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Diggin’ in: Food franchises in the age of COVID-19

Over the last year, keeping a business above water has been about the ability to pivot and shift into a different delivery model.
Over the last year, keeping a business above water has been about the ability to pivot and shift into a different delivery model.

The COVID-19 pandemic has led to one of the most challenging financial times in recent history. Small businesses—especially those operating in the food and restaurant sector—have faced headwinds with social distancing restrictions, lockdowns, and stay-at-home orders. Each has forced owners to reassess their existing business models.

When re-examining a business model, businesses owners should look at two key ingredients right now given this more uncertain environment: pivoting and shifting, and cash flow.

Over the last year, keeping a business above water has been about the ability to pivot and shift into a different delivery model. For a food-based franchise, this has meant looking at options like curbside pickup, transitioning to online-orders only, or implementing protective equipment, and keeping employees and customers socially distanced. Some restaurants are even finding new ways for customers to interact, including turning to digital sign-ins and allowing customers to scan quick response (QR) codes on their phones to access menus (eliminating the need to physically touch them).

Either updating or building a business plan can go a long way to navigating a more tumultuous situation. In today’s business environment, preparedness, having a thoughtful approach, and a plan to adapt will provide business owners with the strong foundation needed—not only to survive, but also to thrive. A business plan is also a living document that can be changed, adapted, and amended depending on the changing business environment.

For instance, having a plan during a pandemic would help franchisees and small business owners pivot during changing circumstances. Catastrophic contingency planning is not a typical part of any business plan; however, as an owner, it is important to think about the future and an ever-changing landscape.

In fact, because of these changes, it has created a great opportunity for franchisees to take stock of their current financial needs—all with the aim of improving their cash flow. Some economists are indicating there may be a rise in inflation. Depending on the nature of the loan one has with their bank, it could be an optimal time to consider locking in a rate for fixed monthly costs. With the transition, generally, apart from customers either wanting to or being able to visit a location, there is also an opportunity to look at the physical footprint of one’s franchise. If the go-forward model does not include customers sitting in the restaurant, costs can be saved by reducing the physical footprint.

That said, two trends are expected to carry this sector forward in the medium term.

Food-based franchises have adopted options like curbside pickup, transitioning to online-orders only, or implementing protective equipment, and keeping employees and customers socially distanced.
Food-based franchises have adopted options like curbside pickup, transitioning to online-orders only, or implementing protective equipment, and keeping employees and customers socially distanced.

Going digital (with delivery)

The pandemic has accelerated certain trends that have been years in the making. Online shopping is no longer just an option; it has become the norm, with almost one-third of Canadians now purchasing items they would have normally bought in a brick-and-mortar store. Similarly, consumers are still looking to enjoy their favourite foods—in some cases, even more now as a way to get a taste of pre-lockdown life; finding a way to deliver in a consumer-friendly manner will provide food franchisees with a major advantage both now and even as the economy reopens.

When looking online, it may be tempting to engage with third-party delivery services. While noting the advantage of existing consumer awareness, it can sometimes be difficult to stand out from competing businesses on those platforms. Further, third-party delivery services can eat into profits. It is important to look at what one’s business’s take-home amount would be. A good rule of thumb is to not have delivery costs exceed 20 per cent.

Managing a cash injection

While the pandemic has brought its fair share of challenges, a lot of businesses and franchises operating in the food sector have seen a healthy bump in sales (and a resulting injection of cash into their business). There are a couple of considerations on how to maximize being cash-rich effectively, and it will boil down to the franchisee’s own business goals. One sound strategy is to leverage it to pay down debt. This will lower borrowing costs and provide the flexibility to either increase one’s take-home pay or even invest back into the business.

Another consideration would be to consider buying or building a new franchise. Quick-service restaurants (QSRs) lend themselves well to allowing the franchisee to operate more than one location. With multiple restaurants, a downturn in business at one location can be offset by healthy growth in another. Also, multi-unit owners can scale and expand the business quickly. This can certainly be advantageous for a franchisee. A caution with multiple locations is ensuring one can weather a downturn in business at multiple locations.

While the pandemic has created challenges, having a business plan in place will help franchisees find opportunities to pivot and weather uncertainties. Longer-term food franchises can offer distinct advantages and, with ongoing demand, should be poised for growth.

Joseph Pisani is the director of North American industry sectors, franchise finance for the Bank of Montreal (BMO). For more information, visit www.bmo.com/franchising.

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