Predictions for Quick-Service Franchises

Along with many other industries, the pandemic has accelerated trends that had been gaining ground in the quick-service world, a few of which being a shrinking dine-in footprint, fully digital payment options, and hybrid restaurants with dedicated pickup areas.

The following off-premises models are among the few that have experienced growth during the pandemic, and show promise for unit operators wanting to diversify their portfolios with recession-proof concepts:

• The drive-thru model
• Trading dine-in real estate for takeout and delivery pick-up zones (curb-side space) dedicated to patrons and drivers
• Ghost kitchens (commissary/satellite kitchens): a delivery-only model where multiple restaurants have orders prepared away from individual locations

Off-premises models might have led the charge in weathering the industry’s economic storm, but that doesn’t mean they are necessarily the silver bullet for every struggling brand. Similarly, while consumers are unlikely to ever fully relinquish the joy of dining out, it would be near-sighted to ignore the fragmented dining experience of the future.

We don’t have a crystal ball, but we do have decades of experience in the quick service industry—so let’s dig into what the future (likely) holds for quick service restaurants as operators, third-party delivery sources, and investors maneuver the long-term effects of the pandemic on consumer behavior.

Overall Projections for Franchising

Results from the International Foodservice Manufacturers Association (IFMA) 2021 Scope, an analysis of foodservice industry and segment growth projections, captures a holistic view of where the food and beverage industry are heading.

Here are some key findings from the report:

• Overall, the total restaurant category is projected to grow 7.4% in 2021 off an annual decline of 28% in 2020.
• Quick service restaurants (QSR) are expected to recover more than half of the spend the segment lost in 2020.
• Full-service restaurant segments, including Midscale and Casual Dining, will not see the same rebound as QSR, growing only 3.7% and 4.7%, respectively. This comes off declines of over 35% in 2020 for each segment, mostly due to limited delivery and off premise dining.
• The On-Site segment is projected to grow 9.7% in 2021, off a 30% decline in 2020.

These are optimistic statistics considering the industry’s severe disruption. It’s not surprising that quick-serves have fared the best, since their business model has never been entirely dependent on the dine-in experience.

Building off these outcomes, when looking at QSR Magazine’s Top Best Franchise Deals, a roundup of restaurants that industry experts predict to have great returns, a few patterns emerge. Among these trends are niche offerings (including health-conscious options), low upfront investment, small dine-in footprints, robust off-premises arm, and franchisor support.

Despite the massive closures (and irrevocable losses in the independent establishments that have and will have to close permanently) franchising is projected for growth. “2021 will probably be the best year in franchise sales in at least a decade,” said Mark Siebert, CEO of the franchise consulting firm iFranchise Group. “Maybe in 20 to 30 years.”

Why is this? From an investor’s perspective, massive closures have brought interest rates to historical lows. This means commercial real estate is readily available in prime locations, which previously could have been cost-prohibitive. Existing multi-unit operators interested in second-generation sites will be especially drawn to this opportunity to secure prime locations (that might have been cost-prohibitive before), stocked with equipment and available at below average market rents and interest rates. Additionally, while payments might be in flux, to the aspiring restaurateur this might be the prime opportunity to take advantage of the flexibility in SBA loans.

The massive labor pool of furloughed employees from entry level to executives also makes staffing easier. Displaced workers are also able to catch the entrepreneurial bug themselves, and those with a wealth of experience are poised to become strong owners and operators.

Ghost Kitchens

While this adjustment is ongoing, a pain point in foodservice prior to the pandemic was the logistics of delivery. Brands wanting to accommodate evolving customer preferences had to both figure out how menu items could survive delivery (or else cold coffee and soggy fries) or how to adjust items to fit that model (a challenge indeed if your business model traditionally goes against delivery). Aside from adjusting to the new way of menu development, in this case considering delivery, brands had to decide between the trade-offs of building a delivery fleet in-house versus losing profit margin by investing in third-party sources.

Ghost kitchens have presented a unique solution for at least some of these conundrums. In a virtual webinar presented by Euromonitor’s Global Food and Beverage Lead Michael Schaefer, the research firm predicted that ghost kitchens could create a $1 trillion global opportunity by 2030.

Without the investment in a brick-and-mortar establishment or front of house employees, the clear benefit of this model is low overhead costs. This restaurant-as-a-service (RaaS) concept is particularly effective for brands that have been light on foot traffic anyway.

Ghost kitchens also have shorter leases than traditional brick-and-mortar establishments, which coupled with lower upfront costs not only lowers the barrier to entry but mitigates risk if the delivery attempt falls flat. Some brands might also opt-in for the native online ordering options, meaning all transactions are taken in-house rather than through a 3rd party provider.

Piggybacking off the idea of taking advantage of empty real estate shells, ghost kitchens can also help brands navigate markets that are currently too expensive for a brand to establish brick-and-mortar locations in. Since operators don’t have to tend to the restaurant’s appearance to build credibility with diners, this means they can also invest in low-cost properties as they expand their reach.

These benefits aren’t just wishful thinking, either. According to Technomic, sales via ghost restaurants from 300 facilities in the United States will rise by a projected 25% each year for the next 5 years—an estimated $300 million in yearly sales.

While large chains, in partnership with third-party developments, have historically had the funds to lead the charge on experimentation, there is a silver lining for the lesser known brands that have survived. With the millions of small restaurants closures, this presents an opportunity for smaller restaurateurs to invest in cheaper property to pilot kitchen-only models and meet surging delivery demand.

