The pandemic was like a mandatory health check-up for many running restaurant businesses.
Many restaurants which became unfocused, implemented non-core menu expansion, did not pay attention to financial prudence will have to undergo a painful recovery process.
In that sense, black swan events like Covid-19 are a good reminder for restaurant businesses to get in shape. And I believe that franchising is a very viable business model for those who want to start a restaurant in the post-Covid world.
Franchising implies that you pay for the rights to open a business that bears the same name and/or sells the same products and services as the "parent" (franchisor) business. Most brands have proven policies for locations, pricing, hiring, and so on, but once the business is up and running, you get a significant say in ongoing management and decision-making, and are entitled to the net profits generated by that location.
Let us understand this in the context of the restaurant industry:
- During the Covid crisis, most standalone restaurants were stuck with very high wastage—the lockdown was sudden and unexpected and they did not get the time to liquidate their stocks. These products with lower shelf life expired (20-30 percent wastage) immediately.
- Franchise businesses typically have outsourced, centralised manufacturing—the cost of making the product is lower. For e.g, in the QSR business, as each retail store does not need kitchen staff, the manpower costs at the retail end are 5-10 percent lower. Even a 5 percent reduction in manpower cost boosts the profitability of the restaurant manifold. The cost of rent, for kitchen space is also substantially lower as only basic prep is involved prior to serving.
- The logistics cost is distributed among a large number of outlets and hence does not impact any single franchise adversely.
- The centralised buying power of the head office, whether in terms of marketing spends or procurement, contributes to the bottom line. Also, as each store is run by a franchisee, who is an entrepreneur, the cost efficiencies are optimum and repairs and maintenance are carried out with great discipline at the lowest possible costs.
- Customer service tends to be exceptional in a franchise-run operation as there is a great deal of personal involvement.
- One of the most challenging aspects of a start-up is managing the wild cash flow swings associated with operating a new business. Many franchisors now transparently reveal a “financial performance representation” to prospective franchisees. This provides both gross and net numbers in order to really give candidates and franchisees a better idea of potential profitability, not just top-line revenue. Franchisors have now become much more frank in their discussions with franchisees about being debt-free to begin with and what exactly they’ll need for capital in order to be successful.
- Franchised brands tend to have significant consumer appeal already. There is a certain familiarity and trust, which makes the customer believe that they will receive a hygienic product. Covid-19 has enhanced the need to keep a watch on personal health and hygiene. Customers want to feel safe while ordering for themselves, friends and family.
The above factors culminate into three big reasons why you’re better off signing up with a franchise, if you're thinking of starting your own restaurant business:
- Franchisee restaurants have a 400% higher chance of turning a profit compared to standalone restaurants, thanks to lower procurement costs, real estate costs, manpower costs, marketing costs and administrative costs. Hence, if chosen well, it is considerably less risky than starting a business from scratch based on an idea of your own, which is as yet untested.
- You, as an entrepreneur, get instant credibility and business. The franchisor will ensure that your gross margins are similar to what you would make running your own business. With lower operating and food costs, you will make a break even at a lesser sale and make significantly higher money as your sales improve.
- Most established franchise brands also offer good growth potential—you can end up owning multiple franchise locations and build your own successful team of people around you, and grow your business.
The writer is the founder and managing director of Jumboking, a homegrown QSR chain in Western India. He is a vocal advocate for franchising as a tool to deliver and maintain asset light models in the new economy.