September Federal Reserve Rate Increase: Perspectives from an Underwriter

September 22, 2022 First Franchise Capital

As expected, the Federal Reserve raised rates 75 basis points in their continued effort to curb inflation. This latest increase brings the federal funds rate to a range of 3%-3.25%, the highest since early 2008. However, even at these rates, we continue to see high levels of M&A activity due to the large supply of capital and softening valuations. For franchisees with strong balance sheets, there are plenty of opportunities to acquire.

Despite the FED rate increases, inflation remains elevated, high energy costs persist, and supply chain shortages continue. Franchise owners should expect to continue to raise menu prices to offset higher input costs. However, keep a close eye on margins to avoid being fooled by top-line sales growth resulting from menu price increases.

To remain competitive, franchisees will need to look for creative ways to compete. Experiment with bundling menu items to mitigate consumer sticker shock. Find ways to improve customer service to beat out the competition. Even if you must reduce open hours, keep your dining rooms and drive-throughs open consistently. Consumers will appreciate consistency and choose to dine where they feel valued.

Yes, these times may call for reevaluation of balance sheets and margins, but more importantly, tough times require nimble leadership and a willingness to adapt quickly. When times are uncertain, relationships become even more valuable. Letting your employees know you have their best interests in mind and understand their needs is key. In this environment it is important to focus on being nimble, responsive, and attentive.

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