Investments in Advanced POS Technology

While strategic decisions about real estate and inventory have prepared models like ghost kitchens for success, integrated POS systems are the key to delivering a sophisticated food service experience.

Speaking of delivery, it’s ideal for delivery management software to communicate directly with your POS system. This software can be harnessed to optimize delivery routes, saving time and money on gas. Customers also appreciate this feedback loop, as demonstrated by 3rd party services like UberEats allowing them to monitor their driver’s progress in real-time.

As an additional benefit to the consumer, you can leverage delivery management software to sync cooking times with driver delivery schedules. That way, food can come straight out of the oven when the driver is there to pick it up rather than run the risk of getting cold. This leads to the final output of speed, efficiency, and food quality—and return customers.

While the benefits of using a POS to assist with inventory management had been seeded before coronavirus swept the nation, the pandemic exacerbated the limitations of a legacy system. Machine learning allows the POS system to accurately project performance beyond traditional forecasting methods like historical sales data (which never could have accounted for such a massive shift in consumer behavior). Instead, the machine can cross-reference data points across a variety of conditions from location and season to weather and even competitor activity.

These insights also influence inventory and purchasing management. By having real-time data of food sales, menus, and recipes, you minimize the risk of overspending on cost of goods sold (COGS) or being out of a house favorite. This granular information about supply levels can also help you maximize productivity by noticing whether the cooking staff are correctly adhering to portion sizes.

With the right amount of food to match demand, you can also make predictions to avoid being over or understaffed. As a manager, it also reduces a headache for you by letting employees switch schedules with little supervision rather than having to field a fleet of requests. With laws requiring predictive schedules, you are best equipped for staffing while also accommodating your workers.

Growing Demand for Voice Ordering

Another burgeoning market is voice commerce, a more advanced version of mobile ordering that has had such a stronghold with Millennials and Gen Z.

Services like Grubhub quickly capitalized on the benefits of voice-assisted technology by integrating with Alexa and Google Assistant. While the services needed to iron out some wrinkles in the ordering process, the ease of this touchless ordering process is in demand. According to the Global Web Index 2018 Insight Report, 27% of the global online population is using voice search, and nearly 40% giving preference to voice over smartphones when seeking information about a restaurant.

McDonald’s and Sonic Drive-In were among the early adopters of voice search, and AI in general, for limited-service restaurants, and presented promising case studies for other foodservice operators wanting to create personalized dining experiences. These brands used dynamic menus with the capability to change based on time of day, weather, current restaurant traffic and trending menu items. McDonald’s also acquired the voice-recognition service Apprente with the hope of capturing complex, multi-item orders and comprehending a variety of accents.

This approach to self-serve benefits the bottom line by taking employees, who are of course more prone to errors than a machine, and reinvesting that time in customer service or food preparation. Additionally, if this capability is integrated properly with your other systems, then when the order is processed it should appear to a cook the same way it would as if an employee typed it in, again minimizing errors.

From a user experience perspective, the ordering process is much simpler than scrolling through lists of toppings and whatnot (and the transaction can safely happen behind the wheel). Without lifting a finger, a customer can open their account and then automatically place, confirm, and set an order up for delivery. Additionally, the ability to reorder food allows customers to tell the machine to just order their usual. This form of personalization can encourage loyalty and further user adoption. Whether through in-app voice-activated ordering or smart speakers (ideally restaurants would adopt both), this customer engagement channel will only grow as mobile ordering does.

How Brand Nurturing will Change (and not)

The key challenge of a fully (or primarily) digital transaction for brands to maintain loyalty from customers, who have more options than ever, is the absence of direct interaction. One solution is certainly app adoption with its goldmine of customer data. Cultivating diner loyalty through personalized offers and rewards programs is highly encouraged, but there are other ways to nurture brand affinity beyond eye-catching packaging and seamless transactions.

It’s well-documented that consumers have grown more community conscious, more supportive of the local restaurants and small businesses they love (or else see them go out of business). Supporting this data is a study by researchers Sherri Kimes and Chaoqun Chen analyzing consumer sentiment toward delivery pricing. This analysis measured consumers’ feelings toward various elements of a delivery transaction, including delivery fees, minimum order amounts, and the delivery provider.

The study concluded that people prefer to order directly from a restaurant rather than a third party. One reason for this conclusion could be that direct ordering is cheaper. A deeper motivation, however, is that this form of patronage fully supports the restaurant, which is important to consumers wanting to sustain local, independent eateries.

With this local affinity anticipated to stay, franchises that draw attention to their local qualities have a stronger chance of remaining top-of-mind— even if they don’t interact with customers directly. After all, local franchisees (who staff most franchises) have undergone the same challenges as small business owners, leaning on franchisor support to weather the pandemic. Whether it’s supporting frontline workers, or volunteering time to the school system, activating the community cultivates loyalty by making people feel good about the brand they’re ordering food from, not the kitchen it’s made in.

Letting the Smoke Clear

Whether you’ve got your eye on some prime real estate or thinking about your next move in automation, we hope these projections can assist you in navigating the unsettled foodservice landscape. Even though demand for in-restaurant dining is likely to return to pre-COVID-19 levels once a vaccine has been developed, technological enhancements have ushered in an era of convenience for consumers and operators alike that will continue to drive the food and beverage market. Some customers are simply going to be frequently or permanently off-premise, and these growing restaurant fixtures and digital advancements are viable, effective ways to reach them.

While not all concepts can be recession-proof and not every tech-focused offer is a winner, the franchises that continue to innovate in the digital space, where more diners are taking seats, are poised to claim the traffic.