Emerging trends provide direction for franchise development
Illustration by Jonathan Hankin
“This is the biggest economic shock in the U.S. and in the world, really, in living memory. We went from the lowest level of unemployment in 50 years to the highest level in close to 90 years, and we did it in two months.” — Jerome H. Powell, Federal Reserve Chair, in June
In January’s Franchise Times, I wrote about black swan events and brand resilience. The pandemic has inflicted astonishing global economic damage and negatively impacted many facets of humanity. We have all settled into new routines, determined to persevere. This column is focused on franchise development. It’s often an under-appreciated corporate function, yet vital to your brand’s success. Deal flow has dried up at many brands and their franchise sales personnel have been laid off or furloughed. However, emerging trends reveal a new normal for development and the optimal path forward.
New categories draw interest, ownership models change
As expected, new winners are emerging based on pandemic-era consumer habits and franchise buyer perceptions about “recession resilience.” Recent data from Franchise Insights demonstrates that buyer interest in franchising remains strong but attention has shifted. For example, the pet category has seen sustained and growing investor interest during the pandemic because pet services are deemed “essential” businesses. Other areas attracting buyer interest according to Franchise Insights include: computer services, education, business services, cleaning, and financial services.
Lending will tighten as it has after other recessions. Lenders can be expected to rebalance their loan portfolios in a flight to both concept and borrower quality. Demonstrate why you deserve buyer attention and lender support. Tell the story of your brand’s resilience. Deals are absolutely getting done.
Big lease obligations look like Superman’s kryptonite right now. Creative operating models with lower perceived risk will appeal to some franchise buyers. We expect more brands to add mobile-only franchise options. We also expect more accessible entry models, such as reduced franchise fees, franchisor-financed entry for general managers who want to be owners, and “operations-for-hire” for investors who want to own, but not run, a franchise. If your concept has flexibility, it may be worth exploring some new options. This would also give your existing owners lower-risk, lower-cost ways to expand.
A reckoning has arrived
Prior to COVID-19, we already had too many brands chasing too few buyers and hundreds more new brands entering each year. In addition, some categories were over-stored. Hopefully this pandemic will force new brand entrants to wait, giving the market time to rationalize the existing brand inventory.
Of course, the pandemic also puts tremendous pressure on otherwise sound systems and concepts. If social distancing requires operators to run indefinitely at reduced capacity, many businesses (franchised or otherwise), are simply not designed to be profitable when partially empty. We can assume that many units will, tragically for those involved, permanently close.
Smaller concepts should consider consolidating with a regional competitor and come back stronger together. Private equity and other funding options are available if you decide to pursue this type of strategic roll-up. Now would also be a good time to help your weakest operators exit (prior hold-outs may be more receptive,) and pull those units under your best operators. Put together workout, financing, incentive and resale programs to promote healthy consolidation.
Re-starting deal momentum
As franchisors cut back to preserve cash, a wave of layoffs hit sales and marketing teams. It won’t be easy to turn the deal spigot back on and rebuild momentum. This creates an opportunity for outsourced lead generation, skilled franchise development and marketing consultants, and brokers to help companies rebound and also address resales.
Fractional/outsourced franchise development services with contractual deal obligations can be a cost-effective approach. Once brands have good experiences with outsourcing, they may opt permanently for leaner corporate staffing.
The pandemic could have the unfortunate effect of masking weak franchise models. We often encounter brands (including large, well-known brands,) that possess the exterior veneer of health but the brand is actually rotting from the inside out. Symptoms (pre-COVID-19) include the inability to get units open, multi-unit commitments falling through, poor customer satisfaction scores, unit closures and owner turnover, rising owner discontent, inability to describe your ideal franchise candidate, inability to systemize or codify top operating practices, etc. Since the pandemic is putting many things on pause, use this time to accomplish needed reinvention.
Unit economics face pressure
An avalanche of government stimulus has propped up our economy. But, it’s not free. Taxes must eventually increase, especially at the state and local level given recession-related revenue shortfalls. Other costs may rise, such as worker compensation, insurance, cleaning and supply chain.
Central bankers will try to keep a lid on inflation, but the above categories will break out early. Some labor cost pressures may be temporarily abated due to high unemployment, but operators must still pay to retrain workers. Combined with social distancing-related capacity throttling and uncertain consumer spending recovery, franchisee unit-level economics will remain under significant pressure.
Look for opportunities to help franchisees cut costs and operate more effectively. Then help restart demand. Marketing investments should be made at the franchisor level. Even brands that have remained deeply engaged with their communities will need additional investment to cut through the noise and entice customer spending.
Alicia Miller is a managing director at Catalyst Insight Group. Her Development Savvy column covers smart ways to market and grow a franchise. Reach her at email@example.com.