Before the world was hit by a pandemic, I had been thinking about how franchising will evolve over the next five to ten years. In particular, I had been thinking about the evolution of the role of the Franchise Business Consultant (FBC), given how over 100 franchise brands rely on our technology for their franchisee coaching.
In chatting with some franchise family, I realized that franchising had been shot three years into the future, figuratively speaking. I think the pandemic will accelerate certain trends and wanted to share these thoughts with you. That being said, I encourage you to challenge my ideas and help refine this projection of the future of franchising.
Dynamic #1: Weaker Businesses Are Going to Close
It is sad to say, but several businesses will not make it through the current quarantine. I’m an optimist with regards to what will come after this pause, but short term I am a realist that several businesses are just not strong enough to survive due to weak margins and poor cash flow management. This is especially true in the restaurant space, where over 11% of restaurant operators expect to permanently closed within the next 30 days.
However, with the government interventions, I believe this will be stretched out over a longer period. Several businesses will survive the quarantine, but the wheels will have been set in motion to force their closure within a year or so. Businesses that will be so strapped for cash will be unable to market or maintain operations to a decent level, gradually eroding their business. Not only will consumers be more cautious about their expenses (thus fewer customers to service), the ones which remain will visit the businesses marketing more aggressively.
Dynamic #2: The Rise of the Multi-Unit Operator
Multi-unit operators have been growing for years and now own more than half of all franchise units. Economies of scale help make them sustainable businesses even with lower unit-level margins. Well-capitalized operators will scoop up the units that are having trouble staying afloat but still have potential to turn a profit. This will accelerate. This is perhaps the most profound trend with regards to the future of franchise coaching.
Cash will continue to be cheap with very low interest rates continuing to facilitate their expansion. Post quarantine, many entrepreneurs will be looking for an out and they will be acquired at greatly reduced multiples.
For the franchising business model, the combination of dynamics #1 and #2 will be a positive as larger systems will be better equipped to assist their operators in surviving than the regular “mom and pop shop” down the street. The overall diversity in the ecosystem will be reduced, but out of all the units that weather the storm, the overall proportion of franchised and corporate chains will be increased.
Dynamic #3: Changes in the Talent Pool and Discretionary Income
Overall, with all these units shuttering, franchise businesses should see a return to equilibrium with regards to the current labor shortage. This will help them put better staff in place, should reduce employee turnover and thus improve margins due to less time spent retraining.
However, over the next 12 to 24 months, higher unemployment means that there will be less discretionary income to spend and that may negatively affect certain franchise verticals. This impacts the strategies business owners will need to put in place to attract customers.
Dynamic #4: Increased Focus on Operational Efficiency
Businesses will be put under greater pressure to maintain profitability. They will look at ways to run a tighter ship by simplifying their operations, investing in technology and cutting costs where possible. The ability to secure loans at low cost will accelerate the transition to new technologies.
As an example, the pandemic will speed up the migration to order ahead in the restaurant space. The consumer will have had increased exposure to the technology during the quarantine. Furthermore, ordering on one’s device is much safer in the context of a pandemic than utilizing self-serve kiosks such as the ones installed by brands such as McDonald’s over the past few years, while offering up the same reductions in labor costs.
Overall, this is good news for suppliers in the franchise space who focus on operational efficiency. The next few months will be tough for everyone in franchising, but there is light at the end of the tunnel.
What Should a Franchisor do over the Next Two Years?
A franchisor should align their Franchise Development teams towards conversions and resales. There will be many struggling single-unit operators looking for a way out (both in your franchise and outside). Prepare yourself to be more appealing for multi-unit operators. In certain verticals where your typical franchisee was laid off from corporate America, then you may see growth in greenfield locations but otherwise net new development may be reduced.
Franchise marketing should focus on being there for their franchisees with a big push once the quarantine ends. It is counter-intuitive but it has been demonstrated that those who market aggressively during a recession not only outperform their competitors during the recession, but also afterwards thanks to the market share they have gained. With all these unit closures, it’s your chance to capture the audience who cannot remain at status quo.
