The Recipe - Change And Success In The Food Biz

Food franchises have always been popular – after all, everyone needs to eat. But hospitality is going through massive changes, so what do new buyers need to think about?

The hospitality sector is always changing. Fashions come and go in food, just like everything else, and people enjoy new tastes and new experiences while still wanting the same old favourites. But the effects of the pandemic caused more disruption in hospitality than almost any other sector apart from tourism.

The lockdowns which closed many eateries completely for weeks, and saw them operating under restrictions for many more months, meant many people had to think and react fast just to stay in business. It was a time for creative thinking and new solutions, and many of the lessons learned during that time have now been adopted into everyday business. Trends such as online ordering and click-and-collect also accelerated faster than had previously been expected.

Now there’s a ‘new normal’, and the challenges aren’t over yet. People are working from home more and visiting the traditional CBD areas less. Labour shortages are causing operators to be stretched, with many opening shorter hours as a result. And a growing proportion of customers are becoming aware of the environmental consequences of their choices.

But despite all this, people still need to eat, and want to enjoy eating. Looked at over the long term, despite the pandemic, the number of cafés and restaurants in New Zealand has actually grown over the last five years, according to ABC Business Sales. And while some didn’t survive Covid, those which adapted are now growing again – dramatically, in some cases.

That means that there are plenty of opportunities for anyone looking at a food franchise right now. You just need to make sure that the franchise you choose has what it takes to succeed in changing times. Elsewhere in this issue you’ll find advice on funding a food franchise (page 22) and making a food business a financial success (page 43), so here’s a look at some of the biggest trends you’ll want to look out for. As the striking image from Katsubi demonstrates, what matters in a food franchise is not just the ingredients – it’s how those ingredients are put together and served.

Thinking ahead

When Katsubi was founded 20 years ago, the QSR (Quick Service Restaurant) brand with its famous Red Bowl offering signalled a change in people’s expectations. It appealed to people seeking new flavours, and to New Zealand’s changing demographic. It appealed to those looking for a healthier option than traditional take-away foods and, because each item was made to order, it enabled those with dietary requirements to pick and choose exactly what they wanted.

These are all trends that have increased massively since, and Katsubi has grown with them (see page 63). Katsubi isn’t the only one, of course, with franchises across the food sector seeking to adjust their offerings to meet changing consumer tastes. So what’s next for the food biz, and what should you be looking for in a sustainable franchise opportunity?

Finding the right site

While delivery has grown dramatically in recent years, traditional bricks and mortar outlets still have considerable appeal. People like both to go out and eat, and to eat while they are out, and that means having somewhere for customers to sit – or at least drive-through.

The pandemic has made a lot of new locations available which might seem attractive, but they won’t all be viable. Franchises have a lot of information about how their business model works and will look at the rent payable as a percentage of projected sales for the site. They won’t want a franchisee to take on something that can’t succeed.

Apart from the rent, choosing the right location is something of a science. ‘Good franchises will analyse the characteristics of any potential site very carefully,’ says Jeff Vassel of Geotech Information Services. ‘It’s different for every brand, but it’s often good to be close to other food businesses: people might say, “We feel like a burger” then, when they get to McDonald’s, say, “You know what, let’s do Mexican instead.” We call that food substitution.

‘But the clever ones will go into a site in much more detail. They’ll know if their concept works better for people on their way to work, rather than homebound, so they’ll want to be on the right side of the road. If there’s a competitor’s site already there, then they will look for a location which potential customers will see first. That’s part of what Geotech does, using information from all sorts of sources from census information to mobile phone data to see not just what the demographics are around a location, but what the flow is and where people are coming from and going to. And good data also helps franchises move away from exclusive territories to reflect real-life buying patterns and maximise the potential of each location.’ (see page 44)

Of course, changes in working patterns have made new site selection more critical than ever. Looking at a historically busy area of the Auckland CBD, the top end of Queen Street, Geotech says it is seeing a slower recovery of pedestrian activity since the pandemic. ‘In 2020 and 2021, foot traffic in this section fell to around only a third of pre-pandemic levels when comparing to the same time period in 2019. While there has been an increase in foot traffic and pedestrian movements in 2022, this is still less than half that of pre-pandemic levels.’

What will happen when the City Rail Link roadworks stop and the trains start running? ‘That’s an area where data from similar projects in other cities can help identify the right locations,’ Jeff suggests. Find out more about changing traffic patterns at www.franchise.co.nz/article/3528

Question for franchise buyers – How well-researched is your potential site?

Never mind the quality, enjoy the convenience

Of course, one of the biggest growth areas during the pandemic was to-your-door delivery. ‘A lot of QSR restaurants, especially, went from negligible online sales to over half of theirsales being via delivery,’ says Jeff. ‘And while 20-30 year olds were previously the biggest users of this service (and still are), we saw the highest increases among families.’

