Federal Reserve Rate Increase - From the Desk of Rick Dennen

December 15, 2022 First Franchise Capital

December 15, 2022— As anticipated, the Federal Reserve announced a 50 basis points increase to the federal fund rate, resulting in the prime rate reaching 7.5%. This is the seventh time the FED has raised rates this year in an attempt to lower inflation. Additional increases are likely, as the FED appears to be committed to slowing inflation by continuing to raise interest rates.

Many economic experts project a recession in the second half of 2023 due to the tighter monetary and fiscal policies. The implications of the rising rates and looming recession will have a varied impact on the QSR industry.

Historically, the QSR industry is relatively stable during these types of economic conditions as consumers look for more cost-efficient dining options, including value meals, versus more costly sit-down dining. Employee shortages will continue to impact operations, but there continues to be significant opportunities to implement technology automation and further improve the customer experience. Additionally, consumer preference for convenience via delivery and mobile options will continue to proliferate in 2023.

Franchise owners should expect to continue to raise menu prices to offset higher costs. However, inflation rates have decreased from their high of 9.1% in June 2022, which should help level out costs in 2023. Franchise owners should keep a close eye on margins to avoid being fooled by top-line sales growth resulting from menu price increases.

Prudent franchise owners will continue to look for opportunities to grow. Capital is still needed for growth, and debt is still relatively inexpensive. In 2023, franchisees who prudently pursue expansion opportunities should be prepared with their deal team, as early as possible in the new year, to quickly capitalize on growth opportunities that help expand market share in a profitable manner.

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