Why Your Franchise Depends on Strong Unit Economics, And 5 Ways To Strengthen Them
Unit economics are the lifeblood in every franchise opportunity. Here's how to boost yours.
By Dan Rowe •
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When prospective franchisees are evaluating franchise opportunities, one of the most crucial metrics to compare options is unit economics. Unit economics is a means by measuring, tracking and improving the performance of a franchise at the unit level. If a franchise doesn't have strong unit economics, it's not an investable concept — because without strong unit economics, you can't have strong ROI.
Improving unit economics basically boils down to generating more revenue and optimizing costs. On the sales side, brands need to either promote more spending and frequency of customers, or create a new revenue stream like off-premise, catering or wholesale. Optimizing costs doesn't necessarily mean cutting, but rather get creative and find a better alternative to doing the same thing.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
Here are five real world ways to improve unit economics in today's challenging restaurant landscape.
Menu engineering
With restaurants still adjusting to the post-pandemic landscape and skyrocketing inflation, restaurant food costs are rising. Wholesale food costs rose 17.1% in the last 12 months, the biggest increase since 1974, according to data from NRA. While one solution is to raise prices, it's a fine line before pricing the customer out of your restaurant. According to research by Technomic, customers at QSR restaurants find $7 per entrée to be a fair price, but felt $10 per entree was getting too expensive. For reference: the average QSR entrée price is $10.08.
Thankfully, there are other alternatives to engineer the menu for stronger unit economics, without alienating loyal customers.
First, evaluate the menu and eliminate items that are too expensive. Then, identify the inexpensive bestsellers and craft new menu items that use those less expensive ingredients. Finally, at the point of sale, have your team or digital prompts for online ordering suggest adding high margin items like drinks and sides to an order. When Rise Southern Biscuits & Righteous Chicken moved to digital ordering, sales of sides skyrocketed based on suggestions prompted during the ordering process.
Also, as supply chain issues persist, it is wise to remove menu items that are either too difficult or expensive to keep in stock.
Finally, consider the time it takes to prepare menu items, and eliminate labor intensive dishes to boost profits.
Related: When Rebel Foods Cracked The Recipe For Unit Economics
Optimize hours
Remember Outback Steakhouse? When co-founder Chris Sullivan worked for Bennegan's and Chili's, he noticed the discrepancy between how much it cost to stay open for lunch and the consistent lack of profit. When he eventually founded Outback, Sullivan suggested that by passing on lunch, the operation would be easier and more profitable to run — and he was right. Additionally, because the brand wasn't focused on the business lunch audience, they could avoid high real estate costs that are typical in prime downtown areas.
It might seem counterintuitive that to increase revenue, you need to reduce hours, but it isn't. Pay attention to the times of day when you experience peak revenue, and if there are gaps in profit between certain hours, it might boost unit economics to close during slower periods.
Alternatively, there are some franchise concepts where owners can make money in their sleep — literally. Brooklyn Dumpling Shop, the fastest growing dumpling franchise in the country, is able to stay open 24/7 through the use of a robotic kitchen and automat system. Similarly, PayMore, the top used and new electronics retailer, has several online stores in addition to the brick-and-mortar location, allowing the company to generate revenue 24-hours a day.
Related: Considering franchise ownership? Get started now and take this quiz to find your personalized list of franchises that match your lifestyle, interests and budget.
Improve technology
Utilizing new technology can improve restaurant operation, efficiency and cut costs. Taffer's Tavern reinvented the full-service restaurant sector by creating "the kitchen of the future." Taffer utilized technology to reduce kitchen labor burden by 60% and systemized the operation so that training time is also significantly reduced — saving time and money while optimizing profit.
However, if you can't reengineer the back end of your operations, you can still implement other technology to reduce labor, improve operations and increase profitability. For example, when Rise moved to exclusively online and kiosk ordering, the brand eliminated labor costs significantly by removing the need for cashiers. Also, the average ticket order increased — a win-win.
Related: Jon Taffer on Communication, Marketing and Consistency in Franchising
Lower labor costs
Labor costs in the restaurant industry rose by 10% in 2021, according to data by Restaurant Business. With factors like the Great Resignation contributing to a tight labor market, restaurants are raising pay to attract workers, and considering how to reign in some of those labor costs will help improve unit economics.
An easy solution that any restaurant can implement? Add menu bundles. Selling $20 worth of product costs just as much in labor as selling $10.
For multi-unit franchise operators, consider hiring a super manager to oversee several locations, instead of having general managers at every unit. You can hire a super manager for $80,000 to oversee three stores, instead of paying $60,000 per general manager, thus significantly reducing payroll costs.
Some emerging franchise concepts were created to run lean and mean. Curry Up Now, an Indian fast-casual concept, doesn't need a trained Indian chef at each restaurant, a requirement that can often get pricey. Similarly, the dessert franchise, JARS, doesn't call for a trained pastry chef either. By structuring a restaurant that can run without high-cost positions and still deliver quality, labor costs are drastically reduced. Brands like Taffer's Tavern, Rise and Brooklyn Dumpling Shop were developed to rely on technology rather than human hands, slashing costs dramatically.
Lower ancillary costs
Review supplementary costs like cleaning, maintenance and rent, and get creative about where you can cut back. Do you need a separate cleaning service, or is it side work that current staff can do in downtime? Pal's Sudden Service, for example, has employees do maintenance on the store.
Rent typically costs 8-10% of sales. Consider negotiating with your landlord for a better deal, and get creative. For example, would they grant lower rent in exchange for a percentage of sales?
Remember, there are countless items in a restaurant P&L besides food and labor. Review inventory carefully and see if there's a less expensive way to accomplish the same thing.
With so many franchise concepts available and margins being squeezed, the importance of solid unit economics is imperative. In today's tight market, following these five tips to improve unit economics will make your franchise opportunity more attractive to new franchisees and investors.
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