2022 Disruptions in the Franchise Industry: Where Should Leaders Put Their Sights On?
May 25, 2022
(Part 7 of the 2022 Multi-Unit Franchising Conference)
What is the state of the franchise industry nowadays and what should franchise owners and franchisees be preparing for? During his lecture at the Multi-Unit Franchising Conference, which happened earlier this year, Darrell Johnson, CEO of Frandata, shared his thoughts and deep analysis on this matter.
Frandata is the premier source of market intelligence data in the franchise world, across 230 industries and over 4,000 brands. In this blog post, I’ll be sharing the takeaways of this session, which was, as you can imagine, very informative and eye-opening. These are the things that franchise leaders need to be aware of and understand so that they can make better decisions in their present and future businesses.
These are the things that franchise leaders need to be aware of and understand so that they can make better decisions in their present and future businesses.
World and US economy
While we are doing better in terms of the recovery from the pandemic, Darrell warned us that as we enter the second half of 2022, the economy is in a weaker position than expected.
Proof of that is the world GDP. In 2021, the world in general finished with a 5.9% GDP, while the U.S. had 5.6%. In 2022, it is expected to be about 4.4%, and the U.S. will be close to about 4.0%, therefore, it’ll slow down.
The perspective for 2023 is that the downfall will continue, with the world GDP projected to be at 3.8%, and around 2.6% for the U.S. So as you can see, there will be a significant slowdown which will continue to impact our economy.
Another factor that influences is the elevated inflation, which in Darrell’s opinion, will persist longer than expected. The US CPI inflation will be an average of 7.9% for the whole year. This is worse than last year due to the significant supply chain issues caused by the Ukraine war because we have a lot of imports from Ukraine and Russia.
Tight labor market
Here are a couple of statistics on the labor shortages that the US is experiencing that Darrell shared at the conference:
- 37% of franchisors say they have slowed down growth due to labor issues.
- 39% of businesses are facing retention issues.
- 88% of franchisors are unable to find first job employees as well as headquarters personnel.
- 78% of franchisors consider the staffing levels a constraint or what is slowing down their growth plans.
- 3.9% is the average pay increase.
- 50% of small business owners are forced to raise prices.
The labor pain in the franchise model will be here for a while. And, with the current level of inflation, franchisees have two choices. Either they increase prices to cover the rises in costs or erode their bottom line, which might not be the best idea because they’ll risk the health of their business.
Franchisors are also complaining about the quality of the employees because people are not loyal or committed to the company they work for. Seeing this, the Frandata CEO advised business owners to look inwards at the organization to see what they can do to become an employer of choice.
Learn here 10 actions to attract, retain and grow top talent for your organization.
As a result of the staffing crisis, many companies are turning into artificial intelligence and other high-tech solutions for businesses in many industries, including food service. This means that a lot of the jobs that people are not willing to take will be substituted with technology.
Supply chain hurdles
The biggest issue regarding the supply chain is the low shipping capacity. A lot of containers are stocked in ports, causing merchandise transportation chaos, inventory shortages, an increase in the cost of goods, and a reduction in margins.
There are also labor shortages, from truckers to warehouse employees, that affect supply availability. This means that the product might be there, but there is no personnel to process and deliver them.
As a result, 45% of small businesses are reporting supply delays. And, to cope with this challenge, 47% of small businesses are passing the related cost to consumers. A way to mitigate this increase is to make the price of your product irrelevant by offering an excellent customer experience.
Review how you can create a positive and memorable customer experience with these tips.
Consumer spending and sentiment
Darrell said that it is expected that consumer spending will increase in the first half of 2022, driven by retail, e-commerce, and automobiles. However, this is creating price pressures going forward, so it might go down for the rest of the year.
Another risk when it comes to consumer spending, access to cash, and the economy in general, is the uncertainty of potential virus variants, as well as the Ukraine war, and the impact that these issues are having across the world and the country. Right now, consumer sentiment or confidence is going down, and the projection is that the trend will continue.
