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Three financing trends that QSR franchisors need to know


Three financing trends that QSR franchisors need to know

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Over the past two years, franchise restaurant owners and operators experienced fluctuation in economic cycles more swiftly than we could have ever predicted. The pandemic forced the industry to adapt and evolve in ways that most likely would have taken more than a handful of years, but it is now occurring in less than half that time.

We were already seeing seismic shifts between 2017 and 2020, but the onset of the pandemic was a turbo-boost for restaurant brands – and thank goodness we saw rapid adoption. From new tech-enabled apps, loyalty programs and third-party delivery innovations to reimagined restaurant design and operations automation, it’s a new world for restaurant franchisors.

In 2022, operators are once again enveloped in a quickly evolving world. What are the trends to be paying close attention to? Here are three important issues that franchisors should be recognizing and how to embrace them to support franchisees and gain their buy-in.

1. Invest in automation and technology

Restaurant franchisors and their operators who have been early adopters in utilizing automation effectively over the past couple of years had a definite head start and continue to do so into 2022.

Those not as heavily invested have been behind the eight ball and face a slew of other difficulties. As an independent investment bank providing advisory services to restaurant franchisors, we will continue to look strongly upon automation to help offset rising labor and commodity costs in anticipation that it drives lower costs, helps provide better customer service, and increases productivity across the board for restaurant locations.

The most common usage of automation that embeds into the restaurant experience is the widespread utilization of mobile and brand loyalty apps given that today’s consumer values convenience.

But a sophisticated, data collecting mobile app is not where automation ends in 2022. The past few years have created a shift in consumer habits. Peak hours have changed to more of an all-day business with more people working from home, average tickets have increased due to plus one purchases and QSR marketing has changed as some consumers are no longer “driving to work”, resulting in a shift to digital becoming bigger and faster than ever before.

Automation will grow by leaps and bounds in restaurant operations. However, these investments in technology will not be available without significant cost. Franchisors and franchisees must be prepared to allocate necessary resources or risk falling further behind in an already competitive landscape.

Labor shortages paired with demand for higher wages and increased food and paper costs are forcing brands to seek efficiencies through automation. Brands most successful with automation are incorporating new technologies into restaurant design for new development and remodels alike.

Features like double drive-thrus, pick-up only parking, and even additional kitchen lines devoted to off-premise dining have created the biggest impact in terms of automation and additional revenue streams. Brands focused on automation and technology reap additional benefits such as reduction of food waste, order accuracy, consistency, reduced training and overall customer satisfaction. These investments do come with additional costs in the short-term, but will benefit profitability for all in the long run.

2. Remove barriers for new store openings

Equipment shortages, construction delays, inflation – these are some of today’s major obstacles that franchisees face as they take on the rigorous process of opening a new location. Franchisor guidance and support through the entire process is critical for franchisees.

From real estate selection to design and materials procurement, to training and implementing a grand opening strategy, the franchisor should be invested in each step of the process to ensure a successful store opening.

Construction and equipment delays are creating significant problems for franchisors and franchisees. These shortages are creating a significant impact on new store development and delaying reimaging and scheduled remodeling of stores.

Additionally, rising inflation and labor shortages are adding significant increases, which can add as much as 20 per cent increase in costs. Smaller franchisees focused on growth and store development will be hit the hardest, whereas larger, better-capitalized franchisees have the resources to build themselves.

QSR restaurants are shifting to a smaller footprint as consumer preferences have changed to off-premise dining. Reducing the store footprint provides an offset to rising costs as well as requiring less overhead, which allows franchisees to provide more efficient food service and increased profitability as a result.

Ultimately, franchisors need to be willing to step in and provide support to franchisees from the time they sign their agreement, up until opening day and beyond. Patience and flexibility will be critical traits that franchisors must embrace to be successful in 2022.

3. Support scaling franchisee portfolios

In today’s world of restaurant franchise ownership, financial constraints are mounting for smaller ownership groups. That’s not to say that well-run smaller franchisees cannot thrive or grow their portfolios, but mediocre and low-performing franchisees will likely fall further behind more focused competition.

Thus, within many markets, consolidation remains critical to survival for restaurant franchise systems. Fledgling franchisees face hiring challenges, remodeling requirements, and changing regulations that may be insurmountable resulting in declining performances, store closures and ultimately selling.

The pandemic has certainly sped up consolidation. However, it’s not to say that smaller franchise groups are out of luck. With a solid infrastructure in place, franchisees can open locations more freely with less investment as efficiencies take shape within their organizations. Franchisees with five to 10 stores don’t need massive capital improvements to further expand location count.

From a franchisor perspective, scaling is more advantageous and profitable. The larger a franchisee’s portfolio grows, operations become more efficient, and they have more capital to invest into their networks which will give them more purchasing power as organic growth is harder to come by.

So, what role can franchisors play as lending institutions prioritize growth for larger groups with stronger footings? Franchisors should have relationships with financial institutions and advisory firms that are available to support its franchisee base.

Within their system, a franchisor can and should initiate conversations with locations that are not built to withstand today’s pressures and discuss a sale or merger with larger franchise groups within the brand or to qualified groups currently operating outside of the franchise system.

The author

Pete DiFilippo is a partner at C Squared Advisors, an IFA member organization that provides financial and transaction advisory services to franchisors and franchisees in the restaurant, retail, and service industries

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