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Food in Franchising 2023/24

One year on from my article in 2022 its interesting to see how the hospitality sector has bounced back from the days of lockdowns, business shut downs and lock outs by Landlords and how digital technology has advanced in the delivery of food services.

 

I usually start my article with a line from a song that connects to the topic…Hmm food and song…how about “I heard it through the grapevine“.

 

Written by Norman Whitfield and Barrett Strong for Motown Records in 1966.The first recording was produced by Whitfield for Gladys Knight & the Pips in September 1967. 

 

It was also made famous by Creedence Clearwater Revival… oops I have strayed!

 

One year on and the challenges to those in the food and franchise sector continue but at the same time new and exciting opportunities open up.

 

Challenges for business

The key concerns affecting the sector remain:

 

  • Staff shortages
  • Digital adoption competition – contactless payments
  • Environmental factors – green washing.
  • Increased fixed operational costs and inflationary pressures.
  • Regulatory costs, license and permits.
  • Workplace Health and safety issues such as increased staff costs; and 
  • Making a profit!

 

It is still the case that around 45% of businesses in the accommodation and food services sector are in desperate need of staff which has led to reducing operating hours and some businesses only offering lunch or dinner services, not both.

 

One positive of this is that businesses now have to compete for staff and offer better and more flexible working conditions, training and other incentives to retain good staff.

 

We have all experienced going to a café or a restaurant recently seeing the lack of table staff and training that affects the dining experience as well as the increased menu prices.

 

Certain sectors such as fine dining restaurants have also been affected with inflation and fixed costs increasing for business. The returns to franchisees have been squeezed due to increased operating costs after also having to cover their royalty and marketing fees. 

 

Franchisors need to ensure they can negotiate competitive supply arrangements for their franchisees so that franchises can remain attractive and competitive in a very competitive market.

 

Recent NAB research found that 4 in 10 consumers made conscious adjustments to non-essential spending such as eating out to combat the rising cost of living. This becomes a negative cycle as inflation forces businesses to raise prices.

 

The market size of the hospitality /restaurant sector in Australia is around $14.1 billion in 2023, with an expected growth rate of 1.2%.

 

The bigger franchise systems such as Subway, Dominos, McDonalds can adapt to the market, and they have resources (financial and otherwise) to manage these challenges whereas newer franchise systems may not have the same resilience.

 

Australia is a multicultural society, embracing foods from many countries from Asia, Greece to Italy, Spain, Mexico, France, Turkiye and Lebanon and we are seeing an influx of many of these cuisines in the franchise sector.

 

Cost of entry

The cost of entering into a new food franchise can range from these new franchise systems range from low end $50,000 up to $700,000 so franchisees need to consider before committing to the following:

 

1. Be clear about your their budget – what can you afford?

2. Identify if the site on offer is an A grade or C grade location.

3. Ensure you they have adequate working capital to cover your their first 6 to 12 months of operation (particularly where it is a new greenfield site).

 

 

An observation 

I asked Mark Said of MKS Group Accountants and Advisors Melbourne who acts for a number of franchisors and franchisees in the sector, as to his view on the market and he stated expressed the following views:

 

“The franchise market (especially in hospitality) has undergone a period of transformation since the Pandemic. 

 

As the world gradually recovers, this e industry sector is showing signs of resilience and innovation. 

 

We have seen experienced many hospitality franchisors and franchisees es adjusting their business models to incorporate not only additional health and safety measures but also major investment in technology such as mobile ordering and updated CRM technology all aimed at improving their customer experience.

 

Going forward, we believe there will be an increased focus on sustainability and environmental responsibility as consumers are becoming more eco- conscious of their carbon footprint. 

 

Franchisors need to adapt and deliver on these these consumer eco-friendly expectations practices.  These changes will also align with the evolving preferences of today’s travellers and diners. 

 

In summary, we see the food is franchise sector adapting to new realities, a focus on safety and technology, with a and growing commitment to sustainability to remain relevant and competitive”

 

 

New or existing franchise ? 

New players in the market challenge existing brands and an example of this is in the Mexican cuisine sector for example, Nando’s is a well known brand under some pressure from systems like Guzman and Gomez, Zambrero, Mex Tex.and Salsa’s.

 

There is a myriad of new players in the market and they have the benefit of starting from a blank canvass with their own unique offer. 