While some franchises, most notably the pizza companies, have thrived on delivery for years, it has posed a bigger challenge for many brands to find ways to package meals in such a way that they can survive an uncertain journey. As Ben Cumming of Hell Pizza says, ‘Delivery is undoubtedly a growing market, but I think too many restaurants dive into it without actually having a suitable product to back it up. Third party services like Uber have made it all too easy to jump on the delivery bandwagon, but burgers (along with fries) tend to be very hard to deliver well. How many of those customers will return? In some cases, I feel that certain brands have eroded their reputation by offering delivery, but at the same time I can understand their reasoning.

‘There is a lot of extra effort and cost involved in operating your own delivery system, and we have invested heavily over the last 5-10 years or so with a custom driver app, sophisticated heat bag systems, and the like, but it remains hugely beneficial for us as we have complete control of the customer experience.

‘The next challenge for delivery businesses is sustainability, and finding a practical and cost effective way of maintaining the same service while reducing or eventually eliminating carbon emissions. At Hell, we offset the carbon from all of our deliveries (making them carbon neutral) and have more plans in the pipeline, but consumer expectations (and potentially government policy) in this area will only make it even more costly and difficult for new delivery businesses to operate in future.’

Do you pay for what you get?

But perhaps the biggest challenge posed to food franchises by the delivery services has been a financial one.

‘When UberEats first came to New Zealand, they pretty much dictated the terms,’ notes Nathan Bonney of Iridium Partners, who has a long background in food franchising. ‘Many businesses were paying 33-35 percent of the sales price to Uber, and they weren’t allowed to recoup that cost by passing it on to the customer. At that level, an increase in delivery sales could damage your profitability considerably.

‘But that’s changed as more competition has come into the market, like MenuLog and DoorDash. Percentages have dropped, and you can now do differential pricing which has made it a lot more workable – and, of course, franchisees are benefitting from the buying power of the group, as always.’

Andy So of Katsubi says, ‘Online orders and UberEats saw us through the pandemic, to be honest. A lot of food businesses closed, but our franchisees all survived. And while we are now getting a lot more customers coming out of the house to eat with us, delivery has been good for us. Yes, there is a big cost, but there is also the advertising and promotion. That leads people to us online, then they come to the stores, too – it all builds and helps to get our name out there, especially when we go to new areas.’

Question for franchise buyers – If delivery is important to the business model, is the business set up to handle it efficiently, does it have suitable products, and does it have a good deal with a reputable service provider?

Making more of what you have

The move to delivery during the pandemic encouraged some brands to experiment with alternative offerings which would enable franchisees to make more use of the investment in their kitchens. By creating new online-only brands, they were able to promote completely different menus without confusing their regular customers.

Pita Pit is one such example. While the franchise has a strong lunchtime trade, they developed two new online brands which extended their trading day into breakfast with Egg’d, and into the evening with Bowl’d. The concepts were so successful that they are now being launched instore under the Pita Pit umbrella (see page 11).

However, not all companies are so open. ‘There are a couple of wellknown brands that are doing alternative brands for delivery only without publicising the fact,’ says Nathan. ‘In some cases, the alternative brand is covered by a completely separate franchise agreement although it is based in the same premises.’

And beyond that, we are seeing the development of what are known as ‘dark kitchens’ – brands that only exist online and are serviced by commercial kitchens with no onsite or take-away service at all. ‘From the operator’s point of view, you’re not having to pay people to serve customers, so all your labour costs are focused on core production,’ Nathan explains.

Question for franchise buyers – Is the franchise strong enough to stand on its own, or are there alternative income opportunities available? If so, how realistic are they?

Getting the staff

It’s not just labour costs but staff availability that is concerning many food businesses right now. Many are operating shorter hours simply because they can’t get enough staff, meaning fewer trading hours to pay the rent. ‘It’s a huge problem for employers right now, but having owneroperators running their own stores does make it easier,’ says Andy So. Ben Cumming agrees: ‘The last year has been the toughest time in living memory to operate a food franchise, but we remain optimistic and ready to adapt as well as possible to what’s in front of us. We are really proud of the way our franchisees have dug in and kept the fires of Hell burning during these stressful times – they are working extremely hard but are enjoying the success coming their way at the same time.’

Nathan Bonney says that the labour shortage created by our long-closed borders and slow processing of visa applications is likely to continue for some time to come, despite some movement in recent weeks. ‘Hospitality has always relied upon students and working holiday visitors as a flexible source of labour, and we need the government to address immigration urgently. It’s not about what you pay – the simple fact is that, in many areas, there just aren’t enough people to fill the available jobs.’

