Franchisees say cost increases are hurting their bottom line. | Photo: Shutterstock.
Inflation continues to hit U.S. franchisees even as costs appear to be easing, and more of them are now dealing with slowing customer demand over higher prices.
That is according to the annual franchisee survey from the International Franchise Association (IFA), released on Monday. The survey found that 87% of operators across all industries are experiencing either a moderate or substantial impact from inflation, a number consistent with the previous year.
Eighty percent of operators said their business earnings fell in the past year as a result.
“That’s a pretty whopping percentage,” Michael Layman, SVP of government relations and public affairs for the IFA, said in an interview.
“It seems to suggest that franchisees have adapted to rising costs and the labor shortage in all the creative ways they can. Now these impacts are hitting their bottom line.”
The study was done for the IFA by the information firm Frandata and features interviews with more than 1,400 operators who own more than 8,200 businesses from a cross-section of industries, including restaurants.
Franchising as a business continues to grow in overall popularity. The IFA says there are now more than 800,000 franchise business locations for the first time. “There’s still a lot of growth across a ton of business lines in franchising,” Layman said. Tough economic times, he added, typically yields growth in franchising.
Some past concerns among operators do appear to be easing, most notably finding and retaining labor. Twenty-six percent of respondents cited that as their top challenge, more than any other factor. But that was also down from 47% a year ago.
A growing percentage, however, say that “managing costs and inflation” was their top challenge, 25% compared with 21% a year ago.
And a lot more said demand slowdown was their top challenge: 22%, compared with 12% a year ago.
Labor remains a major concern for restaurants in particular. More than 80% of restaurants in the survey said they had labor issues over the past year, compared with 68% more broadly.
Labor is a huge cost center for restaurants, and paying higher wages to recruit and retain workers is creating challenges with profit margins.
Nearly two-thirds of quick-service restaurant operators in the survey, and 90% of sit-down restaurant operators, said inflation was having a “substantial” impact on their business.
Most operators are raising prices as a result. That includes 95% of quick-service franchisees and 91% of all establishments. Larger franchisees were more likely than smaller operators to raise prices but overall it is commonplace.
Restaurants of all types have contended with substantial inflation coming out of the pandemic, leading to consistent price increases. That has led to traffic declines as consumers adjust their spending to deal with those prices.
That, in turn, has led to a value war throughout the industry as operators look to get customers back. But that value war has also hurt franchisee profitability.
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