About 67% of the nearly 700 franchisor chief executive, chief financial, and chief development officers surveyed for BoeFly’s Franchise Growth Confidence Index expected to achieve their domestic growth goals this year. While that is an improvement over the 50% figure from the fourth quarter of 2023, it is still down from 76.9% at the start of 2023.

Meanwhile, the annual franchisee survey from the International Franchise Association (IFA) found that 87% of franchisees across all industries are experiencing either a moderate or substantial impact from inflation. As a result, 80% of operators said their business earnings fell last year.

The impact of inflation

Higher interest rates are impacting franchises in several significant ways:

• Increased Cost of Borrowing: Franchises, particularly new or expanding ones, rely heavily on loans for initial investment, operational costs, and expansion. Higher interest rates make borrowing more expensive, leading to higher repayment costs, which can reduce profitability or delay expansion plans.
• Franchisee Demand Decline: Potential franchisees may be deterred by the higher costs associated with taking out loans, which could lead to slower franchise growth. This may also impact the ability of franchisors to recruit and retain new franchisees.
• Lower Consumer Spending: Higher interest rates often signal economic tightening, reducing consumers’ disposable income. This can negatively affect franchises in retail, dining, and services as customers become more conservative with their spending.
• Real Estate Costs: Many franchise businesses require physical locations. With higher interest rates, financing real estate purchases or leases becomes more costly, adding pressure to operational expenses.
• Profit Margins Shrink: Franchises with existing debt may see profit margins shrink due to increased repayment costs. This is especially problematic for franchisees operating in highly competitive or low-margin industries.
• Franchisor Support and Flexibility: Some franchisors may offer franchisees more support or financial flexibility, like lower franchise fees or operational assistance, to counteract the impact of higher interest rates. However, this could strain the franchisor’s overall economic model.

Tips for handling inflation

Inflation is bound to rise and fall. The key is figuring out solutions for managing inflation’s impact on your business. Franchises can adopt several strategies to cope with inflation and its impact on their operations and profitability.

Adjust Pricing Strategically—Franchises may need to increase prices to maintain margins, but it’s essential to do so carefully to avoid alienating customers. Strategies include:

• Incremental Price Increases: Gradually raising prices instead of making significant jumps can minimize the risk of customer backlash.
• Value-based Pricing: Emphasize value over price by improving the customer experience or adding perks that justify price increases.
• Offering Tiered Pricing: Providing premium and budget options allows customers to choose based on their affordability during inflationary periods.

Focus on Operational Efficiency—Inflation increases costs across the board, including raw materials, labor, and utilities. Franchises can counteract this by improving operational efficiency:

• Streamlining Processes: Automating routine tasks or improving supply chain management can reduce costs and increase productivity.
• Reducing Waste: Implementing waste reduction programs, particularly for franchises in the food and retail industries, can help reduce unnecessary expenses.
• Energy and Resource Efficiency: Investing in energy-efficient equipment and reducing resource usage can lower operational costs.

Diversify Supply Chains—Franchises dependent on specific suppliers may face rising costs due to inflation. Diversifying supply chains and exploring alternative vendors can help mitigate price hikes and ensure better pricing flexibility:

• Sourcing Locally: Engaging with local suppliers can reduce shipping and logistics costs, especially if global supply chains are disrupted or inflated.
• Negotiating Long-Term Contracts: Locking in prices through long-term supplier agreements can provide stability during inflationary periods.

Embrace Digital Solutions—Inflation increases operational costs, but adopting digital tools can provide cost savings:

• Digital Marketing: Digital platforms can help franchises reach more customers cost-effectively compared to traditional advertising.
• E-commerce Expansion: Expanding online ordering, delivery, or subscription services can drive additional revenue streams, reducing reliance on foot traffic.

Enhance Loyalty Programs—Encouraging repeat business through loyalty programs can help franchises retain customers despite price increases:

• Incentivize Repeat Visits: Offer discounts, rewards, or exclusive promotions for loyal customers to maintain their patronage.
• Personalized Offers: Using customer data to provide tailored discounts can help keep customers engaged without broadly reducing prices.

Negotiate Better Lease Terms—Inflation impacts real estate and lease costs, which can hurt franchisees operating in physical locations. Franchisees should:

• Renegotiate Lease Terms: Attempt to secure favorable terms, such as reduced rent increases or more flexible conditions, particularly if landlords are facing increased vacancy rates.
• Consider Downsizing or Relocating: Relocating to lower-cost areas or downsizing operations can reduce overhead expenses.

Optimize Inventory Management—Efficient inventory management helps franchisees avoid excess stock and supply shortages, both of which can be costly during inflation:

• Just-in-Time Inventory: Minimize stockpiling and reduce holding costs by adopting a just-in-time approach to inventory management.
• Inventory Tracking Software: Use digital inventory systems to monitor stock levels, forecast demand accurately, and avoid costly over-ordering.

Increase Franchisee-Franchisor Collaboration—Franchisors can offer valuable resources and guidance to franchisees dealing with inflation:

• Bulk Purchasing Discounts: Leveraging the franchisor’s purchasing power can provide franchisees access to better rates on goods and services.
• Operational Best Practices: Sharing data-driven insights and successful strategies from other franchisees can help individual operators navigate rising costs.

Reevaluate the Franchise Business Model—Franchisors may need to consider temporary adjustments to their business model during inflationary periods:

• Flexible Franchise Fees: Reducing or deferring franchise fees for a set period can provide relief to struggling franchisees.
• Modular Concepts: Offering smaller, more cost-effective franchise models that require lower startup costs can attract franchisees in a tight economic environment.

Focus on Customer Retention and Experience—Strong customer relationships can sustain business during inflation:

• Invest in Customer Service: Prioritize customer experience to ensure that customers feel the value of their spending, even when prices increase.
• Provide Transparency: Open communication about price increases, especially if linked to inflationary pressures, can help customers understand the rationale behind changes.

By implementing these strategies, franchises can navigate the challenges of inflation while maintaining profitability and customer satisfaction. 

Working with a franchise advisor is a smart move. The expert guidance of Seth Lederman of Frannexus can help set you on the path to being a successful franchise owner. Contact him today to speed up your franchise search, evaluate the right opportunities, and increase your chances of being awarded the franchise of your choice.