Why NOW is the time to invest in a Franchise
Inflation offers a prime time to buy a franchise asset
By March 2022 the U.S. inflation rate hit a 40-year high of 8.5 percent. As inflation drives the cost of goods up and lowers the value of cash, smart investors are looking to find investments that are a hedge against inflation. While gold, TIPS and real estate are traditional inflation period investments, it’s also a contrarian’s time to consider franchising.
What is Inflation?
Inflation is the rate at which the value of the dollar is falling.
What Causes Inflation?
Looking back at 2020 and 2021 it’s no surprise that inflation has hit the American economy in 2022. Inflation can occur with:
- Raw material prices increase
- High demand/low supply
- Labor shortages
- Rising wages
- An increase in the money supply
How is Inflation Measured?
Economists use several U.S. indexes to determine when the economy is in a state of inflation. The most common tool to calculate inflation is the Consumer Price Index (CPI). The CPI looks at a weighted average of the prices of common consumer goods like food and medical care. It’s calculated by looking at price changes for each item in this set basket of goods. The CPI is in essence a cost-of-living indicator. When you read the inflation rate is 8.5% it is based on this measurement.
For business owners, looking at the Producer Price Index (PPI) is also key as it’s the same premise as the CPI, but looks at the price producers receive for goods and services. It’s a good tool to try and forecast spending and demand by customers.
Is Inflation Bad?
It is neither. It depends on your circumstances. If you’re invested in assets like real estate, a franchise business or stocks, inflation can be good because your asset would sell at a higher rate. Those who are cash or bond heavy are likely to view inflation as bad because it erodes purchasing power.
For investors, inflation is an opportunity. As Warren Buffet has said, when the market goes down he gets excited because it’s a great time to buy assets at below-market value.
Is Now the Right Time to Invest in a Franchise?
Franchising is a long-term investment, so there really isn’t a wrong time to become a franchisee. The idea with franchising is that you’re building wealth for the long-haul. The economy is cyclical and there is always something business owners must contend with be it inflation or a global pandemic. As Ken Priest, CEO of Rise, one of our brands, says “You simply figure it out.”
Franchising has some intrinsic features that make it a good investment vehicle during inflationary periods. Depending on the industry, a franchise offers regular cash returns and low volatility. With the cost of goods and services increasing, franchisees who can optimize their P&L to lower costs can enjoy higher profitability during periods of inflation.
For example, Rise is a chicken franchise and chicken costs are rising fast. Unlike other chicken franchises, Rise has other popular menu items and shifted its marketing to promote those, thereby driving sales of items with less expensive cost to help maintain its profitability. Throughout the pandemic, and today, Rise continues to thrive with average franchisee gross revenue of $801,477* and Rise planning to open 25 more corporate locations because business is that good.
Strong Conversion Market
Unfortunately, many businesses went under during the pandemic. Now with inflation, I would expect to see 5-7% more restaurant owners decide to get out of the game. What this means for a prospective franchisee is that there is a lot of ideal space for their new business that is ripe for a conversion. A conversion is when you’re able to take the bones of the old business and simply make cosmetic changes to the space to open your new franchise. Conversions are music to a franchisee’s ear because it means you’ll be able to cut your build-out costs in half. This often means six figure savings.
Used Equipment
Just like there is prime real estate conversions available for a new franchisee, there is also a big market to find used equipment for the business. Again, this will help a new franchisee during this inflation period reduce start-up costs.
Best Franchises for Inflation Hedging
Regardless of inflation, there are seven million people in the world who are going to need to eat every day. If you have a restaurant franchise you can be their choice of where to go.
The key is picking the smartest food franchise to invest in. To make money with a franchise during inflation, or even in a more stable economy, that choice should always be an emerging brand. An emerging brand gives an investor lower start-up fees, prime territories, and the time needed to make money on the investment. While a brand like McDonald’s has great name recognition, it doesn’t give a new owner the elements needed for strong ROI.
Right now, there are some exciting new brands that are innovating the restaurant space with simplified operations, which translates again to lower costs for owners. In the full-service space, Taffer’s Tavern revolutionized the category with a kitchen of the future, while concepts like dessert franchise JARS, dumpling franchise Brooklyn Dumpling Shop and DIY cake decorating store Duff’s CakeMix all operate without hoods and vents. This means a far less expensive kitchen is required. There are also brands like Rise and Brooklyn Dumpling Shop using technology to reduce costs and drive profit.
With inflation pinching consumers wallets, a concept like PayMore, the fastest growing used electronic and gaming retail store is perfectly positioned to succeed. Not only can consumers sell their unwanted electronics for top dollar, the store offers customers the opportunity to buy recent iPhones, computers, tablets and gaming devices for far less than new.
Any of these emerging concepts would be a strong buy to hedge against inflation.
Conclusion
While there’s never a wrong time to buy a franchise, investors know that when the average person worries about the economy, it’s an even better time to invest. The economy is in a constant state of flux and inflation is just a condition a savvy owner can deal with. Just like every other business situation, inflation is just one piece of a puzzle that pays off handsomely when you solve it.
* “The numbers illustrate the total Gross Revenue generated by the Franchisee-Owned Restaurants during the Applicable Measurement Period (Jan 2021 to Dec 2021), as stated in Item 19 of the Rise Disclosure Document dated April 20, 2022.” “Gross Revenues” mean all revenues the Restaurant generates from all business conducted at or from its location including amounts received from the sale and delivery of food items, services, products, merchandise, and tangible property of any nature whatsoever, including proceeds from business interruption insurance, whether in cash or for credit, and whether collected or uncollected. Gross Revenues, however, does not include the amount of any applicable sales tax imposed by any federal, state, municipal or other governmental authority if such taxes are stated separately when the customer is charged and the Restaurant pays such amounts as and when due to the appropriate taxing authority. Also, excluded from Gross Revenues are: (i) the amounts of any documented refunds, chargebacks, credits and allowances given to customers in good faith pursuant to our standard procedures for issuing such refunds; and (ii) tip income and tip expense.