Question for franchise buyers – How many people are required to operate this business and where will I find them? Can I run the business on my own/with family until the labour market improves?

The rise of the robots

One of the trends currently being discussed is automation. Will that help solve the problem? ‘Not immediately, but there are certainly areas where it can make a difference by allowing staff to be deployed where they can be most effective,’ Nathan suggests. ‘For example, we’re now seeing not just online ordering but the development of in-store kiosks, where people can order what they want without having to wait in a queue. Used properly, kiosks reduce errors, never miss a chance to upsell, and allow staff to focus on production.

‘Kiosks can also be attached to integrated ordering systems, as Ned Lyerly of Carl’s Jr. recently demonstrated at the National Franchise Conference (see page 28) so that, for example, when you order a juice then the machine will automatically pour it, rather than a staff member having to read the order then pour the drink. Ned showed a clip of the drive-through voice recognition ordering system which is currently in development. too – it was a bit clunky, but that sort of thing will only get better.’

So can we expect to be served by robots? ‘I think robot waiters are an expensive gimmick, but automation will be welcomed where it speeds service, reduces costs, solves a real issue or helps protect staff or save them from boring, repetitive tasks,’ suggests Nathan.

Andy says, ‘There are certainly areas where technology can help. In the kitchen, automation might improve consistency, portion control and taste, while making the franchisee less reliant on particular members of staff. But how much does that new equipment cost? You have to do a thorough cost/benefit analysis and prove your case before asking franchisees to invest in any new technology. And never forget that personal contact is an important part of hospitality – our franchisees are out there front-of-house, communicating with customers all the time and building loyalty.’

Question for franchise buyers – What new technology is the franchisor currently considering, and how will this be tested before being introduced across the franchise?

Meating the market

We recently ran an article on our website about McDonald’s ending trials of its meat free burger, McPlant, in the USA, although it has found a sustainable niche in other markets around the world (see page 16). When we posted it on Facebook, the article attracted a large number of comments, both for and against. The world of plant-based meat substitutes and dietary requirements is one that you enter at your peril.

This is a massive challenge for many franchises, because producing food that is genuinely vegetarian or vegan requires more than popping a plant-based product into your burger bun – it requires separate cooking equipment, separate utensils and considerable staff training and management to ensure non-contamination of the product by meat juices. Then there are the sauces, sides and desserts to consider. It only takes one junior staff member to get it wrong and you could have a PR disaster on your hands.

But – and this is an important but – the appeal of plant-based products isn’t just for vegetarians. Only about 3 percent of the US population is estimated to be vegan or vegetarian, but operators say the market is no longer being driven by non-meat eaters. Rather, plant-based options are increasingly being embraced by those looking to eat less meat, those concerned about animal welfare or climate change.

‘You might say that vegetarians or vegans are unlikely to go to McDonald’s anyway because they don’t want to associate with the brand, but these others are a fast-growing sector of society and if you don’t have something they can eat when they choose, they won’t be coming to you any more,’ Nathan suggests. ‘In the long term, that’s not a good strategy, which is why we are seeing major chains like Burger King and KFC starting to offer products from Impossible Foods or Beyond Meat.

‘At the same time, we’re seeing the development of 100 percent plantbased brands around the world, including Lord of the Fries, which has carved out cult status in New Zealand with just five outlets so far. All the major operators are now playing in this space with food boxes and supermarkets full of meat-free products. It may not be the only future of food, but it’s certainly the future of the majority of food that we will be consuming.’

According to Ben, ‘The meat-free market in our experience remains relatively small, but is slowly and steadily growing, especially in some areas (Wellington, for example). Hell puts extra effort into training practices and technological aids to keep any issues to a minimum, as we know that customers with special dietary requirements are both fiercely loyal and also attract other friends and family members. Pizza is almost always shared, so even if our vegan pizza sales are not that significant on their own, when viewed in the context of the larger order assembled around those products, they become much more valuable than you’d first expect.’

Question for franchise buyers – What menu items do you have for those looking for a non-meat alternative, and how do you plan to develop this market?

Chew it over

If you are looking at buying a hospitality franchise, then, there’s a lot going on. But where there’s change, there’s opportunity, and by joining a franchise, you’ll be in a much better position to seize those opportunities than an independent operator.

You’ll have a brand, menus, training, support, marketing and buying power all working for you, while someone else will be doing the research and development necessary to keep you up-to-date in all the areas we’ve outlined above – and many more besides.

That will allow you to concentrate on growing the business and creating happy customers. But you’ll always need to be open to change. As Andy So of Katsubi sums up, ‘Things always change. Our job is to listen to customers and always want to do better.’

About the Author

Simon Lord is Editor of Franchise New Zealand and has worked in franchising for almost 40 years, including being marketing manager of a major fast food company in the UK.