QSR September 2022

BEST FRANCHI SE DEALS

Private equity was aggressive. Wendy’s and Taco Bell franchisee Delight Restaurant Group reported a 92.2 percent growth in sales, primarily through acquisitions of units. Flynn Restaurant Group had $3.7 billion in revenue in 2021 after it completed a $552.6 million pur chase of 937 Pizza Hut and 194 Wendy’s stores from bankrupt operator NPC International. What’s next? Rabobank believes deals of this nature led to a shakeout of sorts for U.S. franchisees, “which is expected to result in greater consolidation of the land scape.” The company credited the uptick in deal activity to a conf luence of challenges; higher returns, buyers’ cash levels, and recent growth trends. Valuations in 2023/2024 are unlikely to be as attractive. Margins are tightening due to rising prices, instability in commodity complexes is increasing, and the cost of capital is climbing. “I would say the economy is on everyone’s mind at the moment, specif ically inf lation and the govern ment’s next moves,” Oswiecinski says. “This directly affects franchising with regarding to tightened lending, access to and cost of capital for prospective franchisees. This means brands that have the majority of their new franchisees using SBA loans may need to temper devel opment expectations. Brands that have a product/ services tied to essential human needs will fare better.” The same goes for brands that are more inf lation resistant, or higher-margin business models with a smaller portion of the P&L tied up in labor and real estate expenses, he says—concepts differentiated enough in the market to have pricing power. “Outside of labor challenges, the biggest topic to monitor has to be the economy in general,” Chapman reiterates. “Will the economy just endure a short dip or is a crash on the horizon? How do international con f licts/trade battles impact supply chain/distribution? If the economy does, indeed, crash will that actually be a good thing for quick-serves offering cheaper food, and often the comfort food options many folks turn to in an economic depression?” As usual, setbacks will present opportunity for some and f inal straws for others, and that’s especially true of an entrepreneurial world like franchising. “Overall, though, as we saw in the last recession and during other periods of volatility, some people will use these exter nal circumstances as an excuse to not make a change, “ FRANCHISORS WHO ARE TAKING DIRECT ACTION AND SHARING THE BURDEN OF RAISING WAGES AND THE ‘GREAT RESIGNATION’ ARE THE ONES THAT STAND OUT”

while for others it will be an inf lection point that prompts them to take the leap into something they’ve been want ing, but putting off, like franchise/business ownership,” Oswiecinski says. Something else to consider is the landscape itself. In 2020, independent locations declined by 8 percent, according to The NPD Group (28,399 closures). But per NPD’s Fall 2021 ReCount restaurant census, which totals restaurants opened as of September 30, 2021, the independent field expanded by 1 percent, or 2,893 units, last year. Independent locations grew in seven of the nine Cen sus regions, NPD said, and large areas like Los Angeles, Dallas-Fort Worth, and Seattle-Tacoma. Simply, independents are reemerging as a competi tor, although they’re likely to trail for some time due to debt load and other realities difficult to address with out collective scale. “But even as dine-in returns, other channels aren’t going to vanish. While dining rooms are back, curb side and off-premises is not going anywhere,” Friedman says. “So brands that accommodate these incremental opportunities for transactions are win/win. Smaller footprints, fewer SKUs are also winning combinations, as supply chain and labor issues continue to linger.” You can say the same about drive-thru, even if the angle has changed. “COVID made drive-thru an exponentially stronger competitive advantage,” Chap man says. “Drive-thru quick-serves could limit close proximity and face-to-face interaction, reduce/elimi nate dining room service—therefore, limiting staffing needs—avoid complete reliance on delivery apps that can cripple margins, etc.” “This created even more demand and interest in the quick-service category, especially for those with drive thru models as sales exploded,” he continues. “It will be interesting to see if drive-thru concepts maintain their momentum in a post-COVID world where more and more folks are working from home.” Labor isn’t a topic losing ground, either. Quick-ser vice franchises boasted a workforce of 3,880,612 in 2019. The 2022 projection was 3,810,044, according to IFA. Full-service: 1,116,894 in 2019 and 1,096,149 estimated for 2022. “Franchisors who are taking direct action and sharing the burden of raising wages and the ‘Great Resignation’ are the ones that stand out,” Chapman says. “Some brands have introduced robot servers and other new ideas to streamline service and cut labor costs. Others have doubled down on show ing their people how much they care to improve hiring and retention, like offering entry-level employees actual career paths and possible future ownership opportuni ties and hosting systemwide surveys to reward devoted franchisees with great stories by paying for education/ certifications or subsidizing housing costs.”

GUILLOCHE BORDER: ADOBE STOCK / SAIFUL

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SEPTEMBER 2022 | QSR | www.qsrmagazine.com