As we brace for the economic impact of the global Covid-19 pandemic, now is not the time for business as usual, especially when it comes to the franchising model at the heart of some of Atlanta’s biggest businesses.
Franchising is a primary form of distribution in almost all sectors of the U.S. service economy, one currently reeling from waves of mandated and self-imposed closures in response to the pandemic. Many of the largest franchisors also have significant exposure to demand shocks globally.
A report prepared last year for the International Franchise Association (IFA) counted nearly 774,000 franchised establishments nationwide in industries including restaurants, lodging, real estate, and business services. These franchisees employ more than 8.4 million people nationwide, nearly half of that in the quick-service restaurant industry alone. The strip mall nearest you is likely populated almost entirely by franchise-based concepts run by small-business owners.
Given franchising’s concentration in service-based industries, the COVID-19 pandemic and the steps to stop its spread threaten what the IFA report calls “America’s hidden small businesses,” along with them the livelihood of millions of employees.
This is the greatest crisis the franchising community has ever faced, and franchisors need to rise to the challenge. They must demonstrate strong leadership, innovative thinking, flexibility and compassion to prevent many of their franchisees from failing along with other independently owned small businesses in the coming weeks.
Fast action to save franchisees takes on critical importance in Atlanta, home to some of the biggest players in franchising. Atlanta’s Chick-fil-A, Intercontinental Hotels Group (IHG), and Roark Capital all have various levels of exposure to the ongoing COVID-19 threat through their unique ownership structures, holdings and markets.
In Chick-fil-A’s unique franchise model, its owner-operators put up small amounts of capital—$10,000—in exchange for paying royalties on top-line revenue and sharing profit. Though the restaurant business is the segment hardest hit in this crisis, Chick-fil-A’s exposure is contained in North America. Most importantly, Chick-fil-a is family owned, with a corporate culture strongly united around core founding principles and a balance sheet that likely reflects a conservative approach to risk. Consumers trust them, and so do their franchisees; this will be a major asset as they address the crisis.
Franchisors need to rise to the challenge, demonstrating strong leadership, innovative thinking, flexibility and compassion.
IHG is a publicly traded global hotel franchising company based in London with recognized brands such as Holiday Inn and Intercontinental. Its global reach meant exposure in China, the source of the COVID-19 outbreak, but this was limited to 15 percent of open rooms and less than 10 percent of operating profit, leaders told investors in a recent earnings call. Most distressing is IHG’s exposure in other parts of the world hit hard by the pandemic. Hotel occupancy rates are taking a beating globally, a trend that won’t recover in the near term. Other hotel companies are likely to follow Marriott in announcing layoffs, with dire consequences for both the employees and the broader commercial real estate market. As IHG relies on royalties from a global set of franchisees that are impacted in Europe, Asia and the Middle East this will no doubt impact employees at its U.S. headquarters in Atlanta.
Atlanta-based private equity firm Roark Capital, too, faces challenges ahead. By specializing in investing in franchised and multi-unit business models, Roark’s portfolio includes dozens of investments in varied industries with well-known names: Carl’s Jr., Anytime Fitness, Massage Envy and Orange Theory, to name a few.
Roark spinoff Focus Brands is home to the Cinnabon and Auntie Anne’s brands, while spinoff Inspire Brands has Buffalo Wild Wings, Arby’s, Sonic Drive-In and Jimmy John’s as holdings. Roark enters this crisis with a strong management team and a diverse portfolio of brands across many service segments, though the restaurant industry dominates. This breadth offers strength, but it also complicates the difficult task of coordinating dozens of brands in many distinct markets around the globe during a crisis.
What should franchisors like Chick-fil-A, IHG and Roark Capital do as this crisis mounts?
First, they must act fast: Eliminate royalty payments and other franchise fees for the foreseeable future. Provide financing for franchisees, if possible, and negotiate payment terms on their behalf.
Unfortunately, many franchisors entered this crisis highly leveraged, weighted down with increasing amounts of debt and paltry cash for a “rainy day.” Private equity firms have gobbled up increasing numbers of franchise brands, further leveraging their assets. In this unprecedented crisis, the franchisor executives and private equity firms that benefited from the financial boon of the bull market should forego some of their salaries and gains in the short term.
Brands must leverage all the resources they have to collectively fight the economic impact of this pandemic. Combined sacrifice is a necessity, servant leadership a must. Telling franchisees they must assume all the risk of their investments could deal a devastating blow to both sides of the partnership. Unless franchisors themselves own outlets, the sole source of their own continued survival is the franchisees that earn them royalties. Without those royalty fees, they own equity in a brand with no earning potential.
As franchisors work with franchisees to navigate this crisis, they need to ensure compliance with corporate standards while allowing flexibility to innovate. This could mean flexibility in operating hours, engagement in community efforts or coordinated efforts across franchisees.
Services that can go virtual should do so for the foreseeable future. Restaurants must increase food delivery, encourage takeout and work to deliver ready-to-cook meals. Americans need to eat—that hasn’t changed and won’t—but they are fearful of contracting COVID-19 and wary of their pocketbook. This makes consumer value and safety paramount. Upscale services need to be downscaled while quick-service establishments must put consumer safety and transparency first.
Franchising is a story of resilience, of charismatic founders and hard work. It involves rags-to-riches stories that embody the American spirit. The franchising community can do this, but it will be painful and will require sacrifice from both franchisors and franchisees. At its finest, franchising is a marriage between franchisee and franchisor – ‘til death do us part.
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Ben Lawrence is the Aziz Hashim Professor of Franchise Entrepreneurship at Georgia State University’s Robinson College of Business. He holds a Ph.D. in marketing from Boston University’s Questrom School of Business and was formerly on the faculty of Cornell University. For questions about franchising or how to get involved with GSU’s franchising initiatives, contact him at blawrence@gsu.edu.
Read his previous commentary: Why Atlanta Should Be the Global Hub for Franchising
