The State of Franchising in 2022

Lead market researchers at FRANdata shared crucial insights on the state on franchising, how it looks heading into 2022 and what to expect as business moves out of a post-pandemic mode.

State of the economy

Key pressure points of the economy entering 2022 are changing consumer spending trends, a tight labor market, supply chain hurdles and inflation. The post-pandemic landscape yielded both temporary and permanent changes to consumer behavior and business operations. The hike in e-commerce spending is expected to ease as in-person shopping returns, along with decreased sales in technology alternatives for physical activities — like Peloton. What's here to stay are many of the hybrid-contact initiatives put into place by the pandemic. Hybrid digital and physical services like curbside pick-up, mobile ordering and contactless delivery will likely remain in place. Inflation comes in as one of the major issues in 2022 for businesses big and small, and is further accentuated by a nationwide labor shortage — hitting franchises particularly hard.

State of consumer spending

Among the biggest concerns for franchises heading into 2022 is what could be perceived as decreased brand loyalty, as consumers are turning towards value-based purchasing and trying newer brands. However, CEO of FRANdata, Darrell Johnson says companies shouldn't attribute this shift to decreasing loyalty. "Is it brand loyalty, or is it just changing the way consumers are behaving? And it's much more the latter," says Johnson. "As a brand, understanding your consumer and how the consumer has changed their behavior is key to successfully adapting to change." The shifts in behavior and technology presents a crucial question of how both new and old brands will adapt to the emerging landscape, and take advantage of it.

"The beauty of the franchise model is its ability to adapt and change at scale — but the question is: what are they adapting and changing to? Companies that pick and choose the changes they want are at risk of missing the opportunity available to the more agile brand. FRANdata has identified over 400 new franchise brands entering the market within the past 3 years," says Johnson. "They are coming to market when the economy is trying to sort all of this out, the winners and losers of the future will be determined by their ability to identify and implement necessary changes quickly."

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A tight labor market

A significant change in consumer behavior isn't the only factor affecting franchises. A tight labor market and wage inflation are among the biggest challenges facing small businesses in 2022. With a nationwide labor shortage and demand to fill jobs, businesses are offering increased pay to attract and retain employees. According to FRANdata, businesses are expected to increase wages by 3.9% in 2022. The only problem is, the wage growth could lead to prolonged inflation, as businesses need to subsequently raise prices to maintain profit. The labor issue is pushing more and more franchisors to adopt AI and other technology options to combat a lack of quality staff available. "Looked at from the employer's standpoint, the biggest issue is not quantity, it's quality," says Johnson. "You would be hard-pressed to find any employer that doesn't say, 'Just give me a few good people.' But the challenge is finding a few good people. And that generally, means education, experience, training and the ability to train." Johnson also highlighted that the issue of attracting and retaining quality employees isn't a question of salary or benefits (which he notes is just the baseline to enter the game), but it's what you offer the staff beyond a paycheck, and the benefit of the franchise model is the ability to offer employees invaluable experience. "So how do you deal with the labor issue? By recognizing the strengths of what franchising offers," says Johnson. "And it's not about compensation or benefits, the measure of success is whether people stay and grow. You can start in the kitchen and end up owning 50 franchise units, you can do that in 10 years. A franchisor can hire you in the kitchen, and within 5 years, show you how to run a business."

Looking forward

The post-pandemic business landscape presents obstacles both new and old to franchising, but all in all, the future for franchises will likely be bright, so long as they adapt and change to shifts in the economy and consumer behavior. Johnson stresses, especially to new brands and in times of economic uncertainty, the importance of honing a business's concept to fit and adapt to ongoing trends is a necessity. "One thing new franchise brands are really good at is subsector specialization. They can look at a sector and say, 'I see all the mature brands that are big and successful, but I don't need to be that big quickly. What I need to do is take a slice out of their business today.' And that's what we saw in fitness back in 2008-2010, where you got all these brands coming to market and saying, 'I don't need to be everything to everyone, but my focus is on-demand fitness, or personal training or massages — my focus is on just a slice of this overall sector.'"

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Source: 2022 IFA/FRANdata Franchise Economic Outlook