Franchises account for 3-4% of the U.S. GDP and employ over 8 million people nationwide, and restaurants are the fastest growing franchises compared to other industries.
In 2023, the National Restaurant Association reported that the restaurant industry generated approximately $997 billion in sales. And this year, U.S. restaurant sales are forecasted to top $1 trillion for the first time in history.
Franchise owners in particular play a vital role in the restaurant space, as they operate many of the most loved brands in America.
How are these franchise owners and operators faring in 2024? It’s a mixed bag. Inflation, labor shortages, rising costs of goods and ingredients — as well as a looming election — are adding uncertainty and challenges to franchisees and restaurant owners’ already full plates.
The Current State of Inflation
The U.S. Department of Agriculture keeps a close eye on inflation and how food prices change month over month. They report this out as the Consumer Price Index (CPI), a measure of economy-wide inflation.
- According to the CPI, food-at-home (grocery store or supermarket food purchases) decreased 0.1% from July 2024 to August 2024 and was 0.9% higher than August 2023.
- The food-away-from-home inflation was more volatile. Restaurant purchases CPI increased 0.3% in August 2024 and was 4% higher than August 2023.
That 4% increase is the kicker. Let’s look at how it compares to the past few years. Each year, we can see how economic and political factors caused significant CPI changes.
- In 2022, food prices increased by 9.9%, faster than in any year since 1979. Food-at-home prices increased by 11.4%, while food-away-from-home prices increased by 7.7%. A flu outbreak, the war in Ukraine, and high energy costs are some of what’s to blame for this broader inflation.
- Food price growth slowed in 2023, as economy-wide inflationary pressures, supply chain issues, and wholesale food prices eased from 2022. Food-at-home prices increased by 5.0%, and food-away-from-home prices increased by 7.1% — averaging out to 5.8% on the whole.
So in theory, the 4% food-away-from-home (restaurant) inflation isn’t quite as bad as recent years. But that’s not the whole story. Consumer spending and behavior is still changing at a noticeable rate — a rate restaurant owners and franchisees feel.
According to Restaurant Business Online, 87% of operators across all industries are experiencing either a moderate or substantial impact from inflation. And 80% of operators said their business earnings fell in the past year as a result.
Challenges Faced by Restaurants and Franchise Owners
Rising Food Costs and Consumer Behavior
The implications of increased food and supply costs are vast. Since ingredients like meat, dairy, and produce cost more, restaurants have to pay more to make the same menu items. At the same time, customers are feeling the pinch from higher prices at the grocery store and in other areas of their lives, leading some to cut back on eating out.
Lower Profit Margins
The inflation of food costs across the board means many restaurant owners and franchises are spending more on ingredients while trying to keep menu prices at a level that still attracts customers. The result? Lower profit margins.
Labor Shortages and Rising Wage Demands
Labor shortages in restaurants are one of the biggest challenges franchisees face this year. 81% of quick- and full-service restaurants report staffing issues.
Many minimum wage and hourly workers are also leaving the service industry or choosing other job opportunities. So, there’s less available talent to fill roles in the kitchen, on the floor, or behind the counter.
Restaurant owners are having to offer higher wages to attract and retain employees. While this can help with staffing, it also raises costs, which further reduces profit margins.
Political Landscape: Election Impacts on Franchises
The upcoming election makes labor costs even more unpredictable. With a new administration comes potential changes in wage, tax, and healthcare policies. These unknowns make it even harder for restaurant owners to plan for the future in a highly competitive and unpredictable market.
Depending on the results of the election, new policies could directly affect restaurant businesses’ day-to-day operations, profitability, and overall sustainability.
Politics and Policies to Watch
Minimum wage and tax changes are two of the top political issues that affect restaurateurs.
This election season in particular, some candidates are pushing for a $15 federal minimum wage. While that increase would benefit workers, it would also increase labor costs for franchises. Having to pay more in labor without drastically increasing prices threatens already slim profit margins.
Each 2024 election candidate also has different tax proposals that would impact business owners. Their considerations cover corporate tax rate changes, business loss and passthrough income limitations, as well as international and small business tax adjustments.
The Role of Restaurant Associations
Individuals and business owners often struggle to understand how they can participate in politics during an election year. Aside from voting, it can be hard to know how to get involved and influence change.
