Key Disruptions Rocking the Restaurant Franchise Space
5 Min Read By Merilee Kern, MBA
Like veritably all businesses in the post pandemic era, those operating in the restaurant, café, food truck or other type of F&B franchise space are experiencing a wave of major change—as is the franchising trade at large. Accelerated and elevated adoption of technology; consumer demand for more efficient and on-demand service; and employee appeals for greater flexibility are among the many industry pivots that are evolving seemingly by the day.
These and other kinds of changes and challenges each have their own implications within the franchise space—a sector projected to open more than 26,000 locations and nearly 800,000 new jobs, employ nearly 8.3 million people and contribute $477 Billion to the U.S. GDP by 2021 year end.
“Amid all of the economic upside and the changes that are propelling the sector into new territory on multiple fronts, there are also numerous disruptive trends that, if not aptly adapted to, can become make-or-break factors for a franchise-based business,” cautions Jimmy St. Louis, Chief Executive Officer at Franchise123.com.
According to St. Louis, here are a few key disruptive trends reshaping the space.
Transparency Takes the Lead
Now more than ever, accurate data and transparency is no longer a request, but rather has become a foundational requirement. The franchise development industry has never experienced the collective and global transparency of franchise data that is now underway. Franchise brokers, consultants and online franchise portals currently dominate the franchise development industry, but these outdated methods do not adequately meet the needs of modern investors.
No matter the investment, buyers expect transparency and comprehensive data to facilitate the vetting process. Franchise buyers do not just want to be sold something, but rather they want to invest in a business that will best assure they will thrive financially, professionally and personally.
Proper franchise selection has the biggest impact on whether or not a franchisee will succeed in any or all of these areas. Brokers and franchise portals not only limit the options available, but may also guide a prospective buyer towards a brand that is not right for their goals, objectives and sensibilities.
Industry Portals Are Perishing
Specialized industry lead generation and business development portals have long been the connector between franchisors seeking to engage with potential franchisees, and they are dying on the vine—and rightfully so. Although consumers may not be aware, portals can be doing them a disservice. This is because of the fairly ubiquitous business model where portals are compensated for leads created—inherently creating a bias and weighting interests toward the portals themselves versus prospective buyers. That means that, as a franchise investor, a portal makes money off of you whether or not you are actually interested in—or suited for—the brand you merely clicked on to check out.
Beyond this dynamic, there are a myriad of other problems with franchise portals. Brands are looking to these portals to find qualified and interested buyers, but often feel that they are wasting their time, energy and marketing dollars on unprepared leads. Those that are often not pre-qualified, vetted or properly funneled toward applicable brands. In addition the prospective franchisee is then often prematurely bombarded with phone calls even prior to their understanding of the brand. In turn, they are also left to their own accord to organize their thoughts, perform their own research and make their own investment decision. Thus, franchisors have been lamenting that they are paying too much per lead and heeding very limited results—eroding business development budgets that are stressed and waning post-COVID-19.These dollars are now being allocated toward other lead generation methods with a more demonstrable ROI.
Mass Entry Mishaps
Also in the wake of COVID-19 people are more wary than ever. Many have lost their jobs and, with it, their sense of stability in a traditional career path. Suddenly a 9 to 5 job and promise of a bi-weekly paycheck does not feel reliable and, income aside, many people are also seeking more professional autonomy. The recent pandemic has accelerated the mass exodus from traditional careers and fueled the transition to freelancing, gig work and entrepreneurship. With this, franchise businesses have become a very popular option for people looking to pursue a more entrepreneurial route while absorbing less risk.
This wave of new buyers are seeking to capitalize on the engrained support—and to leverage the power of an already established brand—as they embark on their entrepreneurial path. However, this eagerness and enthusiasm can lead to hasty or high pressure-driven decisions and avoidable mistakes—with selecting the wrong franchise for their goals and personality paramount among them.
Industry insiders indicate that new legislation will soon be proposed that threatens the profitability of the franchise broker business model. Franchise brokers count on being paid a portion of the initial fee that a new franchisee has paid to the brand up front, before the unit opens. For example, if a franchise investor pays $99,000 for the rights to open five locations, a franchise broker is typically paid 50 percent or more of that as their commission, regardless of the amount of locations the franchise opens. However, the newly-proposed legislation allows brokers to be paid the franchise fee as each franchise unit actually opens. This payment paradigm changes the entire sales process and cash flow for a broker. Compounding the concern is the fact that there are thousands of franchises soled each year that never open.
With the current system, brokers are paid for their efforts of successfully bringing a new franchisee into the fold whether or not a unit actually opens—a post-sale situation out of their control and sphere of influence. This entire dynamic can put both the broker and the franchisor in a more compromising position, strain professional relationships in the process and potentially undermine a franchisee’s ability to obtain adequate broker assistance when desired. In simple terms, this new legislation will align the interest of all parties, but the broker network will surely not like it.
What Does This Mean for the Future of Franchising?
“These disruptions in particular are prompting key concerns for all contingents: inadequate access to mission critical information, cost inefficiencies and misaligned interests among them,” noted St. Louis. “Franchisors are having immense difficultly finding qualified franchisees due to misaligned interests of portals. This as brokers, and the tidal wave of prospective new franchise buyers themselves, are lacking a means to procure qualified information and efficiently connect with the right franchisors. This sector exemplifies the need for innovation and we expect to see several technological solutions manifest over the next few years. Transparent and self-guided sales processes have already begun to dominate a multitude of industries, including everything from buying houses on platforms like Zillow and cars on Carvana to shopping for insurance and more. Franchise development is long overdue for change; namely to establish a more innovative sales method that truly aligns the interests of franchisors and franchisees, alike, to the drastic benefit of all parties.”
Perhaps anything less than what St. Louis describes would be akin to shopping for a home without access to meaningful online data, leading to wholly inefficient and uninformed decision making that only exacerbates risk. In today’s marketplace, and the hugely impactful franchise trade in particular, that kind of result is entirely unnecessary, avoidable and will surely be regarded buy industry pundits as wholly unacceptable. Today, one couldn’t even imaging buying a home without suitable online resources.
According to one report, assuming control of the COVID-19 pandemic is forthcoming this year, FRANdata predicts that by year-end, franchising will have recovered to nearly 2019 levels in most metrics: business growth, employment, economic outlook, and contribution to the GDP. The report also cited that total franchise output is projected to grow by 16.4 percent and contribute a total of $780 billion to the U.S. economy. All this largely founded on antiquated systems and processes rife with shortcomings. One need only imagine the economic upswing were the franchise development space to operate in a more efficient and equitable manner.