7 Reasons Franchise Restaurants Can Fail

January 3, 2019 First Franchise Capital

It can be a mystery: two very similar franchise operations are doing business in the same market. One appears to get so much business that it’s always a challenge to keep up, while the other’s parking lot is consistently empty. Both are part of national chains, so they benefit from big-dollar advertising and plenty of product testing and research. One’s owner is in a great mood, while the other’s is reviewing career options.

If we take the concepts, the menus, and the locations off the table, why would one of the two be thriving while the other may not be around much longer? Look closely, and you’ll probably discover some combination of these factors.

1. Labor issues

Finding and keeping enthusiastic, customer-focused employees is a never-ending challenge, especially in an era of historically low unemployment. Given that both locations draw from the same labor pool, we suspect the successful operation has a more efficient and more experienced staff, while the poor performer struggles to keep shifts filled. Pay rates may be a factor, but it probably has more to do with the local management teams and how they treat employees. Walk up to the counter at both, and you’ll likely notice a difference in the way you’re treated and how your order is prepared. Customers notice those things, too.

2. Poor experience

Customers think about more than food when choosing a restaurant. Part of the attraction is the atmosphere and the experience, which incorporates everything from customer service to the lighting, seating, and sound levels in the dining room. A franchise restaurant that fails to hit the mark on all those factors will become less attractive, even if the food is good.

3. Inconsistent performance

One of the primary attractions of franchise restaurants is the consistency and predictability. If you have a hankering for a MegaTastyBurger, you know exactly what you want when you walk into your neighborhood MegaTasty location. If it doesn’t match your expectations because of sloppy preparation or second-rate ingredients, you’re less likely to return.

4. Inventory issues

Often, service problems and inconsistencies are rooted in problems with inventory management. Few things infuriate customers as much as a favorite item or side that isn’t available because the location ran out. The same is true if what’s being served is visibly less than fresh — such as a stale bun or slimy lettuce. Inventory problems can also contribute to food safety issues, and an outbreak of food-borne illness can be devastating to a franchise. Attention to inventory is every bit as important as dealing with labor.

5. Ignoring details

Relationships between people are often derailed by the “little things”, and the same is true of relationships between consumers and the businesses they patronize. Tables that start to look less than tidy, napkin dispensers that are frequently empty, the counter staff forgetting to inquire about which sauce the customer prefers — all these little things impact the customer’s opinion of the location and the likelihood he or she will return.

6. Indifferent owner

Successful franchisees tend to be involved in their businesses. Even if they’ve done a great job of delegating the day-to-day responsibilities to a group of well-chosen and trusted managers, you’ll see them visiting their locations, spot-checking food and other aspects, interacting with employees, and talking with customers. An absentee owner who doesn’t pay attention to what’s happening in their locations is less likely to succeed.

7. Poor capitalization

Many of the factors described here are directly related to the capitalization of the locations. If the franchisee’s finances are such that the business is operating on a shoestring, any of these issues can quickly derail things. A well-capitalized franchise operation is not only able to maintain daily operations; it can invest in upgrades and improvements to ensure the business continues to draw customers and meet standards. Multi-unit owners need to monitor capitalization, and if it drops below comfortable levels, they may want to consider careful borrowing as a way to improve operations, boost profitability, and restore long-term financial health.

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