 

Older established franchise systems have issues with their older fit outs needing capital investment  and upgrade by their franchisees to upgrade their to their  fit outs when times are already tough and having to to replace ing aging plant and equipment.

 

Any new franchisee needs to weigh up the option of taking up a new franchise system or buying into a long established brand.

 

There may be some comfort for a franchisee buying into a long established, well-known brand but that may mean a greater up front cost and additional also costs for updating the equipment and refit of the premises and brand.

 

With a new franchisor you acquire new fit out,  new equipment and start afresh but then you need to ensure you have  enough working capital to cover the first months of operation while the business takes off.

 

Of course, new opportunity may mean greater risk for a new franchisee.

 

New players in the market

There are some new brands that you may not have heard of worth a look, in the food sector such as Sankalp Indian (12 outlets), Dosa Hutt (16 outlets) Monkey King Thai, Thailander (8 outlets), Dragon Hot Pot, The Lok Lok Dumpling Bar, Misschu (aka Miss Chu) to name a few.

 

We have had trends over the years with a surge in Pizza franchises then, ice creameries, coffee and chocolate franchises.

 

Franchisees should try to find systems that have long term appeal not just a passing fad as once you have acquired a franchise there are only limited options to exit the system.

 

Good New Week!

With all of the challenges confronting business there remains positive opportunities which can be, and this can be seen in the resurgence of restaurants and the fast food sector in shopping centres, shopping strips and CBD areas.

 

The food and hospitality sector is dynamic, somewhat fickle and highly competitive with so many options for consumer tastes.

 

Every franchisor even McDonalds has over the years had to reinvent their brand, offer and presence in the market. 

 

The well known brands have taken decades to grow and evolve and generally have the financial capital and backing to overcome challenges. They can also afford to make mistakes and recover from them, which is not the case with new franchisors.

 

Lease or Occupancy License  

In many systems the Franchisor holds the head lease for the premises and grants the franchisee an occupancy license for the term of the franchise. 

 

There are some pros and cons to this for franchisees as under a license they have no ability to deal directly nor negotiate with the Landlord or shopping centre management. The landlord will deal with the Franchisor who holds the lease. 

 

For the franchisor the benefit of holding the head lease is that they control the site and their brand in case the franchisee abandons the business or they are terminated  as the franchisor can retain their presence in the location.

 

On the other hand, the franchisor is then primarily liable to the landlord under the lease For franchisees that do hold the lease, they are primarily liable under the lease. 

 

Either way the franchisee generally has to provide a bank guarantee or security deposit which is at risk if things do not go to plan Shopping Centres also demand store upgrades which can place a financial burden on the franchisee and this has led to negotiations with the franchisor over how those costs will be paid and funded.

 

Tough times?

Some brands have significant capital backing which allows them the luxury to expand even during tough times. As my brother Ted of Ted’s Camera Stores fame always said – “when time are tough market harder”!

 

This concept rings true, and we see it in many sectors where many businesses retract, reduce their stop marketing and die a slow death while those that are innovative, invest in technology and market harder, pick up market share in their sector.

 

Franchisees should do their research on their prospective franchisors and identify if their franchisor is on an expansion path or looking to reduce their franchise footprint.

 

If the franchisor has reduced their presence and converted to company owned outlets this may be a sign that the franchisor is not looking to actively grow its system.

 

Before you jump in!
  • If looking to take on a franchise do your due diligence on the franchisor just as much as they do their due diligence on you.
  • Consider if you are taking on a greenfield site this which may be a higher risk than an existing site.
  • Are you being offered an A, B or C grade site?
  • Is the Franchisor big on technology and innovation? if not, how will they compete in the market sector they are in.
  • Is the store fit out due for an upgrade and refurbishment?
  • Is the plant and equipment new or will it need replacement?
  • Will you hold the lease or hold under an occupancy licence.

 

Above all if you are considering entering into a franchise, make sure you seek advice from a Specialist Franchise Lawyer who is a Member of the Franchise Council of Australia (FCA) and seek independent financial advice before you commit so you can make an informed decision. 

 

 

Robert Toth is Special Counsel and Franchise Specialist at Sanicki Lawyers, with over 35 years of experience in franchise, licensing and distribution law.  He is an Accredited Commercial Law Specialist and regularly publishes articles online and acts for Overseas and Master franchisees and in mediations.  Phone 03 9510 9888 | robert@sanickilawyers.com.au | Mobile 0412 67 37 57 www.sanickilawyers.com.au