Beyond the Arches #2: Why an uncertain economy drives investors to franchising
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Why an uncertain economy drives investors to franchising
It’s no secret that the economic landscape is turbulent right now. Consumers are doing their best to cope with inflation. Warnings of an impending recession are plastered across media outlets. And this week, the Fed bumped the interest rate up by a quarter point to 4.75% and cautioned the markets, and public at large, to expect more increases in the near future.
While the situation may seem dire, these conditions could be a boon for the franchising sector and its investors. How is that possible? It comes down to two things: resilience and trust.
Resilient Industries
Unlike other asset classes (think stocks and bonds), real assets like franchises have lower volatility and hedge against market downturns. Franchise businesses offer a variety of goods and services, so they tend to be inflation-resistant. Some may even realize increased profits during periods of inflation as increased costs for materials allows for the price of products and services to also increase.
Additionally, investments with real assets benefit from appreciation. A profitable franchise can appreciate over time and provide a buffer against future recession and inflation activity, while providing an inflation-adjusted income stream.
Brand Recognition
Brand recognition is one of the most powerful aspects of the franchise model. Franchise licensing offers new business owners the benefit of a turnkey experience with an established customer base. This, in turn, gives investors the opportunity to mitigate some of the common risks associated with establishing a small business.
From a consumer perspective, franchises represent a known quantity; customers know exactly what to expect of the goods and services provided before they even walk in the door. This brand recognition gives these businesses a boost, in the early days of operation and as well as in times of uncertainty. When the going gets tough, people fall back on what they know and trust, including how they choose to spend their money. A loyal, established customer base is an incredibly valuable bulwark for businesses (and their investors) as they weather the storm.
Franchise News
- TOMS King, a 90-unit Burger King franchisee in Illinois, is filing for Chapter 11 bankruptcy due to rising costs and a reduction in customer traffic during the pandemic.
- Former Applepbee’s president, John Cywinski, is taking the helm at Modern Restaurant Concepts, the parent company of QDOBA, Modern Market Eatery, and Lemonade.
- Rising egg prices are going over hard with restaurant owners, forcing them to rework their budgets and seek alternatives as the cost per dozen continues to soar.
- Quick-service sandwich shop Subway is reportedly exploring the possibility of a sale that could value the company at more than $10 billion.
- An injunction hearing in Sacramento Superior Court has put California’s controversial FAST Act (Assembly Bill 257) on pause potentially until the 2024 election.
Deal Flow
- Private equity firm Gala Capital Partners has acquired Rusty Taco in a deal that includes investments from cofounder Denise Fenton, CEO Brendan Mauri, and other executives.
- Exeter Capital, a newly formed Boston private equity firm, and Pittco Management, a family office for the founder of AutoZone, have acquired 100 Dunkin’ units from Tim Cloe, the largest franchisee in Florida.
- Tech services and cybersecurity franchisor CMIT Solutions LLC has been acquired by private equity firm HKW.
Macro Trends
- China is reemerging from Covid lockdown into the wider global economy. The reopening of its borders is anticipated to bring welcome relief to many strained regional economies, as well as generate a wave of consumer demand, a potential wealth of opportunity for franchises and operating companies.
- US inflation continues to decline, reaching 6.5% in December, down 2.6% from its peak in June of 2022. The Labor Department also reported that the country added 223,000 jobs in December, a slowdown in job creation that could signal an additional reduction of pressure on prices.
The FranShares Way
If you’re an investor looking to incorporate franchises into your diversified assets, investing fractionally with a FranShares franchise portfolio offers high earning potential and diversification in a completely passive investment model.
To learn more about the FranShares opportunity, speak to our Investor Relations team.
