffic-boosting concepts in high-growth categories like beverages and chicken.

Hamra Enterprises branched out and brought a new brand into the fold for the first time in a decade last year. It inked a deal to open two dozen Caribou Coffee locations throughout Missouri. 

“We’re looking for things that are growth vehicles,” Hamra says. “Consumers are seeking out craveable products and looking for innovation. They’re sharing where they’re getting new things and trying new products. All of that elevates the competitive nature of the business that we’re in. We were blown away by the different offerings Caribou has and the innovation that they’re doing around beverages. For us, it was about getting into that category, because it’s different from anything else that we have in our portfolio right now.” 

Similarly, Chandi Hospitality recently signed a 10-unit development deal with Guy Fieri’s Chicken Guy! concept. 

“Everybody was like, ‘Why would you sign on to develop a new concept right now? The financing costs are high. This and that are high,’” Chandi says. “I think it’s a double-edged sword. It’s an opportune time, too, because not as many people are opening and more people are closing. It’s all about being proactive and strategic, because you can still find really good opportunities in this environment.”