Last week, McDonald’s said that it will keep going its $5 Meal Deal through December, in effect promising that the value war in the fast-food space will continue until then, if not longer, given that January is usually a deal-filled month.
It’s understandable. Traffic is down, enough that it’s put pressure on sales. Consumers are frustrated about menu prices. A survey this week by Gallup showed their view of the industry has plunged this year.
Value is a needed component of the fast-food sector, and deals can help quiet the consumer contention that fast-food chains have grown too expensive. And while consumers think of value as “more than price,” as many have noted, they often want their fast food to be cheap.
But these discounts come at the expense of franchisee profitability. That profitability has been difficult coming out of the pandemic, as costs have taken off. It’s why franchisees raised prices so aggressively. And it’s why they’re pushing back on some of the discounts—or not accepting them at all.
All of which means franchisors should consider giving operators a break on remodel requirements
Many brands require franchisees to remodel stores every so often to keep them fresh, an important requirement given that consumers generally dislike going to dated or broken down restaurants. But those remodels cost money, requiring operators to take out debt to fund it.
That debt must be repaid. And interest on the debt costs money, especially now.
Many franchisors will delay capital requirements during times of difficulty, as they frequently did when the pandemic hit and they were doing what they could to help operators preserve cashflow.
But they are often hesitant to do this when they are pushing operators to market discounts on their major menu items to get customers in the door.
Most franchisors do little to help franchisees fund remodels. And given that franchisors usually do not operate many of their own restaurants right now, they are divorced from the impact that discounts can have on franchisee profitability.
A year-long delay in remodel requirements would probably go a long way toward getting operators on board with whatever value offer is on the marketing calendar at the moment. Franchisors could tie that break to a commitment to run those offers for a period. And when the value offer ends, the remodel requirement could kick back in.
At the very least, it would provide an acknowledgement of the challenge of operating restaurants in an environment like this.
One of the unusual elements of the current market is the valuation for restaurants right now. Numerous chains are on the market, usually because lenders are selling debt at a discount and their owners are walking away.
Private-equity firms and other investors do not want anything to do with restaurants right now in part because of the pressure the environment is putting on operator profitability.
Many franchisees have seen the value of their business fall. The value of franchisors, by the way, remains generally strong, as companies like Tropical Smoothie have fetched healthy multiples for their business.
That value push is running into operator concern about the value of their business and its potential future viability.
Franchisors would go a long way toward acknowledging this difficulty by giving a break on remodels.