One major way to stay active is working with restaurant associations.
Restaurant associations play a crucial role in advocating for restaurant franchise owners. Groups like the National Restaurant Association (NRA) and the International Franchise Association (IFA) lobby on behalf of their members, pushing for policies that support franchisee and business owner profitability and success.
Other top restaurant associations include:
- Research Chefs Association (RCA)
- Culinary Institute of America
- International Association of Culinary Professionals
- James Beard Foundation
Many of these restaurant associations also give business owners general guidance on restaurant business strategies and hard-to-understand regulations.
Strategies to Mitigate Costs
How can restaurant franchises counteract inflation and economic pressures?
Here are a few cost management techniques for restaurants.
Lean into creative marketing.
The franchise model of maintaining brand consistency can make it challenging to get creative. But most of these big brands — specifically quick service restaurants (QSRs) — are pulling out all the stops to support local franchises.
Promoting new, flashy menu items and seasonal favorites are just a couple ways you can look to your franchisors to drive additional traffic and revenue. For example:
- Burger King has added new flavors like ghost peppers and paprika-spiced burgers to attract new business.
- Wendy’s is adding pumpkin spice to their Frosty and cold brew coffees to lean into Fall promotional opportunities.
- Taco Bell introduces a new product every five weeks to keep customers coming back.
Control supply chain costs.
Most franchisees are at the mercy of the franchise when it comes to pricing their products. Though local market and economic factors can give you some leverage, it can be minimal unless you manage several locations.
If you can’t heavily influence the top line, it may be worthwhile to look to the bottom line. Controlling costs takes time and attention to detail.
One of the biggest cost management techniques in restaurants is supply chain management. Your franchisor may have high-volume master agreements with suppliers. Lean into those. If you’re unaware of any existing agreements, now is a good time to explore alternate ingredient options with existing suppliers or new ones.
You can typically save money buying closer to home (more locally). Or, you can often counteract rising food costs by buying in higher volumes (bulk) or at higher frequencies (more often).
Look at technology spending.
Similarly, your franchisor may recommend or require you use specific technology to manage your restaurant’s inventory, labor, and sales. If not, consolidating any of the tools you’re using or implementing new ones is a huge way many restaurants manage costs.
There are several “all-in-one” technology tools that can cut down on spend and save you time from logging into multiple systems.
Engineer your space.
Though inflation is heavily impacting brick-and-mortar costs for restaurant owners, one area you can still influence is your space. Without having to move locations, you can ensure you’re taking advantage of the space you have and potentially save money.
- Menu engineering: When’s the last time you updated your menu? Is it as prevalent as it needs to be? Are your highest margin items showcased? How you engineer your menu can influence customer’s purchases and increase revenue per transaction.
- Mood: Despite labor challenges, your staff’s influence on customers remains the same. The mood they bring into your restaurant brings customers back or turns them away. Train and remind staff the power of a positive attitude. Ask them to emphasize these higher margin menu items verbally as well.
- Music: Background music doesn’t just set the mood in your restaurant. It can increase the amount of time customers spend with you, and it can increase sales too. You do have to spend money on background music, but you don’t have to spend a fortune.
Explore background music.
Many restaurant owners and franchisees don’t realize until you’re in business that you can’t play just any music at your restaurant. Personal playlists and individual music streaming apps don’t have the appropriate licenses for business use.
Without the proper licenses, you can be hit with fines and potential penalties for playing music illegally.
Pandora CloudCover offers background music for business use, specifically restaurants and franchises of all types and sizes. We stream music in full-service restaurants, quick-service restaurants, bars and breweries, coffee shops, and more.
Plans start as low as $17.95/mo when prepaid annually, and you can try it free today. Terms and conditions apply.
References
2024 State of the Restaurant Industry. National Restaurant Association.
Food Price Outlook, 2024 and 2025. U.S. Department of Agriculture.
How the 2024 presidential election could impact minimum wage. Business Insider.
Comparing 2024 Presidential Candidates’ Tax Proposals. Crowe.
Tracking 2024 Presidential Tax Plans. Tax Foundation.
How restaurant franchises are dealing with inflation. Nation’s Restaurant News.
How Taco Bell’s Marketing Engine Embraces Culture and the Customer. QSR Magazine.