While analyzing the business climate of 2020, it is no secret that restaurants and hospitality businesses were some of the most devastated.
As a result, high-profiled celebrities including TV’s Guy Fieri and Podcast impresario Dave Portnoy turned to fundraising in order to bolster a wilted industry. However, while many small-to-mid-size restaurants shut their doors, there were many more restaurant franchises that opened over the last year. Some restaurateurs were able to find opportunity in COVID’s chaos, but not everyone could capitalize.
It is estimated that more than 110,000 restaurants nationwide went out of business over the past year, according to the National Restaurant Association. At the same time, 2020 was one of the best years ever for restaurant franchises and franchise development companies. Nearly 200,000 restaurant franchises were added across the United States, according to Statista.
“Last year was definitely polarizing,” said Chris Conner, President of Franchise Marketing Systems in Alpharetta, Georgia. Conner’s company is a full-service franchise development agency that aids businesses like restaurants on their franchise journey. “Some segments were completely obliterated. And for some, the pandemic has helped and pushed them. We’ve had multiple brands set sales records in 2020.”
The pandemic swept through the industry and changed the business climate seemingly all at once. Many businesses closed their doors, put their brick-and-mortars up for sale, or opted out of their leases. With so much commercial real estate for sale all at once, the market shifted towards the buyers.
“Lease rates went down in commercial real estate,” explained Conner. “Landlords started doing crazy deals. In one instance, Simon Malls offered fixed percentage rent—which is unheard of. That’s how bad these big commercial real estate owners are hurting right now.”
Just like Conner, Fransmart’s Dan Rowe is seeing similarities as he operates his own franchise development company in New Alexandria, Virginia. Rowe is CEO at Fransmart where his team is having one of their busiest years to date in spite of the pandemic.
“Fransmart is having record franchise sales because we believe it’s a buyer’s market. Most of our franchisees buying right now are already franchisees. They remember how tough it was to find great sites or great people just two years ago,” explained Rowe. “Right now, it is easier than ever to find better employees. And with many restaurants closed, so the other sites are getting all the sales lift.”
During recessions where many individuals need to find work, restaurant franchises often push forward by taking advantage of their proven business models. In 2020’s scenario, franchises that succeeded and expanded were of the fast-casual variety. These restaurants do not require many employees, they often take advantage of first-party technology, and have well-established, off-premise dining capabilities (takeout, delivery, etc.).
Chris Conner explained that the pandemic simply sped up industry trends that were already starting to take hold of the hospitality industry. In this way, 2020 made it nearly impossible for restaurants to stay alive if they did not switch to serving a high volume of customers in a quick fashion for off-premise dining.
“The pandemic just killed sit down, dine-in,” said Conner. “If you were in a brick-and-mortar, the business had to shift to delivery, carry out, or drive through. A lot of franchises shifted and were able to increase turnover rate and embrace technology.”
That is not to say that the fast-casual trend is the only way from now on. However, due to strict government guidelines, the businesses with proven concepts and streamlined off-premise dining were the same ones ready to purchase another location for their business when the opportunity presented itself.
Furthermore, the pandemic’s recession differs from past recessions due to the accessibility of capital and all-time-low interest rates.
“The recession in 2009 and ‘10 destroyed franchising because you couldn’t get a loan,” explained Conner. “But this time, money was available via stimulus. It was the perfect scenario to create [franchise] growth.”
So, the same scenario that gave businesses like Wal-Mart and Home Depot record sales years transcended into the hospitality industry. In 2020, marginal restaurants folded. The businesses who came into 2020 with some money in the bank saw profits rise and investment opportunities present themselves.
However, that is not to say that franchising in 2020 was easier or more prevalent than ever before… Dan Rowe explained that there are actually less businesses going after franchises at the moment. It’s just the ones that can see the opportunity are really making it work.
“People are nervous, especially first-timers. Also, there are those people who haven’t been through a serious economic cycle before,” said Rowe. “But I’ve been doing this for 30 years and have been through some storms. All the opportunities are always after the storm, so now we are going for a land grab.”
People like Rowe and Conner are using their decades of industry experience to coach franchisees through what seems to be a very uncertain time. They’ve shifted their location discovery and overall franchise development to a virtual experience. Additionally, franchise development businesses have had more time to research recent Federal Trade Commission (FTC) rule changes and convey that information to their franchisees.
“It certainly isn’t any easier,” said Rowe. “It’s actually harder in terms of FTC and registrations. The FTC was a mess this year. The rules changed and lots of brands had difficulty getting or staying registered to the franchise, and that compounded the problems of COVID.”
So, restaurants that were in a position to jump at new opportunities were able to differentiate themselves. Of course, thanks to experienced franchise development companies like Rowe and Conner oversee.
“It is easier in the sense that a franchisee could open for less than it would have cost two years ago,” said Rowe. “You can get better conversions, get lower rents, better terms, higher ROI, and have an easier time getting employees. Plus, a new restaurant opening nowadays makes a lot of noise. Whereas two years ago, you needed 10 PR firms to make any noise about an opening.”
Upon some cursory research, many individuals can find these very trends occurring close to home. Over the last several months, one local-to-NJ, fast-casual restaurant has been expanding nationwide. Bubbakoos Burritos set out to reach the franchise’s 100th restaurant by the end of 2020 and has hit that mark.
“Bubbakoos was one we sold for a while,” said Chris Conner. “We’ve also done really well with pizza—Pizza Guys is Chicago pizza with a twist. They have a heavy delivery focus.”
So, as the fast-casual trend is exacerbated by the year of coronavirus, it still is not clear if that trend will end sooner than usual or continue for a long future. However, it is clear that those who are quick to adapt are those who find themselves leading from the front in 2021’s “new normal.”
“We are killing it,” finished Dan Rowe. “We continue to automate and digitize our franchise marketing and sales processes. We have been careful to sell smart franchise deals to experienced groups and we coach in picking the right locations, building the right teams, launching the right marketing. Because in the end, happy and referenceable franchisees are the best tool to sell more franchises.”