Investing in a franchise lets you leverage your leadership capabilities to get a higher ROI than you can with a completely passive investment. However, if you're considering a restaurant franchise, it's crucial to understand why this type of franchise business might not be the best fit for your goals.
At Learn2Franchise, we've seen firsthand the challenges and limitations that come with restaurant franchises. That’s why we typically recommend other types of franchises to our candidates.
Learn2Franchise has relationships with about 200 franchises. We have a full time staff that pre-screens hundreds of franchises a year and we make relationships with the ones we feel are the best opportunities for our candidates. Today, only three of the franchises we recommend are restaurant businesses, and they’ve taken all the pain points out.
In this blog post, I’ll summarize the main challenges with restaurant franchises. These challenges explain why it's so hard to find a great franchise in this space if you’re looking for a semi-passive investment.
Financial Problems with Restaurant Franchises
1. High Startup Costs
Starting a restaurant franchise requires a substantial initial investment, with costs varying widely based on location, concept, and scale. The overall cost to open a restaurant can range anywhere from $95,000 to $2 million… or even more.
For the space alone, expenses can be around $178 to $159 per square foot for buying or leasing, respectively. On average, the cost per square foot, including all expenses, falls between $100 and $800, with a median of $450.
Professional fees for architects, designers, and contractors can add up to $5,000 to $25,000. Furniture and fixtures, critical for setting up the restaurant space, can vary greatly in cost, potentially adding tens of thousands to the startup budget.
2. Low Margins
Operating in the food industry often means working with about 10% profit margins. This is due to the intense competition and the necessity to balance pricing with cost management.
With an array of dining options available to consumers, maintaining a competitive edge while also achieving substantial profit can be challenging.
3. High Ongoing Expenses
Ongoing expenses such as rent, utilities, and food supplies are significant. Monthly rent can range from $2,000 to $12,000, and utilities for a restaurant of 4,000-4,500 square feet can average between $1,000-$1,200 a month.
Other significant financial considerations include the costs for licenses and permits, which can range from $200 to $2,000, and insurance expenses ranging from $2,000 to $5,000 per year.
These costs are further amplified by factors like food spoilage and the need for continuous inventory replenishment.
4. High Rent in Prime Locations
Prime locations are crucial for restaurants due to their impact on foot traffic and visibility. However, these desirable spots come with higher rental costs.
The decision to invest in a prime location often involves balancing higher rent against the potential for increased customer traffic.
5. Food Spoilage
Unlike many other types of businesses, a significant portion of a restaurant's inventory is perishable. This means that ingredients have a limited shelf life and need to be used quickly or risk being thrown away. Managing this aspect requires meticulous inventory management and forecasting, which can be complex and time-consuming.
Food spoilage directly impacts a restaurant's profitability. When food items are wasted, it's not just the cost of the ingredients that are lost; it's also the potential revenue that could have been generated from them. This problem exacerbates the already tight profit margins in the restaurant business, making efficient inventory management a critical skill for success.
Effectively managing perishable inventory requires a deep understanding of customer demand patterns, which can be unpredictable. Restaurants must strike a balance between having enough variety and quantity to satisfy customers and not over-purchasing, which leads to waste. This challenge demands constant attention and can be particularly stressful for franchise owners looking for a semi-passive investment.
6. High Royalties
Some restaurant franchises charge higher-than-average royalty fees. For example, Subway's roughly 15% royalty fees are a considerable expense, directly impacting your bottom line.
These fees, in addition to the initial franchise fees and ongoing operational costs, can make it difficult to achieve a desirable return on investment, especially when compared to other types of franchise opportunities with lower royalty demands.
7. Not Much Room for Error
The restaurant industry typically operates on a narrow profit margin, often around 10%. This leaves little room for error or unforeseen circumstances.
A few bad months, an unexpected increase in expenses, or a downturn in customer traffic can have a significant impact on profitability.
This delicate balance requires constant attention and fine-tuning, which is demanding for those seeking a more hands-off investment.
Operational Challenges with Restaurant Franchises
8. Intense Competition
The restaurant industry is extremely competitive, with 47% of operators in 2023 expecting the competition to be more intense than the previous year. This intense competition is a result of the dense saturation of the market, where both established chains and emerging culinary trends vie for consumer attention. The challenge for new entrants is not just to establish a foothold but to maintain relevance in a constantly evolving market.
9. The Fad Factor
Restaurants that center around specific trends or themes are particularly vulnerable to the whims of consumer preferences, which can shift rapidly.
Will Crumbl Cookies be as popular in 5 years as it is today? Has it already peaked?
The risk of becoming a fad is significant, as what might be popular today could quickly fall out of favor, leading to a steep decline in customer interest and revenue. This volatility requires restaurant owners to be adaptable and responsive to changing market trends.
10. High Turnover
One of the most significant operational challenges in the restaurant industry is the high rate of employee turnover. The National Restaurant Association forecasts the addition of 500,000 jobs in the foodservice sector by the end of 2023, reflecting both growth and the ongoing challenge of high turnover rates. This continuous cycle of hiring and training new staff is not only costly but also time-consuming, impacting the overall efficiency and consistency of the business.
11. Recruitment Challenges
Recruiting skilled and reliable employees in the restaurant industry is increasingly challenging. The nature of the work, often characterized by high-pressure environments and irregular hours, contributes to the difficulty in attracting and retaining talent. These recruitment challenges add another layer of complexity to restaurant operations, requiring owners to invest considerable resources in finding and training suitable staff.
12. Limited Quality of Life
Operating a restaurant franchise can be extremely demanding, requiring long hours and high levels of involvement. This can be particularly true during the initial stages of setting up the business or during times of crisis. For those seeking a semi-passive investment, the day-to-day demands of running a restaurant can be significantly more consuming than other types of franchise opportunities, often leading to a compromise in personal quality of life.
The Ideal Franchise for You
At Learn2Franchise, our team pre-screens hundreds of franchises annually, building relationships with only those we believe offer the best opportunities for our clients.
While restaurant franchises might seem tempting, they often come with a set of challenges that don’t align with a semi-passive investment strategy.
At Learn2Franchise, we're committed to guiding you towards franchises that not only align with your goals but also mitigate common industry pain points, ensuring a smoother path to success. Feel free to book an appointment today to explore ideas that can fulfill your investment objectives.