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QSR Feature
Franchising Navigates 2009
Despite a tough economy, growth through franchising is still possible. Experts weigh in.
How will the tough economy affect restaurant franchising?

What financial experts had hoped in early 2008 would be a hiccup has become a burp in 2009. Those same experts predict it will be the third or fourth quarter before the economy starts to settle and, slowly, climb its way toward normalcy.

Amid the dire news, however, is opportunity for established franchisees with enough savvy and connections to grow their businesses, says Craig Slavin of Franchise Architects, who reports that 2008 was actually a record year for people using his consulting firm to find the right franchise to buy. The real estate, banking, and credit sectors might be in a tailspin nationally, but some local markets are filled with potential for people who find the right brand and the soundest way to finance their franchised restaurant venture.

Growth in quick-serve—whether it’s in franchise sales or consumer purchasing—is being seen by some as a bellwether for how long the overall economy will take to recover. Restaurants in the quick-serve segment performed better than most sectors of the stock market, despite growing consumer fears and tightened household spending. Looking at the 2008 calendar year, and the year-end stock prices for twenty-six large cap restaurant stocks, every one finished well above its fifty-two week low. The whole group of stocks, when the weekly stock price was averaged, finished the year up 78 percent over their lowest points in all of 2008.

“The interesting thing about all this is what the market might be telling us about the economy,” says Phil Mangieri of Restaurant Research LLC. “With restaurant stocks representing an undeniably [word missing] consumer discretionary sector, it would seem that such a strong rebound from fifty-two week lows suggests that an economic recovery is in the brewing.”

The 2009 Restaurant Industry Forecast from the National Restaurant Association predicts that restaurant and foodservice industry sales will top $377 billion this year, following a year that showed stable sales compared to other retail sectors. While all of those aren’t franchised restaurants, the franchised, quick-serve segment is the one expected to increase sales in 2009 or at least hold its own.

That’s something casual dining and fast-casual brands can’t generally expect. The industry forecast predicts full-service restaurants will see a 2.5 percent decline in growth between 2008 and 2009; quick-serve is expected to hold steady with a 0.4 percent increase.

One thing to consider in finding a restaurant brand to acquire is whether it’s necessary or discretionary.

Regarding expansion plans this year, experts like Mangieri predict that full-service restaurants will continue to struggle. Evidence of that hit many consumers during the winter holiday season when sharply discounted offers from national chains were inserted into newspapers. Full-service, casual dining is accustoming the public to expect buy one, get one free offers. That’s an indicator of a segment whose fortunes are going in a different direction from its cheaper quick-serve cousins.

“Comparable sales haven’t fallen through the floor,” Mangieri says of quick-serve in 2008. “Most Americans don’t have the knowledge to cook for themselves. They must have the convenience. I think that trend is here to stay.”

That is buoyed by an assessment from Darrell Johnson, president of FranData, who says that consumers have come to see quick-serve as necessary to ordinary life. Full-service and even fast-casual brands are considered more discretionary, so they’ll take a heavier hit from the public. Even when customers do opt for a full-service opportunity, when they get to the restaurant, they’ll likely scale back what they choose, hence the $3 price cut on lunch entrees.

In 2009, franchisors are going to be scrutinizing franchisees with a higher degree of precision. Since distressed economic times mean only the strong operators will survive, franchisors are taking steps to make sure their franchisees are on solid footing.

And if they aren’t, then they’re either going to provide franchisees with remedial training or find a way to get those stores out of their hands, Slavin says.

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