The International Franchise Association released its annual Economic Outlook Report this week, which overall shows a moderation of franchising activity in 2022 versus a busy 2021. The IFA expects this moderation to continue throughout this year amid persistent headwinds like inflation and labor shortages. That said, the size of the franchise economy is still expected to exceed pre-pandemic levels.
The quick-service segment is positioned for a strong year versus the overall franchising industry, with 2.5% growth projected versus 1.9%, respectively. IFA’s report shows that the quick-service segment is expected to grow to nearly 197,000 franchise units this year, from just over 192,000 last year. For context on how attractive this franchising option has become for so many people through the pandemic, there were 183,543 franchised QSR units in 2020.
“Despite a decline in consumer spending, QSRs will continue expanding … Moreover, during anticipated economic uncertainty, consumers are more likely to cut their ancillary spending such as eating out and prefer more economical options that QSRs offer, including economical menu options and value meals,” the report notes.
As such, several brands have signed aggressive deals to expand this year and beyond, including Capriotti’s, Wing Zone, Slim Chickens, Tropical Smoothie, Smoothie King, Fazoli’s, WaBa Grill, Pizza Forno, Hawaiian Bros, Pizza Guys and more.
Quick-service employment is expected to increase alongside unit growth. The IFA projects franchise employment in the sector to increase by 3.5% to a total of about 3.9 million employees. QSRs hold the largest distribution of franchise employment by sector – and by a lot. In 2023, the segment is expected to make up 45.3% of all franchise employment. The second highest is retail food, product and services, with 13%, and table/full-service restaurants, with 12.8%.
The full-service category is expected to be less bullish on franchise growth this year, with a 1.1% increase expected. The IFA cites real estate challenges and weaker consumer spending on discretionary items.
Operational efficiencies lead to increased output
Notably, the IFA predicts the total output generated by franchised businesses to grow by about 4.2% this year to reach $860.1 billion. In the quick-service segment, that output is expected to increase by 2.5% to reach $289.6 billion, from $275.7 billion last year, while the full-service sector is expected to reach $78.2 billion, from $76.5 billion last year.
“Many brands have evolved and implemented operational efficiencies into their system as a result of the challenging business environment that began with pandemic-related uncertainties, followed by high inflation, supply shortages, labor difficulties, and now the anticipated slowdown in the economy in 2023. The results of numerous franchising initiatives that began in 2020 are already starting to become evident, leading to better growth in franchise output in 2023,” the report notes.
The IFA says the most common technologies adopted by franchised businesses to support higher output numbers include:
- Kiosk ordering and digital payments
- Artificial intelligence software to track inventory and forecast future sales
- Online training programs that complement on-site training
- Delivery apps and voice ordering technology
- Customer insight technology
- AI to segment customers and increase the variety of loyalty programs
- Better site selection using data and analytics that incorporate demographics, competition, customer behavior and more.
Such efficiencies are perhaps more critical than ever, as 90% of QSR franchisees reported increased costs for inventory and 88% reported higher labor costs in 2022. These pressures are expected to remain throughout 2023; the IFA reports that nearly 70% of QSR operators expect cost impacts to worsen this year, including more expensive real estate, higher wages and higher borrowing rates. Initial investment costs, for instance, have increased by more than 30%, while the average time needed to launch new units has also increased.
Macroeconomic predictions for 2023
What does the macroeconomic picture look like for the consumer this year? According to the IFA, the forecasted real GDP growth is expected to be muted at 0.5%. As domestic production slows, demand for labor and wage growth will weaken. Simultaneously, consumers will be impacted a higher interest rate environment. As such, the report expects real consumer spending to grow slowly versus previous years.
Nearly 75% of Americans are concerned about rising prices and expect them to continue rising in the future, according to the Deloitte State of U.S. Consumer Report. Despite a spike in consumer confidence in December 2022, people are likely to remain conservative in their spending in 2023, the IFA report notes, especially as personal savings have dwindled from their peak of 33.8% in April 2020 to 2.3% in October 2022. Further, credit card debt has increased by 15% year-over-year, while total U.S. household net worth decreased from $137.5 trillion to $135.3 trillion from Q3 2021 to Q3 2022. These downward trends could have a major impact on industries that rely on discretionary spending, including restaurants.
“Compared with 2022, consumers will have less financial cushion in 2023. Over the duration of 2022, savings and cash that were accumulated in 2020 and 2021 have been depleted,” the IFA states. “Depending on inflation and the rate of consumer spending over the ensuing few quarters, the surplus savings accumulated during the pandemic may be completely spent in 2023.”
Despite this precarious environment, demand for restaurants remains high, which could keep the sector somewhat insulated. According to the National Restaurant Association’s State of the Industry Report, 84% of consumers prefer going out to eat versus cooking at home.
Contact Alicia Kelso at [email protected]