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What to Expect in the Franchise Sector

In the first quarter of 2021, franchise companies and their franchisees were wildly optimistic about a strong economic recovery in the second half of the year. Several vaccines for COVID-19 were starting to be widely distributed and the end of the pandemic seemed near. Everywhere in franchise publications, phrases like “return to normal” and “post-pandemic” were common.

Then, as summer began, the delta variant started spreading in the U.S. and by July, Colorado was one of the states with the highest number of COVID-19 cases attributable to this new strain, according to the Centers for Disease Control and Prevention (CDC).

As August begins, cases are quickly rising, and control measures such as mask mandates and social distancing are once again being imposed by authorities in Denver and throughout Colorado.   

There is no doubt that the resurgence in COVID-19 cases is cause for concern in the franchise industry; however, there are also signs of recovery and reason for optimism in the second half of this year. Colorado is home to many franchise companies where some recent economic indicators are trending in the right direction for business growth.  

As of July 24, the Colorado Department of Labor and Employment recently reported the lowest number of initial unemployment claims filed since the start of the pandemic, trending toward pre-pandemic levels. The federal government’s unemployment benefit programs will be ending in Colorado in early September, meaning that anyone who has been relying on those payments may soon be looking for a job. 

This is good news for many franchised restaurants and retail businesses facing a shortage of workers since being able to reopen in 2020. In addition, the U.S. Department of Labor reports that July 2021 saw the highest job growth in about a year, signaling a stronger economy nationwide.  

With employment on the rise, many franchise systems will hire employees to meet the pent-up demand from consumers who are ready to venture out to their favorite restaurants and retail venues again despite stricter mandates.

Here are two predictions of trends in the franchise industry that will continue through 2021 and beyond: 

Increased Use of Technology 
Franchise systems have adapted to pandemic restrictions by accelerating the use of technology to facilitate online sales, mobile ordering, contactless payments and delivery services. The restrictions on indoor dining and in-person services imposed in 2020 have resulted in permanent changes in consumer preferences for third-party delivery services, drive-throughs, and online purchases. Consumers have become accustomed to the convenience and safety of purchasing items online that previously could only be purchased in brick-and-mortar locations. This trend will result in smaller footprints for restaurants and retail locations and increased use of shared spaces such as ghost kitchens.  

Franchise systems that continue to innovate technological solutions and adapt to consumer demands will be better positioned to meet pandemic-related challenges and changing consumer demands.  

Increase in Franchise Sales 
With an increase in layoffs in 2020, some people will be looking to “buy” themselves a job by starting a business. Purchasing a franchise will be attractive to many who have access to capital in the form of retirement funds or savings. For those without retirement funds or savings, the SBA added more government-backed loan programs during the pandemic, making it easier for many to obtain grants or loans at low interest rates. The economic recession sparked by the pandemic has not had a negative effect on home values, which have continued to rise, giving more people collateral for a loan. Additionally, interest rates have stayed at historically low levels. All of these economic factors will contribute to an increase in franchise sales in the second half of this year.  

Franchisors that have addressed the pandemic’s impact on their franchise system in their sales materials and in their Franchise Disclosure Document (FDD) are more likely to attract new franchisees. Whether the pandemic had a negative or a positive effect on the franchise system in 2020, there are few systems that felt no effects. Anecdotal evidence suggests that prospective franchisees are asking more questions and driving harder bargains in the purchase of franchises this year. As the pandemic has evolved and not disappeared as some predicted earlier, buyers want to be assured that their new business will weather the ups and downs of COVID-19 and future pandemics.  

To address buyers’ concerns, the FDD should discuss: 

  • Changes in the way franchised locations operate (sanitizing, social distancing)
  • Changes to menus of products and services offered to consumers (supply chain disruptions have resulted in menu changes; the time lag inherent in food delivery services has also changed menus)
  • Changes to methods of delivery (online ordering, curbside pickup)
  • Changes in the financial results of franchised locations (financial performance representations)

Franchise systems have demonstrated a remarkable ability to adapt and change since the start of the pandemic, and many will be rewarded with an increase in franchise sales in the second half of this year. 

This article was originally published in ColoradoBiz.

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