Restaurant industry sales are expected to reach $855 billion in 2023, returning to near pre-pandemic, 2019 levels and demonstrating healthy recovery for the industry. Profits, on the other hand, are challenging as operators deal with inflationary pressure on food and labor costs along with supply chain issues and attracting employees. In surveying operators, the National Restaurant Association found that 50% of operators surveyed expect to make less profit in 2023. Based on these key factors, will franchise or independent restaurants be better positioned in 2023? Here is a comparison.
When it comes to running a successful restaurant in today’s challenging environment, efficiency is key. Managing food costs, adjusting labor hours and controlling operations are critical elements to deliver every dime to the bottom line of a restaurant operation.
Franchised restaurants often have an advantage over independent restaurants when it comes to successfully executing in a streamlined and effective way. Countless articles point to the many ways the franchise industry is employing technology to increase efficiences at the unit level. The fundamentals of a franchise model require repeatable and trainable systems that maximize efficiency in delivery of a similar experience for the consumer across multiple units.
What franchisors gain in efficiency may be lost in the creativity of the menu, a key driver for many customers. Independent operators can seize on the fresh catch of the day to offer the latest palate-pleasing dishes at the spur of the moment. This is a more labor-intensive and less efficient approach, but one that can win over customers and bring them back to sample the latest creations. That's an advantage that can't be matched in a franchise opportunity, which must conform to a single menu nationwide.
For entrepreneurs just breaking into the business, franchises offer a great way to start. From fast food restaurants to full-service and quick casual, franchising gives startup businesses access to an existing business model and brand strategies that help them succeed in their industry. Recent data indicates that around 50% of franchisors anticipate growth of 10% or more in 2023. With established systems, marketing strategies and tried-and-true products and services, entrepreneurs can have the best of both worlds: They get to be their own boss while taking advantage of established infrastructure already in place.
Independent restaurant owners, on the other hand, get the freedom of creating their own concept. In addition, they have the agility to adapt amid changing business conditions without taking changes to Corporate for approval by the brand.
Brand Recognition In A Competitive Climate
With inflation hitting families hard and multiple signs on the horizon of a looming recession, it is unknown whether having brand name recognition may mean the difference for a family dining out. Households pulling back on spending could be less likely to take risks trying new or unknown concepts. But while franchises have great name recognition, the local operator may be extremely well known within the market.
What is certain is that if money is tight, families will search for less expensive dining options. In Q3 2022, YELP reported that searches for budget dining and groceries were up by 11% from the previous quarter and 9% compared to Q3 2021.
Access To Capital And Resources That Help Growth
Franchise restaurants have ready access to capital and resources. In a tightening lending market with deals stress-tested at higher than ever interest rates, lenders may be more willing to fund start-up and resale franchise locations than independent small unit operators.
Prime Locations That Drive Foot Traffic
Establishing a successful business requires strategic planning, and location plays a significant role. All businesses understand the importance of location and focus their resources on securing prime locations that will drive traffic. Increased visibility makes it easier to draw customers in with favorable advertising and promotional activities.
For franchise restaurants, there are typically full leasing departments, sophisticated software platforms and mapping applications working to find the best possible store locations. Independent concepts generally rely on local commercial brokers for access to location and may not have the same resources available to franchises for identifying target sites.
Ability To Adapt To Change
The pandemic forced brands into warp speed in terms of adaptation, and many still have their foot firmly on the pedal as they innovate and adapt. Technology continues to be cited as a major way to overcome staffing challenges of the restaurant model. Franchisors are driven to adopt technology rapidly and implement ahead of the curve, and many franchise agreements are now including technology fees to ensure important initiatives remain funded for the future.
Independent operators are generally unable to leverage the scale of large systems to adopt technological changes. They can still implement new technology, however, so long as they plan for the cost and potential reduced speed at which they adapt.
Ability To Leverage Economies Of Scale On Supply Chain
Franchise restaurants leverage the supply chain of their franchisor to minimize disruptions that could impact independent operators. All signs indicate that supply chain shortages are far from over. Franchises benefit from the economies of scale of the franchisor. Through bulk purchases, franchises can save on operating costs and can pass down lower prices to customers.
An independent operator is on their own to purchase supplies and food. In 2021, it was widely reported that North America’s largest wholesale food distributor was pausing service to “a limited number of customers as they experienced labor shortages. These were primarily independent restaurant concepts. Franchisees of major brands were unaffected as they had contracts in place with vendors. Cost-efficient supply chains support profitability for franchisees, creating an economic edge for the establishments.
Signs point to a continued tough year for the restaurant industry in 2023. But for entrepreneurs breaking into the business game or seeking a business to acquire from the robust resale market, there is still opportunity among both franchise and independent models. Overall, however, franchises may have a competitive edge.
This article was originally written by Official Forbes Business Council Member Robin Gagnon and published on Forbes on February 6, 2023.