A Five-Pronged Approach to Facing Economic Headwinds in the Food Sector

How to navigate turbulence and empower franchisees.

The food and beverage sector, the pillar of franchising, has recently encountered formidable headwinds. Franchise owner satisfaction, a bellwether for industry health, has seen a noticeable decline, ticking down by 3-5% over the past year across all segments from fast-casual to quick-service restaurants (QSR) to casual dining. We’ll delve into the primary economic currents behind this trend: soaring food and labor costs, and the inflationary surge affecting nearly all operational resources.

The Bite of Increased Food Costs

For franchise owners in the food sector, the cost of goods sold (COGS) always looms large on the balance sheet. Recently, these costs have begun to take an even bigger bite. Food prices have escalated nationally due to a complex interplay of inflation on fuel, processing, labor, and transportation. While inflation is slowing, the U.S. Department of Agriculture reports an 18-month average increase in food prices by over 15%.

This surge hits franchise owners where it hurts: profitability. To adapt, some have tweaked their menus, substituting costlier ingredients or resizing portions. Others have reluctantly raised prices, a move fraught with the risk of alienating cost-conscious customers. These decisions are not taken lightly, as they directly affect customer loyalty and the value proposition that has historically made food franchises a staple of dining out.

The Challenge of Escalating Labor Costs

Labor represents one of the largest expenses for any food franchise. The industry, notorious for its high turnover rates, has been compelled to offer higher wages to attract and retain employees in a competitive job market. The U.S. Bureau of Labor Statistics indicates a significant upward trend in earnings for workers in the leisure and hospitality sector, which includes food franchise employees.

However, higher wages, while necessary to secure a reliable workforce, squeeze margins even further. Franchise owners must navigate this challenge delicately, balancing fair compensation with the need to maintain a sustainable business model. Innovative solutions like automation and enhanced training programs to increase employee efficiency are being explored, but these too require upfront investment at a time when cash flow is already constrained.

Inflation’s Broad Reach

Inflation has been the buzzword of the economy, sparing no sector, least of all the food industry. The cost of utilities has skyrocketed, with the U.S. Energy Information Administration reporting a marked increase in commercial electricity prices. Similarly, rental costs for prime retail space have climbed, as have prices for essential supplies and kitchen equipment. This confluence of factors compounds the difficulties faced by franchise owners, forcing them to make tough choices about where to cut costs without compromising on quality.

The Profitability Squeeze

These economic pressures converge to form a profitability squeeze that is the central factor in eroding franchise owner satisfaction. The challenge is multifaceted: how to maintain efficiency and affordability while costs spiral? For some, the answer lies in innovation and agility—embracing mobile technology, refining delivery models, and finding novel revenue streams like catering or branded merchandise.

Yet, the question looms: Is this enough? If current trends persist, the industry may face a pivotal transformation. Franchise owners will need to be at the vanguard of this change, leveraging their entrepreneurial spirit to weather the storm.

Empowering Franchisees: A Five-Pronged Approach 

As the food franchises grapple with diminishing franchise owner satisfaction amid rising costs and shrinking profitability, franchisors play a pivotal role in charting a course through these stormy economic seas. Here are three critical strategies franchisors can implement to bolster their franchisees:

1. Harnessing the Power of the Network for Smarter Purchasing

Franchisors hold significant sway through their expansive networks, which can be leveraged to negotiate better terms with suppliers. In these times of financial strain, it’s imperative to examine every line item, seeking opportunities for bulk-buying discounts or exploring alternative supply chains that may offer more competitive pricing.

Beyond the traditional scope, franchisors can also support franchisees by venturing into new expense territories. This may involve negotiating for lower utility rates, or identifying cost-saving measures in equipment leasing and maintenance. The goal is to pass on the benefits of economies of scale to franchisees, enabling them to rein in operational costs and improve their bottom line.

2. Maximizing Labor Efficiency Through Advanced Scheduling

Labor management is a cornerstone of operational efficiency in the food sector. Franchisors can assist franchisees by providing access to sophisticated scheduling tools and third-party applications that streamline staff allocation. These technologies can predict peak hours, track sales trends, and align staffing levels accordingly to ensure that labor costs are in sync with revenue flows.

Furthermore, franchisors can facilitate knowledge sharing across their network, allowing franchisees to benefit from the collective wisdom of seasoned operators. This might take the form of workshops, webinars, or peer-mentoring programs that focus on labor optimization strategies that have been tried and tested within the network.

3. Menu Innovation: Balancing Cost-Savings with Consumer Appeal

Innovation is not only the spark of creativity but also a practical tool for cost management. Franchisors can guide franchisees through a process of menu innovation that achieves two critical objectives: cost reduction and labor efficiency.

• Resizing Product Offerings
  
  The art of menu resizing involves analyzing which items deliver value both to the customer and the franchise. By identifying best-sellers and high-margin items, franchisors can help franchisees focus on what works and eliminate what doesn’t. This may mean reducing the number of offerings to streamline operations and minimize waste.
  
