More than 200,000 quick-serve restaurants in the United States don't count the company as owners. Instead, these locations are franchises, meaning a company (the franchisor) allows an individual or group of partners (the franchisee or franchisees) to run a location of that restaurant under a franchise agreement.
At a glance, opening and operating a restaurant franchise seems more straightforward than building your own restaurant concept. They're established brands, and most of the marketing comes from the corporate office. But that doesn't mean franchisees have an easier path to restaurant success. There's a unique set of challenges that come with franchising. Here are 7 of them, and what to do about it.
1. Long approval processes
The franchisor and franchisee are a team. For a successful partnership, the brand has to be the right fit for the franchisee, and the franchisee must be a right fit for the brand.
Franchise agreements are also long term relationships–10- to 15-year contracts are the norm. It's absolutely essential to get right. Which means oftentimes the approvals process can be long and intensive.
How to solve it
To expedite the process a bit, make sure you gather all the documents you need and follow the franchisor's requirements. A long(er) approvals process can help prevent many more issues down the line, be they financial or cultural. For franchisees, take this time to assess if the franchise is a good fit for you.
2. Higher-than-expected operating costs
Aspiring franchisees must be prepared to front a hefty sum of money to get the business off the ground. Between up-front licensing fees and opening costs, the amount can easily break into the six or even seven-figure range.
Some of the common franchises and their startup costs, according to Business Insider, are:
- Subway: $116,000 to $263,000 + $15,000 franchise fee
- Kentucky Fried Chicken (KFC): $1.4 million to $2.8 million + $45,000 franchise fee
- McDonalds: $1.2-$2.2 million + $45,000 franchise fee
- Taco Bell: $1.2 million to $2.9 million + $45,000 franchise fee
- Wendy's: $2 million to $3.7 million + $50,000 franchise fee
Some franchisors even require aspiring franchisees to have hundreds of thousands of dollars of cash on hand, which runs the bill up even more.
In addition to these one-time opening investments, franchisees regularly pay fees based on sales and operating costs. For example, McDonald's charges a service fee of 4% of all monthly sales, while Subway charges 12.5% of weekly gross sales for franchise royalties and advertising.
How to solve it
There's no real way to avoid royalties and fees, as they're typically required to reach a deal with the franchisor. However, you can work to mitigate your opening costs by shopping contractors and renovators in your area to see who can give you the best price, which could bring down your restaurant opening costs. You could also explore buying an existing franchise rather than opening your own, which brings renovation and remodeling costs way down.
Another way to solve this is through integrated restaurant technology, such as POS and restaurant schedule software. When franchisees have granular data on sales and staff performance, they can make impactful changes that save on costs. When you can shave off a few percentage points of expenses, franchise fees become easier to manage.
Recommended Reading: How to Manage Your Restaurant Labor Cost Percentage
3. Less control over the brand
Affiliation with beloved brands gives franchise owners an advantage in recognition and brand affinity. But it can also work against you. When a number of Chipotle locations were responsible for foodborne illnesses in late 2015, the entire brand reputation suffered–even though just a handful of their 2,000 locations at the time could be traced to outbreaks. Multi-location restaurants are under a close eye in the media because of their presence nationwide. A slip up by one individual at one restaurant, big or small, can impact the performance of other locations.
How to solve it
The first step to avoiding this issue is to hold yourself to the highest possible standards of service. If these big problems affect your brand, there's solace–for you and your loyal patrons– in knowing your location was not responsible.
If a larger issue does arise out of the situation (see Chipotle's half-day closing for food safety training), all you can do is stay in close touch with your franchisor to see what is expected of you in these times.
4. Not as much decision-making power
Independent restaurateurs get to define their restaurant's theme, alter the menu whenever they want, and work to establish a place in their community.
This is not (always) the case for franchise operators.
It's common for franchises to have promotions, new menu items, LTOs, and rebranding efforts mandated from the top. This is not a bad thing–and changes aren't made in a vacuum. They're researched, piloted, and found to increase revenue and/or profit–a win for franchisees and the franchisor.
It can be frustrating for owners who don't feel like they have control over their business. They're the ones who are living it day-in and day-out. But that doesn't mean franchise owners' voices can't be heard.
How to solve it
Franchisees who have ideas on how to improve the business, but can't act on them, can always contact their head office. Explain your point of view, with numbers to back it up, and there's a good chance your ideas will be considered. If you can, suggest a survey to be sent to other franchisees. You may not be the only one who thought of it. Change can happen, but it's incremental given all the moving parts of a national franchise.
