Pinch of cost: Pandemic may claim half of standalone restaurants. Why franchises can dodge it. – ET Prime

Clipped from: https://prime.economictimes.indiatimes.com

The worst phase of the longest lockdown may be behind us, but it has a loud message for the food and restaurant industry — there’s no return to normalcy. There is growing fear among stakeholders that even after the pandemic is over, some businesses may not reopen. And the ones that do, will struggle for a long time to come.

The food business, in particular, has a unique attribute. People do it for the love of it. That’s one of the reasons why owner-driven, standalone restaurants often do well. Usually, these are the ones where the property is self-owned, and hence the entrepreneur has to manage only the operating costs.

Because of their passion for the business, such entrepreneurs don’t generally rent out the premises even though that may help them earn more money. And in the recovery phase post Covid-19, even the most ardent lovers of food may find it difficult to resurrect their businesses. In such a scenario, franchising presents an excellent opportunity. For more than two decades, I have witnessed that the franchise model stands a 400% higher chance of generating profits than the standalone ones.

The cost equation
The longevity and sustainability of a business often boils down to how costs are managed. A restaurant business has five major cost heads — labour, raw material, real estate, marketing, and administrative. Let’s now examine each of them to understand how different they are in franchise and standalone models.

1. Labour: These include salaries to employees and can be broadly divided into two parts: back end (production) and front end (service). Each forms around 10% of a restaurant’s running cost. In a franchise model, the back end is centralised while technology is employed to create better work schedules and achieve more efficiency in the kitchen. Hence, costs are distributed over many outlets and the combined cost of back-end and front-end staff is lower at 15%.

2. Real estateThis is one cost head that can potentially make or break your restaurant business. Also known as occupancy expenses, these include rent, property taxes, and utilities. Typically, a restaurant layout has 40%-50% of its area dedicated to kitchen and 50%-60% for service. In standalone models, kitchens need to be larger as they house the preparation area, storage, staff, and so on. In a franchise, the kitchen area can be reduced to 20%. This translates to significant savings because location is a big factor when opening a restaurant. Buildings with higher footfall are generally more expensive, but you don’t actually need such real estate for activities such as cooking.

3. Raw material: The cost of goods sold comprises all the food and beverages sold at the restaurant. Obviously, a standalone restaurant will have to buy raw materials at retail prices, while a franchisee with a centralised kitchen gets the advantage of wholesale prices. Also, centralised models have clearly laid out workflows and systems that ensure that older items are used first and there is minimum overstocking. They also routinely track and replace underperformers in the menu.

Another cost factor is food-waste management. The less you waste, the more you save. In a franchise model, this is 5%-7% of the bottom line, which is lower than what standalone restaurants incur.

4. Marketing: Small restaurants have limited negotiation power with online delivery partners such as Zomato or Swiggy and therefore the commissions can be as high as 25%. Under the franchise system, the member restaurants will benefit from the better deals as the franchisor has a better say. This is a win-win situation for both, as the delivery partners get a ready network of serviceable locations. Further, by the time the markets recover, apart from strong social-media presence, franchises will have access to a more robust and centralised marketing budget — the key to thriving in such a highly competitive business.

5. Administrative: Standalone restaurants do not invest in technologies that assist customer-database management, inventory management, or even the ones that help observe basic fiscal discipline. Further, their managers and other staff may not be well trained. Hence, from pilferage to slack customer service, there are many question marks. In a franchising system, there are several advantages such as consistent development of new products, regular training and audits, etc. which even though intangible, do certainly improve the efficiency and add to savings. The head office cost in a franchise system is offset by the efficiency lapses in a standalone restaurant.

The bottom line
In difficult times like these, when half of the standalone restaurants in the country may remain shuttered even after the pandemic is over, instead of losing heart, entrepreneurs should consider joining a franchise model.

But first, carry out your due diligence. Study success rate of the franchise model (there have been cases of failures as well) and find a team that is really committed to the success of their franchisees.

Remember, it all boils down to how costs are managed.

(The author is the founder of Jumboking — India’s largest homegrown burger chain — and an advocate of franchising as a tool to deliver and maintain asset-light models in the new economy.)

(Graphics by Sadhana Saxena)

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