Franchising Could Be the Secret to Reaping the Rewards of a Down Economy. Here Are 5 Reasons Why. Recession and inflation are leading to benefits for franchisees.
By Dan Rowe Edited by Jessica Thomas
This story appears in the June 2023 issue of Start Up.
There's no denying it: Times are tough. Inflation is up. The economy could be on the verge of a recession. But where other franchisees see disaster, you should see opportunity.
The economy is cyclical. What has gone down will go up — which means that if you have the means to buy a franchise during a downturn, when prices are low, you can reap big rewards in the future. Whether you currently have a franchise or are considering becoming a franchisee, here are five reasons to be bullish even now.
1. Real estate
During challenging times, businesses go under. This leads to real estate opportunities on three fronts. First, there are more physical spaces open for conversions, which can cost hundreds of thousands of dollars less than a new build-out. Plus, in a down market, landlords tend to be in a negotiating mood. And finally, for a developer to continue to get funding, their current properties need to maintain a certain occupancy level. All of this means that now is the time for both new franchisees and franchisees with existing leases to negotiate concessions and better terms.
Related: Thinking of Buying a Franchise? These Four Industries Are Flaming Hot Right Now
2. Labor
In 2021, 47.8 million workers quit their jobs, with accommodation and food service workers leading the exodus with a 6.9% quit rate. During a recession, workers seek security and are historically less likely to leave a job. That may help slow the revolving staff door that restaurateurs and many other employers have struggled with over the past two years. And as other businesses close, now is the time to find top talent looking for a new opportunity.
3. Food costs
This one is also especially important for restaurateurs. Since the pandemic, food costs have skyrocketed. But now there is finally some good news: According to a November report by Maloni Intelligence, wholesale food costs are dropping. In October 2021, a pound of chicken breast was $1.907, and in October 2022, it was $1.177. It goes without saying that lower prices like these make a huge difference for any franchisee's balance sheet.
Related: Preparation Is the Key to Franchise Resales
4. Customer acquisition
During challenging times, the first cost that businesses often cut is marketing — which is exactly the wrong thing to do. This is the time to double down on marketing. It's cheaper to retain a customer than get a new one, and a down economy is the time to market to your existing guests to entice them to come in for new items or special offers.
When competitors go out of business, capitalize by turning their customers into yours. Create a competitor campaign in Google Ads using their keywords and URLs, and direct their customers to a landing page offering a targeted promotion. Advertise on social media using location and demographic filters. Monitor the competitor's social accounts and respond to posts suggesting your business as an alternative for consumers.
5. Vendor relations
While supply chain issues continue, a down economy means vendors are more cognizant of keeping their existing customers. Now is the time to strengthen relationships with suppliers and negotiate better rates. During the pandemic, businesses that had strong relationships with vendors were better able to manage supply chain disruptions because they knew in advance that they were coming. The same should prove true in a recession.
No matter what the economy is doing, savvy entrepreneurs can make money, and franchising is one of the safest ways to do it. Historically, the average S&P 500 stock market return is about 10% per year. Multi-unit restaurant franchisees can easily have a 40% to 50% return on investment a year. The key right now is to manage cash flow, capitalize on opportunities, and get ready to reap the rewards when the economic cycle returns to a bull market.