Franchise operations will unfortunately be taking a big hit in the short term. The C-Suite will want utilize whatever funds that are available to keep the development and marketing engines purring for the long-term viability of the company, and ask operations to take a bigger share of the cost cutting initiatives. Overall, we will expand on this further in this article but we’ll see some operations teams abruptly cut in half whereas others will want to utilize technology to cut travel costs and make their coaches more impactful.
What will Happen to the Role of the FBC over the Next 5 to 10 Years?
The role of the FBC today is twofold. First, the coach ensures operational compliance. Second, they help the franchisees to improve performance. A decade ago, most FBCs were simply auditors. Today, every franchise is on a spectrum from cop to coach. Over the next decade, we believe the cop part of the job will have been automated and drastically streamlined.
Compliance is important to protect everyone’s investment (especially in an age where social media can instantaneously kill your brand), but franchisors realized that their long-term viability required franchisees to be profitable, not just growing top-line revenue.
Additionally, it is interesting to note that the average FBC works with 30 franchisees; and that is franchisees, not units, because an FBC maintains relationships. In a system with a higher density of multi-unit operators, you will find the average FBC oversees a greater number of actual units. The more sophisticated the operator, the higher-level the conversations. They are not asking an owner who runs 50 restaurants to change a lightbulb, they are talking about talent development for his next 5 units.
Where does that lead us over the next 5 to 10 years?
Here is what the automation of the cop part of the role will look like so that coaches can focus on relationships:
- Why bother going to visit a unit to check temperatures of various equipment? IoT devices already exist that broadcast all of this information into a central cloud and alert you when a refrigerator goes down and can automate your line checks.
- You don`t need to visit to see proper marketing campaign roll-out or cleanliness in a unit as self-assessments and webcams solve this problem.
- Artificial Intelligence is already used to ensure restaurant quality, ensuring things like portion control and adherence to recipes with picture taking, especially in the pizza category
- You won’t be monitoring cashier transactions as much, as the orders will flow through the consumer’s devices – but those non digital transactions can still be monitored by a microphone and some AI to compliance to upselling procedures
Overall, it is not far fetched to think you can automate the most important base compliance aspects of a franchise.
The coach part of job will remain, and will be more impactful than ever before in the following ways:
- The emotional connection of an owner with their coach will heighten in importance. The coach will understand the deep underlying motivations of the franchisees on a personal level.
- Travel will remain for that personal connection, but will be greatly reduced and replaced with technology such as Skype or Zoom meetings.
- Less travel time implies more coaching time, which implies more franchisees per coach. Tack on the impact of multi-unit operator and you’ll end up with more units per coach overall.
- Coaching requires lots of data analysis to figure out the primary areas of opportunity. The good news is technology will have streamlined and integrated lots of these data signals into a single platform to make it easier to digest.
- Some new platforms will be born out of the merger of many point-solutions in use today (the POS company will handle your POS, your digital menu boards, your order ahead, your marketing campaigns, etc. ) to make it easier for the coach to gain access to metrics in a timely manner.
- Artificial intelligence will analyze each franchisee`s weaknesses and provide insights about action plans to help address those weaknesses based on effectiveness of past suggestions by other coaches for these same issues. In essence, this will bake in the franchise system’s best practices into an actionable platform.
- There will be a rise in specialists at the franchisor level to assist generalist coaches. The coach will be able to tap into franchisor resources that are specialized in certain things (marketing or finance for example). The overall complexity of these tasks has increased so much over the years that the job is better executed centrally by a pro than distributed onto franchisees who are running their businesses. Additionally, it simplifies the unit-level operations and improves margins to shift these responsibilities.
What do you think the future will look like?
The pandemic will have a profound impact on our lives. That said, I personally don’t believe doomsday thinkers that think that people will suddenly stop going to restaurants or out for snacks. I think fundamental currents that were already under way will be accelerated due to the pause everyone will see in revenues for a few months. However, I humbly admit that this is just one point of view and look forward to hearing your opinions and counter-arguments.