Costs are expected to keep rising
There is no clarity as to when things will get under control. That’s why the CEO urged franchise owners to be prepared for the long-term rise in the cost of goods. You must consider this within your budgeting and your financial plans for the next two years.
The importance of knowing your numbers, understanding your business, and how to make better decisions, and at the right time, has gone to a whole new level. Before, having this knowledge was about increasing your profitability; now it's about ensuring your survival. It is no longer a passive choice, you have to act proactively.
Grow with caution
In 2021, revenue increased a huge 16.3% over the pandemic year. A lot of business owners were able to take advantage of location opportunities, resulting in a +2.2% of unit growth, with 792,014 total franchise units in the United States. That’s an increase of 17,000 units in 2021!
The franchise sector also saw employment growth of 3.1%, almost at the pre-pandemic level. The growth is expected to continue in 2022 but at a slower pace. That’s why Darrell summarized the state of franchising with the phrase “growth with caution”.
Are you preparing for growth? Build the proper infrastructure for it with these recommendations.
Multi-unit deals
The industry executive also mentioned that there are a lot of package deals to capture areas of development and franchisors are significantly backing the consolidation of their brands on multi-unit operations.
I've seen it in a couple of our clients: their brands have approached them to acquire more units. It’s a winning strategy because when you have proven operators that are doing a good job with a few of the units, there’s a strong potential for them to grow multi-unit.
Another trend is more franchisees becoming multi-unit and multi-brand, or as we call them, MUMBOs. This diversity protects their portfolio, which helps them confront future challenges.
Discover here the pros and cons of becoming a multi-unit multi-brand franchisee.
Private equity interest and capital
The Frandata CEO pointed out how 2021 was a record year for mergers and acquisitions (M&A), which increased 81% year over year, with 141 franchise brands that change ownership. And he anticipated the aggressive expansion will continue in the future.
It is no surprise. Private equity is seeing a huge opportunity in acquiring emerging brands and small chains weakened by the pandemic.
My concern is the impact this will have on the culture of those brands. Being involved in acquisition processes in the past, I know that whenever there’s an M&A, the culture of the company takes a hit.
It’s a critical matter: the passion, love, and commitment for these brands and products come from their culture. That’s why I advise these brands to look at their leadership to see who’ll continue that excitement for the future, even though they are under new ownership.
Access to capital and underwriting
Although access to capital continues to be strong, lenders are wary about what's happening in the industry and the economy, so they are requiring a lot more information and data to make lending decisions. Also, Darrell warned that borrowing is getting more and more expensive, especially with the increasing interest rates.
So, if you are considering getting a loan, here are the things that lenders are looking at to decide whether or not you are a qualified borrower:
- The brand and the systems unit success.
- The specific industry challenges, like labor, supply chain, and start-up costs.
- The true state of your operations, both current and future.
- Your Brand Fund Score, developed by Frandata, which reflects the franchise results in the brand system, the franchisor’s performance on growth, and the unit economics.
- If the industry you are participating in is a positive one. For example, child or pet-related, food, building & construction, and automotive.
Looking for a franchise? Review these tips to do your due diligence.
And remember that having a healthy credit score will increase your chances of acquiring a loan. You also need clean and clear financials to demonstrate your ability to give lenders a proper return on investment.
As a franchise business owner, you need to be clear of these challenges because sadly, they aren’t going away anytime soon. You have to prepare yourself, future-proof your business, and plan how you’ll overcome the disruptions in the next years.
If you are careful and knowledgeable, you’ll make the right decisions to keep your business healthy. You can trust The American Franchise Academy to help you in this endeavor! We specialize in helping franchisees understand their business and numbers so that they can successfully operate and grow.
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Reflections:
- What actions are you taking to attract employees and retain the ones you already have?
- How are you dealing with the supply chain disruptions your industry is experiencing?
- Would you consider becoming a multi-unit franchisee, or even a MUMBO?
- How ready is your organization to access capital?
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