That being said, there can be opportunity for individual franchises to make an impact. After all, some iconic fast foods–the Big Mac, KFC bucket, $5 foot long, and Filet-o-Fish–were all created by individual franchisees.
5. Different regulations
Operating your franchise in a major city like New York, San Francisco, or Chicago? If so, you'll need to adhere to an extra set of rules known as Fair Workweek laws, affecting the state of Oregon and the cities of:
- Chicago, IL
- Emeryville, CA
- New York, NY
- Philadelphia, PA
- San Francisco, CA
- San Jose, CA
- Seattle, WA
These laws apply to restaurants operating in the locations above that have anywhere from 20-56+ locations worldwide and/or employee count of 500+ people worldwide–criteria that franchise locations almost always meet.
These laws add significant changes to the way restaurants manage and schedule employees, requiring affected restaurants to compensate employees for last-minute shift changes, share schedules at least two weeks in advance, and/or allow input on scheduling, among other mandates.
How to solve it
Familiarize yourself with the laws and regulations in your area. Additionally, you'll also benefit from the resources available to you within your larger restaurant group. For example, many franchisors require all of their locations use an employee scheduling software that helps them schedule with ease and avoid breaking fair workweek laws.
Recommended Guide: Free Restaurant Labor Compliance Guide
6. High employee turnover
Overall, the restaurant industry has around a 75% employee turnover rate. However, franchises tend to see significantly higher turnover rates compared to the industry average, with fast food industry location turnover double that at 150%. For example, Panera's turnover rate is reportedly nearing 100%, while Domino's is recovering from a reported 107% turnover rate.
Among the reasons for such high turnover is the constant demand for employees at these restaurants (which allows dissatisfied employees to easily find work elsewhere) and the reliance on younger and less specialized labor pools, which typically have less incentive to stay at a franchise for years on end.
How to solve it
There is a two-pronged approach to managing turnover at your franchise: better hiring and better retention programs.
Working at a franchise seems like a good idea to aspiring restaurant workers due to brand recognition, but this can unfortunately attract some less-than-qualified candidates because of their perception of convenience. Make sure you've put the time in to find and hire the right people, such as sourcing candidates proactively and asking the right restaurant interview questions.
“As people continue to come back into the hospitality workforce, restaurant owners need to think about implementing creative incentive plans that can help them get staffed up quickly and then keep successful employees long-term,” says Ryan C. Whitfill, partner at Culhane Meadows.
7. Potential for brand dilution
One last common franchise problem is market saturation of the same restaurant. Believe it or not, Chick-fil-A made more per location than McDonald's and Starbucks combined in 2020, according to this QSR report. And that's with 15% fewer operating days a week!
There's a long list of reasons why, but the volume of locations is certainly towards the top of that list. Chick-fil-A operates one store for about every six McDonald's or Starbucks, and about every 10 Subways. With fewer stores, each Chick-fil-A becomes more unique, and by extension, draws more of a crowd to that specific location.
If you're operating a franchise restaurant (more specifically, a franchise fast food restaurant), you can expect strong sales due to your brand recognition and convenience, but you should also be aware of your potential market share. This comes from knowing how close another restaurant with your same name and menu is.
If there is an excessive number of locations of your restaurant in your city or town, this can take away from its novelty and potentially dent your sales. After all, being one of two McDonald's in town seems a lot more financially enticing than being one of seven McDonald's in that exact same town, doesn't it?
How to solve it
Before opening a franchise, conduct a feasibility study to see how you'll stand out in the area you're looking to open up shop in. Forcing yourself to sit down and consider your sales forecasts compared to costs-and what role other franchise locations could play in those predictions-can help you choose the best spot to maximize sales.
Offer great customer service and food quality, so this is reflected in your online reviews and word of mouth. People may pick your location over another one nearby.
Recommended Reading: How Top Multi-Unit Restaurants are Using Tech to Grow
Facing Your Franchise Problems
Although opening and operating a restaurant franchise comes with its own unique challenges, most of them can be solved with a mindset shift, a new process, or a phone call to your corporate office. Your franchisor is counting on you to keep sales strong so everyone can take home a paycheck, so don't be afraid to reach out for support and a clear ask to ensure everyone ends up better off.
It can also be much easier to succeed when you use integrated tools like restaurant scheduling software and a POS. Understanding how you can solve problems within your own store like controlling labor costs and simplifying scheduling will let you gain a foothold on the daily challenges you'll face as a franchisee.
7shifts is a team management software designed for restaurants. We help managers and operators spend less time and effort scheduling their staff, reduce their monthly labor costs and improve team communication. The result is simplified team management, one shift at a time.
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