What Now? How Franchise Operators Can Move Forward in a Post-COVID World
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The past 12 months were not in any business leader’s plans. Some companies found themselves in survival mode, while other innovated and experienced record growth. While increasing vaccination rates provided some optimism, recent returns to shelter-in-place orders have introduced more uncertainty. Nonetheless, as franchisees look forward to a post-pandemic world, owners are wondering what’s next.
For many franchisees, those questions about how to move forward could include: How do, or should, you go back to where you were before the pandemic? How do you grow your business? If the pandemic delayed your succession plan, how do you proceed?
Part of the Pack, Not a Lone Wolf
The franchising truism that you're in business for yourself but not by yourself proved to be correct during the pandemic. While independent businesses have struggled, the brand power behind franchises helped many operators weather the storm. Among our client base, there were few store closings. And while many operators smartly applied for financial assistance, most of them ended up not having to use it.
While the hospitality sector struggled as a whole, the QSR segment was a bright spot. Drive-thrus and curbside pickup kept customers coming back. And with their dining rooms closed, QSRs were able to control costs by cutting or eliminating counter and cleaning staffs. Many QSRs also utilized all the major third-party delivery services to make sure they could reach the broadest base of customers.
Again, this is where being part of a franchise was beneficial. Whereas an independent operator would have to build out an e-commerce infrastructure, franchisors have back-office operations in place to upload content to the various delivery platforms and manage the contracts with delivery services. This applies not just to QSRs, but to sectors such as auto parts, home building centres and pet care as well.
Getting Back to Business as Usual
Operators that were successful before the pandemic see an opportunity to get back to 2019 performance levels. The question is how to get there.
The franchising model is about moving things quickly, efficiently and at a lower cost. Many franchises were already reducing their store footprints, but that trend has only accelerated in the wake of the pandemic. A smaller footprint goes hand-in-hand with an increased reliance on technology and automation to improve back-of-house operations and reduce staffing needs. Online ordering, for example, eliminates the need for a worker taking orders at the register. Similarly, artificial intelligence can help franchisees optimize inventory management. Ultimately, the goal is to reduce expenses to increase your bottom line.
One of the more effective techniques we saw during the pandemic, however, is decidedly low-tech. A lot of franchisees focused on being more visible in their communities. Some donated meals, others donated their time through volunteering. If you're in competition with similar businesses in your area, that type of involvement can help customers get to know you as part of the community as well as the franchise brand. And given the increased consumer push to “shop local,” it allows you to be seen as a small business in the community, regardless of how big the franchise brand is. Continuing to build on that presence will be a big part of returning to pre-pandemic performance levels.
Gearing Up for Growth
As business conditions begin to stabilize, franchisees that have a stable foundation may be looking for growth opportunities. The largest push is in the multiunit operator space. It’s not about having one, two or even four locations anymore; it's about having five, eight, 12 or 20 locations.
The way the franchise business works today is: owning even three locations means you’re still working in the business, whereas operators who own six or eight locations are able to work on the business. That is, they’re spending less time on in-store, day-to-day operations and more time looking for opportunities to grow and be more efficient. That’s why we're seeing more conglomerators and individuals who are well established, have paid down their debt, and have significant cash on hand looking to acquire more existing locations.
There’s also a generation of franchise operators who are young enough to see the future ahead of them and tend to be more receptive to adopting new technologies as part of a growth strategy, given that they’ve had access to technology all their lives.
We’re also seeing franchisees branch out into different sectors, such as pet care operators moving to the home renovations space. Another potential growth area concerns the geographical shifts related to the move to remote work. The pandemic has spurred many people to move to suburban or cottage country areas. But it remains to be seen if that shift is permanent. If it is, what does that mean for franchisees who operated their stores in large urban centers? Should their expansion plans focus on those suburban regions?
This population shift certainly could create new market centers for franchise networks. But don't count out the large downtown areas just yet. They’re quiet now, but they will be back once vaccination levels are at the point where people can return to their offices.
We should note that while footprints are shrinking, costs for real estate, construction, materials and labor have skyrocketed, which is making it prohibitively expensive for new players to enter the market. From our perspective, the next big growth spurt will come from existing owners either branching off its new location or buying out existing locations.
Succession: Still a Tough Sell
Like a lot of other business types, franchise operators have not had a lot of success in transitioning their businesses to the next generation. The work is hard, the hours are long, and the next generation often doesn’t want to take on the same burdens their parents had to shoulder.
Some owners have stayed on, hoping their children would eventually come around. But keep in mind that there are buyers out there now, and you don’t want to wait too long and miss an opportunity to sell in a good market.
For owners who want to lighten their workload but aren’t ready to retire, selling an equity stake to a general manager is a good way to continue to generate income. This can also help a GM, who may not have the capital to buy their own store, ease into ownership with the benefit of an experienced coach and mentor.
None of the franchisees we’ve talked to are trying to return to their pre-pandemic numbers. They’re either hungry to grow or ready to get out. This means there are good opportunities for each type of owner to successfully reach the next step of their business, however they define it.
