How Actions and Reactions Defined the New Normal in Food and Beverage

This issue of Franchise Connect is focused on the food and beverage space. What I want to share with you, however, is applicable across most franchises; how to be confident in your selection of a franchisor partner. Though this advice is somewhat franchise-ubiquitous, the actions over the last 18 months of franchisors in the food and beverage industry played an outsized roll in their franchisee’s success.

Is Now Really a Good Time to Consider the Restaurant Space?

The short answer is yes. The longer answer is: I can’t think of a better time to evaluate a franchisor in the restaurant space.

I can imagine you reading that last sentence and thinking “sure, there may be reasons why now is not a terrible time to invest in the food industry, but the best?”

Allow me to explain.

I likely won’t shock you when I tell you that most franchisors in the restaurant space were bruised and beaten over the last 18 months or so. It’s an unfortunate reality that some in the space didn’t survive, and others barely so.

The Covid-19 pandemic forced franchisors in all spaces to showcase their ability to execute in three broad areas:

1. Their ability to both react and react appropriately to unexpected marketplace changes
2. Their willingness and ability to truly partner with their franchisees
3. Their ability to truly lead

 

Let’s look at these one at a time.

 

Nimbleness and Direction

Dog Haus Restaurants epitomized what nimbleness in action looks like with their 2020 roll-out of “Absolute Brands”. According to Dog Haus’s Director of Franchise Development Erik Hartung, Absolute Brands are a series of virtual brands which re-menu portions of the Dog Haus in-restaurant offerings for take-out or delivery only. Erik explained to me that the company had been considering the Absolute Brands idea for some time, but prior to March of 2020 they were planning a roll-out “sometime in the next couple of years.”

When the pandemic hit and franchisees were suddenly forced to shutter their restaurants, the Dog Haus team went to work, and they went all-in on Absolute. Instead of “sometime in the next couple of years,” franchisees were able to offer the first of the Absolute Brands less than 60 days later, and today they have 4 different virtual brand offerings, with an eventual goal of 8. Dog Haus didn’t complicate things; they used what their franchisees already had; to-date they have only added one new sku to support the virtual brands, and franchisees of Dog Haus are automatically eligible to offer the virtual brands as well. The results? Franchisees generating pre-pandemic revenues by June of 2020 and comping up July 2020/2019.

A True Partner

A franchisor that enlists their franchisees in times of trouble, instead of shutting them out, is much more likely to react in a way that is helpful, rather than neutral or a hinderance. To illustrate this point I will step away from the restaurant space. In reaction to the stay-at-home order of March 2020,  Building Kidz Preschools (a franchisor I work with directly) immediately took several actions to help their franchisees. Like many franchisors, they gave an abatement of royalties. Because royalties are typically a small part of a franchisee’s overhead, however, reduction of royalties is more of a sign of solidarity than it is a “life raft”. Franchisees expressed what they needed most; the ability to secure funding to weather the storm. Building Kidz reacted to the franchisees’ request for assistance and secured a relationship with an SBA lender well before the PPP loan program was actually passed through Congress. In so doing, they put their franchisees in a favorable position when the funds were approved; so much so that all Building Kidz franchisees (17) that applied for PPP loans received them.

 True Leadership

Dog Haus and Building Kidz are just two example of the many franchisors that were able to step up and effectively lead their organizations during the initial days of the Covid-19 pandemic. They used very different methods, but to the same ends; to react to a sudden, unforeseen market shift in such a way that they either strengthened or, in some cases, outright saved their franchisee’s businesses.

Beyond Theoretical

The ever-changing landscape of 2020 and 2021 has laid bare a franchisor’s ability (or lack thereof) to step up to the plate. If you ask franchisees in two or three years from now how their franchisor helped them weather this storm, your will likely get vague answers. Let’s face it, our memories are short, and as business owners the events of two or three years ago are just not front-and-center in our minds. Right now, as many franchisees are just beginning to return to some sense of normalcy, is the perfect time to use real-world experiences, outside of the FDD, to evaluate the franchisor you are considering joining.

Go Beyond the Document

We all know that the FDD is an invaluable resource to help evaluate a potential franchise investment. If you are a franchise-savvy investor, you likely glance at Item 3, look at Item 7 to make sure it’s in your range, spend a bit of time on Item 20, and then dig into Item 19. However, when evaluating a restaurant franchisor as an investment today, I would encourage you to allow the narrative of the franchisees to carry at least equal weight to the FDD in your decision process. If you see an Item 19 showing that franchisees took a 10-20% hit in profitability yet hear from franchisees that business is recovering and also hear anecdotes that sound similar to Dog Haus and Building Kidz, you are likely looking at a franchise with strong and capable leadership.  Likewise, if you see an Item 19 that shows a minimal drop or even increase in profitability in 2020, but franchisees can’t pinpoint how their franchisor helped them either push through the pandemic or make the most of opportunities it presented, you very well may be looking at a brand with mediocre leadership that happened to hold a market position that wasn’t hit hard, or even benefited from, the pandemic.

What Will the Next Challenge be?

The global and domestic economy, and U.S. small businesses, will suffer from another setback in the future. It may be another pandemic, but it could just as easily be caused by a financial bubble burst similar to the dot-com  & housing market recissions, or  even something completely unrelated to U.S. economics like the energy crises of 1973 and 1979.  Prospective franchisees are in a unique position today to know, rather than hope, how well franchisors respond to external threats to their business.