Forward thinking food and drink franchises provide proven opportunities in a competitive market
Everybody has to eat, so setting up a food business should be a sure-fire winner. Yet opening up your own restaurant or takeaway can be risky.
An average of two restaurants closed each week in the year to the end of March 2018, according to analyst CGA and corporate advisory firm AlixPartners. Casualties included upmarket and independent establishments, as well as casual dining chains.
Just ask Jamie Oliver. His Jamie’s Italian chain, which boasted 42 restaurants at its peak in 2015, went into administration in May this year. Even though his expertise in the food business has earned him a personal fortune estimated at £150 million, he has admitted that 40 per cent of his ventures have ended in failure.
Challenges facing food businesses
Karl Chessel, business unit director at CGA, in the fourth Future Shock report produced in conjunction with trade association UKHospitality, says: “Like for like sales growth is sluggish, key input costs are rising and competition is fiercer than ever.”
However, people are still going out to eat and drink and in the last four years a net 4,000 new restaurants have opened. Fast food outlets averaged 61 per 100,000 people in 2018, up from 47 in 2010. But more outlets does not mean higher sales or increased profits.
The Future Shock report showed like for like sales grew by just 0.6 per cent in the year to August 2018 and that many large brands were relying on new openings for sales increases.
“New openings are fuelling growth, but have pushed the market towards saturation point,” Karl says.
Restaurants and pubs face food price inflation of 11 per cent, driven partly by the Brexit effect on currencies, and staff costs are rising. Finding staff - especially chefs - is geting harder. Meanwhile, restaurants and pubs face increasing competition from home delivery services and the rise of pop-ups and events catering outlets.
But it’s not all gloom and doom, according to Karl, who adds: “There are plenty of opportunities too. Forward-looking operators who properly understand the habits, needs and motivations of different consumer groups, and who deliver memorable experiences, can still thrive.”
Don’t abandon your dreams: A franchise could be the answer to them
Despite the bad news, many people still dream of welcoming the hungry and thirsty public into their own food outlet, be it a five star establishment or a neighbourhood takeaway. So rather than abandon the idea of setting up a business in the food and drink sector, it’s worth looking at franchise offerings, because a franchise may well be a less risky way of getting into it.
With a well established franchise, you get the benefit of an existing brand that consumers recognise and a tried and tested business model. The franchisor should provide help choosing a suitable site, which is particularly important in the food and drink sector, where walk in trade is usually your largest source of income.
Added to this, the franchisor should be able to help negotiate site leases with commercial landlords, who will often only deal with big businesses with a long track record of success. You will be able to access sites that would normally not be available to small start-ups.
Franchisors, especially in the fast food sector, know what sells to their target customers, provide delivery of the necessary products and help you fit out your business with everything from ovens to tableware.
All this means a franchise is likely to be far less risky than starting up alone. Nevertheless, starting a food and drink business with a franchise is not totally without risk. You need to be realistic about what it can offer and do your research carefully.
Explosive growth has brought fierce competition
Franchise consultant Len Rainford, says: “The food and drink sector has been a huge success over the past few years, but this explosive growth has also brought fierce competition and increased commercial rent and rates for everyone involved.
“Oversaturation is another major problem, with some companies having too many franchisees competing against one another, often in secondary locations and poor catchment areas.”
Make sure the management team of the franchise you’re contemplating investing in is responsive to changes in the sector. “In this market, there is always a need to change in line with customer’s expectations and franchises that don’t, have suffered,” Len says. “Wimpy is a good example, going from over 500 outlets to around 80 in the UK because of its failure to adapt to consumer preferences.”
As well as checking out the franchise management and its future plans, talk to as many franchisees as possible to gauge the level and quality of support they get. “A franchise is only as good as the collective value of its franchisees and it’s essential that franchisors help their franchisees to achieve maximum potential,” Len says.
Four trends to look for
If you’re considering a food and drink franchise, look for one that addresses one of these four trends:
1. Healthy food. Research by trade association UKHospitality and analyst CGA found that nearly two thirds of eating and drinking out customers said they tried to lead a healthy lifestyle. Healthy food franchises are becoming more common.
2. The rise of food and drink businesses in ‘third space’ venues, such as community spaces, events and festivals. A survey of food and drink supply sector leaders showed that 50 per cent of them listed festivals and events as among their top three marketing targets in 2018. This is likely to be an ongoing trend. Does the franchise address this market?
3. Home delivery. While sales of food and drink in restaurants and bars have been flat recently, the home delivery market has been booming. In the last six months of 2018, figures showed that 58 per cent of the UK’s adult population had had food delivered to their home.
4. Ethical sourcing. Consumers want to know where their food and drink comes from and that it’s ethically sourced. Coffee chains have been promoting their fair trade credentials for some time and this is spreading to other food and drink sectors.
Is food and drink for you?