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Joseph Pisani
Managing Director of Industry Sectors
Joseph Pisani is involved in many aspects of Commercial Banking at BMO. With a mandate that spans Franchise Finance, Professional Services and Healthcare, Joseph ha…(..)
View Full Profile >The past 12 months were not in any business leader’s plans. Some companies found themselves in survival mode, while other innovated and experienced record growth. While increasing vaccination rates provided some optimism, recent returns to shelter-in-place orders have introduced more uncertainty. Nonetheless, as franchisees look forward to a post-pandemic world, owners are wondering what’s next.
For many franchisees, those questions about how to move forward could include: How do, or should, you go back to where you were before the pandemic? How do you grow your business? If the pandemic delayed your succession plan, how do you proceed?
Part of the Pack, Not a Lone Wolf
The franchising truism that you're in business for yourself but not by yourself proved to be correct during the pandemic. While independent businesses have struggled, the brand power behind franchises helped many operators weather the storm. Among our client base, there were few store closings. And while many operators smartly applied for financial assistance, most of them ended up not having to use it.
While the hospitality sector struggled as a whole, the QSR segment was a bright spot. Drive-thrus and curbside pickup kept customers coming back. And with their dining rooms closed, QSRs were able to control costs by cutting or eliminating counter and cleaning staffs. Many QSRs also utilized all the major third-party delivery services to make sure they could reach the broadest base of customers.
Again, this is where being part of a franchise was beneficial. Whereas an independent operator would have to build out an e-commerce infrastructure, franchisors have back-office operations in place to upload content to the various delivery platforms and manage the contracts with delivery services. This applies not just to QSRs, but to sectors such as auto parts, home building centres and pet care as well.
Getting Back to Business as Usual
Operators that were successful before the pandemic see an opportunity to get back to 2019 performance levels. The question is how to get there.
The franchising model is about moving things quickly, efficiently and at a lower cost. Many franchises were already reducing their store footprints, but that trend has only accelerated in the wake of the pandemic. A smaller footprint goes hand-in-hand with an increased reliance on technology and automation to improve back-of-house operations and reduce staffing needs. Online ordering, for example, eliminates the need for a worker taking orders at the register. Similarly, artificial intelligence can help franchisees optimize inventory management. Ultimately, the goal is to reduce expenses to increase your bottom line.
One of the more effective techniques we saw during the pandemic, however, is decidedly low-tech. A lot of franchisees focused on being more visible in their communities. Some donated meals, others donated their time through volunteering. If you're in competition with similar businesses in your area, that type of involvement can help customers get to know you as part of the community as well as the franchise brand. And given the increased consumer push to “shop local,” it allows you to be seen as a small business in the community, regardless of how big the franchise brand is. Continuing to build on that presence will be a big part of returning to pre-pandemic performance levels.
Gearing Up for Growth
As business conditions begin to stabilize, franchisees that have a stable foundation may be looking for growth opportunities. The largest push is in the multiunit operator space. It’s not about having one, two or even four locations anymore; it's about having five, eight, 12 or 20 locations.
The way the franchise business works today is: owning even three locations means you’re still working in the business, whereas operators who own six or eight locations are able to work on the business. That is, they’re spending less time on in-store, day-to-day operations and more time looking for opportunities to grow and be more efficient. That’s why we're seeing more conglomerators and individuals who are well established, have paid down their debt, and have significant cash on hand looking to acquire more existing locations.
There’s also a generation of franchise operators who are young enough to see the future ahead of them and tend to be more receptive to adopting new technologies as part of a growth strategy, given that they’ve had access to technology all their lives.
We’re also seeing franchisees branch out into different sectors, such as pet care operators moving to the home renovations space. Another potential growth area concerns the geographical shifts related to the move to remote work. The pandemic has spurred many people to move to suburban or cottage country areas. But it remains to be seen if that shift is permanent. If it is, what does that mean for franchisees who operated their stores in large urban centers? Should their expansion plans focus on those suburban regions?
This population shift certainly could create new market centers for franchise networks. But don't count out the large downtown areas just yet. They’re quiet now, but they will be back once vaccination levels are at the point where people can return to their offices.
We should note that while footprints are shrinking, costs for real estate, construction, materials and labor have skyrocketed, which is making it prohibitively expensive for new players to enter the market. From our perspective, the next big growth spurt will come from existing owners either branching off its new location or buying out existing locations.
Succession: Still a Tough Sell
Like a lot of other business types, franchise operators have not had a lot of success in transitioning their businesses to the next generation. The work is hard, the hours are long, and the next generation often doesn’t want to take on the same burdens their parents had to shoulder.
Some owners have stayed on, hoping their children would eventually come around. But keep in mind that there are buyers out there now, and you don’t want to wait too long and miss an opportunity to sell in a good market.
For owners who want to lighten their workload but aren’t ready to retire, selling an equity stake to a general manager is a good way to continue to generate income. This can also help a GM, who may not have the capital to buy their own store, ease into ownership with the benefit of an experienced coach and mentor.
None of the franchisees we’ve talked to are trying to return to their pre-pandemic numbers. They’re either hungry to grow or ready to get out. This means there are good opportunities for each type of owner to successfully reach the next step of their business, however they define it.
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