To say 2024 was challenging for the restaurant and hospitality industry would be an understatement.
The hospitality industry relies on discretionary spending, and the cost-of- living crisis placed significant pressure on an industry still recovering from the pandemic.
In the UK, it's estimated that 46 percent of consumers intend to cut back on spending on dining out in 2025. Then there's the double whammy of a reduction in the employers' national insurance threshold and the increase in contributions. According to estimates published by industry body UK Hospitality, this will mean an additional 774,000 workers will be eligible for employer NICs costing the sector £1 billion. Coupled with an increase in the minimum wage and the abolition of zero hours contracts, we expect many operators to re-evaluate their roll out plans.
Rollouts are expensive, after all. You've got rent, rates, service charges, insurance, fit-out costs and SDLT even before you open the door and hire your first employee!
As the country's third largest employer, the hospitality industry contributes over
£93 billion to the UK economy each year; if the industry takes its foot off the gas, it will impact the Government's growth agenda.
But what if there was another way to continue rolling out?
Enter the franchise ...
Is franchising a business model in which a franchisee acquires the rights to operate an established brand and replicate a successful business operation?
The recent British Franchise Association (BFA) Journal suggests that the UK is currently home to 1009 franchise systems (an 8% increase on 2018) operating from a total of over 50,420 units (a 4% increase on 2018). However, we are a long way behind the US, where there were an estimated 792,000 franchise outlets in 2022 employing almost 8.5 million people.
Franchising is prevalent in the QSR sector but presents opportunities for restaurants and grab and go operators.
For a franchisor, the biggest opportunity is the ability to reduce the capex required to open new sites. You can structure your franchise so that the franchisee takes on all of the "risk" associated with a new site.
Operators can either go full steam ahead and switch to a wholly franchised model, where all new sites are franchised, or a blended model of some company-owned and some franchised sites. Less risk means that franchisors may be able to expand into what would have previously been considered more marginal areas if they can find a franchisee willing to take on that location.
So, is 2025 the year franchising goes mainstream in the UK?
I certainly think it's the year it goes mainstream as headwinds look set to continue, and operators will need to adapt their business model to ensure they continue to thrive.
While franchising may not be the silver bullet, it does provide operators and entrepreneurs with an alternative to traditional rollouts. Both parties just need to go into it with their eyes open, seek advice on how to protect their assets, and implement the best structure for the transaction.