A food and drink franchise won’t suit everyone. If you dream of setting up a restaurant to showcase your own personal style of cooking, it’s probably not for you. However, food franchises are not just about profit and nothing else - you must care about quality and customer service as passionately as the most dedicated chef patron.
Consider a food or drink franchise if:
• You have spent time front of house in a pub, restaurant or fast food outlet. It’s hard on the feet and the face - the pressure to smile at customers can become wearing after a few hours. Some people just can’t take it.
• You care passionately about quality of food and service. Customers can soon detect ‘don’t care’ attitudes and franchisors will be expecting high standards too.
• You want the safety of an already established brand and don’t mind the need to conform to the preset standards that go with it.
Think carefully if:
• You are not prepared to put in long hours. Most food and drink franchises, even where you’re the manager rather than front of house, require long hours.
• You are not willing or able to make a fairly hefty investment. A high street coffee shop or takeaway can cost hundreds of thousands of pounds. Don’t let money rule you out though: you can start a mobile coffee and snacks delivery franchise, such as Cafe2U, for under £20,000.
• If you have had no catering and hospitality shop floor experience. This is a Marmite sector - you either love it or hate it. If you have none, try working in a pub or coffee shop part-time to see if you enjoy interacting with customers enough to do it all the time or ask franchisors if you can spend time working in their outlets. Even as a manager, you need to understand what customers want and the pressures your staff are facing.
• You are not keen on expanding to multiple outlets fairly soon. Many food and drink franchises - fast food franchises in particular - expect franchisees to open extra outlets within months of starting the first one.
“I had a desire to unleash my entrepreneurial spirit”
Growth potential attracted former banker
The food delivery sector attracted former senior banker Robbie Jones. He is now the Wiltshire Farm Foods franchisee for Newcastle, Northumberland and the Scottish Borders, running a service that delivers ready made foods, mainly to elderly people at home.
Robbie says: “I had a desire to unleash my entrepreneurial spirit and wanted a business with a strong social conscience and customer service ethic.”
“I was immediately struck by the strength of the brand, the quality of the product and the importance placed on customer service. The growth potential was significant in terms of market share and our target market is growing.”
He was also attracted by the Wiltshire Farm Foods business model: “It is straightforward, relatively low risk and there is support from the franchisor when you need it. It has taken hard work and dedication, but with our fantastic team we are achieving our objectives and having fun in the process.”
“Franchising is the ideal way to open your very own store”
My franchisor helped me survive the storm
Steven Prime became an Esquires Coffee franchisee in 2008. He says: “The franchise business, like any other, has its ups and downs and I have experienced both sides in the hospitality sector, but it’s taught me that the important thing is to keep going and with your franchisor on your side you can get out the far side. I’m happy now driving my own business and my franchisor has helped me survive.”
When Steven wanted to start his own business, his dad, who was in hospitality, suggested he consider a franchise. Steven chose Esquires Coffee. The UK was in recession and he was only 22, so it took five funding refusals before he got a loan from NatWest and opened his Esquires Coffee shop within Coventry Transport Museum.
“After struggling through two tough, recessionary years with advice and help from Esquires and my family, it got into profit in 2010,” Steven says, who earned himself the British Franchise Association Young Franchisee of the Year Award on the back of his success.
By 2015, he had the money to open a second outlet, in a shopping centre. “I researched all the numbers, compared the site to those of other Esquires stores and felt confident enough to sign a lease with the centre’s landlord,” Steven says. “Unfortunately my numbers, which were based on footfall figures provided, were not being met, with the centre experiencing a huge drop in footfall, information that was not provided to us at the time.”
Steven approached the landlord on this basis for a reduction in rent: “Initially they were understanding, but suddenly changed their minds and demanded the full rent overnight. Following a breakdown in communications, I had no choice but to ask to get out of my lease and was pleasantly surprised when they agreed to it with no extra charge. Clearly, there was a mutual benefit here that I was not aware of at the time.”
The benefit to the landlord turned out to be a larger, corporate group willing to pay more rent. “I learnt that success is not just about location, but about finding a good, progressive and probably smaller landlord - as I have at the Transport Museum,” Steven says.
“You need a mutually beneficial relationship with your landlord and your franchisor. In my case, the power Esquires had, as a bigger business than mine, helped when I was negotiating with the landlord.”
He adds: “I’d still recommend anyone wanting to get into the food and drink business to do it via a franchise. It marries your enthusiasm and skills with a proven model and if you choose a franchisor you can work well with, they will support you.
“Indeed, when you join a franchise like Esquires Coffee, you gain the support of an industry leading brand with huge customer loyalty, while also being able to run your own unique coffee shop in the heart of your community. This balance of business support and personal freedom makes franchising the ideal way to open your very own store.
“Esquires listened to me and now I’m building up the business again, I know they’re interested in my continued success.”
Linda Whitney writes about franchising for the Daily Mail, What Franchise and many other publications.