  A smaller, more focused menu allows for more efficient inventory management, reduces the complexity of order fulfillment, and can speed up service times. All of these factors contribute to a smoother operation that can better weather economic turbulence.

• Simplifying Ingredients
  
  A refined approach to ingredients can lead to substantial savings. By paring down the number of ingredients used across various dishes, franchises can take advantage of bulk purchasing and reduce inventory complexity. This also simplifies the cooking process, making training easier and potentially reducing errors and food waste.
  
  Moreover, ingredient simplification need not come at the expense of quality or flavor. It encourages culinary creativity and can lead to the development of signature dishes that set a brand apart. By focusing on quality over quantity, franchises can cultivate a reputation for excellence that resonates with customers.

• Labor Efficiency
  
  Menu innovation directly impacts labor efficiency. A streamlined menu requires less time for preparation and training, allowing staff to become proficient more quickly and reducing the time it takes for a new employee to become a productive team member. Additionally, with a simpler menu, employees can multitask more effectively, optimizing labor during both peak and slow periods.
  
  By incorporating this fourth prong, franchisors provide a comprehensive blueprint for franchisees to adapt to economic pressures. Menu innovation is a proactive step that can yield immediate and long-term benefits, enhancing both the customer experience and the franchise’s financial health.

4. “Would you like some fries with that?” and Other Smart Promotions

In the competitive restaurant landscape, smart promotions are not just a tool to drive consumer traffic; they are an art that balances customer attraction with franchisee profitability. A successful promotional strategy begins with targeted offers, crafted from a deep understanding of customer data. By analyzing purchase histories and preferences, franchisors can help franchisees tailor deals to specific customer segments, like offering weekday lunch specials to professionals or family meal deals on weekends.

The efficacy of these promotions often hinges on their time-sensitive nature. Limited-time offers (LTOs) generate a sense of urgency, enticing customers to act swiftly, while strategically placed off-peak promotions can invigorate sales during typically slow periods. Additionally, smart bundling of products can subtly enhance average order values, providing customers with perceived value without diminishing profit margins.

An often-overlooked aspect of promotions is the integration of upselling techniques. By training staff to suggest complementary items, franchisees can subtly increase per-order revenue. Collaborations with delivery services offer an expanded avenue for exclusive deals and can be a boon during periods of limited-time free delivery offers.

Loyalty programs, too, play a pivotal role in driving repeat business. These programs, especially when they offer personalized rewards, not only encourage frequent visits but also foster a deeper connection with the brand. That said, the strategy of discounting requires a delicate touch. Deep discounts, while attractive to customers, can erode the brand’s perceived value and unit-level profitability. It’s about finding that sweet spot where the offer is enticing to the customer yet still maintains a positive contribution to your franchisee’s bottom line.

The success of any promotional campaign is contingent upon meticulous tracking and analysis. Continuously assessing the performance of promotions, coupled with customer feedback, provides invaluable insights for future strategy adjustments. It’s this cycle of analysis, adaptation, and implementation that keeps a brand’s promotional strategy not just current, but smart and sustainably profitable for both franchisees and the franchisor.

5. Fostering Financial Acumen for Greater Profitability

Financial literacy is often the linchpin of a successful franchise operation. Franchisors have a unique vantage point from which they can aggregate network-wide financial data and distill actionable insights. By delving deep into this trove of information, franchisors can identify patterns and pinpoint areas where franchisees can economize, even if it’s just by 1-2%.

Workshops and seminars on financial best practices can be incredibly beneficial, equipping franchisees with the knowledge they need to manage their finances more effectively. Topics could include cost-control techniques, cash flow management, and strategies for maintaining a healthy P&L statement.

Moreover, franchisors can develop a financial education curriculum tailored to the specific needs of their franchisees, addressing everything from daily bookkeeping to long-term financial planning. By strengthening their franchisees’ financial skills, franchisors empower them to make informed decisions that can lead to substantial savings and improved profitability.

Incorporating these strategies into the franchise system can create a robust framework for franchisees to not only survive but thrive, even in the face of daunting economic challenges. Each tactic underscores the franchisor’s role as a leader and a resource, reinforcing the symbiotic relationship that is the hallmark of a strong franchise network.

Smart Franchise Brands Will Thrive

The food sector finds itself at a crossroads with franchise owner satisfaction reflecting the broader economic challenges at play. While the headwinds of rising costs are strong, they are not insurmountable. The sector’s history is rich with examples of adaptability and resilience. To the hardworking franchise owners on the front lines, this period demands courage, innovation, and strong community support to navigate these challenging times. I have little doubt that the smartest food franchise brands will find a way to grow and thrive.

Franchise Business Review can help you measure franchisee and employee satisfaction in critical areas to franchisee and brand success, including innovation, financial outlook, employee engagement, marketing and promotional support, and more. Click here to learn more and get in touch.

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