Industry experts weigh in on what it really takes to close deals in the restaurant segment of the franchising industry.
In the franchising industry, there’s one common question that every brand is trying to solve: how much does it really cost to close one deal? Even though there isn’t a silver bullet or definitive answer that’s guaranteed to lead to results, the general consensus is that the dollar amount is higher than what brands would expect.
As the industry becomes more crowded and the unemployment rate continues to drop, there are more concepts competing for a smaller group of prospective franchisees. That’s especially true for restaurant concepts—both consumers and aspiring business owners have more options than ever before when it comes to deciding where to eat or what chain to invest in. And according to 1851 Franchise Chief Development Strategist Sean Fitzgerald, that means that brands are going to need to allocate more money for marketing than they have in the past.
“It’s going to continue getting harder for restaurants to grow, so they should keep increasing their budgets. There are so many options out there for both consumers and potential operators, so finding new franchisees is going to become more and more of a challenge,” said Fitzgerald. “I consistently see brands that are completely under budget—it’s not uncommon for budgets to decrease while goals increase. To reach those goals, that increase in budget needs to be there so that brands can remain competitive, especially when you throw in the fact that the restaurant industry is cooling down from a business perspective. Whenever you have headwinds, you’re going to need to spend more. You’ve got to roll up your sleeves and convince people that this is a good time, good industry, good category and good brand.”
In order to convince qualified candidates that the time, industry, category and brand are the best possible fit, No Limit Agency CEO and 1851 Publisher Nick Powills says that brands need to set themselves up for success when planning out their marketing budgets and initiatives. That means taking a look at the size of their brand and ensuring that their efforts are being targeted in the places they’re looking to grow.
“There are more restaurants than ever before and the same amount—or less—of restaurant buyers. So now, brands have to spend more to market to fewer people, and that’s stressful for franchises because they think that they should budget less as they continue to grow. But the reality is that spend is at an all-time high on recruitment fees and marketing dollars to get in front of franchise prospects,” Powills said. “The size of a brand will dictate the investment that a franchisor needs to put against franchise sales. An emerging brand will probably have to budget more than a brand with over 500 units, but those larger brands need to make sure that their dollars are being spent in the markets that they want to grow in.”
Philip Schram, Chief Development Officer for Buffalo Wings & Rings, is seeing the effects of the increasingly competitive restaurant segment of the franchising industry first hand. The growing restaurant concept is heavily investing in the marketing strategies behind its development initiatives. And Schram says that marketing is just the beginning—the total dollar amount ends up climbing more when site selection, real estate and construction support are factored into the equation.
“There was an article published recently that mentioned there are 16,000 new franchisees that come into the industry every year, with 4,000 or so brands vying for their business. When you do the math, that comes down to an allowance of four new franchisees per brand per year. So, it’s clear that the industry is extremely competitive,” said Schram. “That’s why brands are spending more and more money to close deals. To figure out how much your brand should be spending specifically, the first thing that you should look at is your unit level economics. Brands with strong unit-level economics may not need to spend as much because it’s clear to candidates that it’s a good opportunity. The second point to consider, which is also very important, is the total cost of the franchise. The higher your investment is, the more you’re going to need to spend to market it.”
The restaurant industry is continuing to evolve at a rapid rate, and brands need to adjust their budgets in order to keep up. What used to be the standard marketing spend on franchise deals is no longer cutting it, and it’s likely that the number will continue to climb in the near future.
Powills said, “It used to be that completing a franchise deal cost between $8,000 and $12,000. Now, I’d imagine that most brands are spending between $20,000 and $30,000 to get one deal done, and as long as the economy continues to improve, that number could go well into the $30,000 to $40,000 range. So, if I’m a restaurant franchisor that’s looking to get 10 deals done, a safe marketing budget is between $300,000 and $400,000. And even though that might create sticker shock up front, the return on one single franchise sale could be several million dollars over the lifetime of a franchise agreement. It’s important to keep that in mind and look at the impact that the return will make on the entire franchise system.”