Staying Strong Through Stagflation

Perhaps you’ve been hearing about the possibility of stagflation. If it happens, how would franchisees be impacted? Here, we’ll look at what stagflation is and how franchisees can survive and succeed despite its difficulties.

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Understanding stagflation

Usually, the economy moves between periods of business growth (which can cause inflation) and periods of business contraction (which can lead to higher unemployment). In rare circumstances, however, inflation and high unemployment can occur together, creating a situation that’s been termed “stagflation.”

People who lived through the 1970s can remember the stagflation of that time. It stemmed from the Organization of Petroleum Exporting Countries (OPEC) placing an embargo on shipments of oil to the U.S. The result was a quadrupling of oil prices, a shortage of energy, spiraling inflation, and a business slowdown. Consumers found themselves faced with higher prices in all areas of the economy while, at the same time, many were losing their jobs because of business contraction.

What could cause stagflation now?

Today, concerns about possible stagflation stem from the unknown effects of tariffs, which are taxes on imported goods. Tariffs are paid by the company that imports the goods, but the cost is often passed on to consumers, resulting in higher prices.

Tariffs also cause business expenses to rise, as they increase the cost of equipment and supplies companies use to run their operations. With rising costs and reduced demand from belt-tightening consumers, some businesses might have to put expansion plans on hold or cut jobs, leading to increased unemployment.

Why stagflation is hard to manage

In normal circumstances, the Federal Reserve Bank (the Fed) can use the Federal Funds Rate (FFR) to help manage the economy. When the economy is running hot and the job market is tight, prices go up as businesses compete for employees by raising wages. In those situations, the Fed tends to raise the target FFR to slow down the economy. It raises the cost of borrowing, so businesses tend to slow down their expansion activities and reduce hiring, and prices tend to fall as a result. In contrast, when unemployment is high, the Fed generally lowers the FFR so companies can borrow more easily and grow their businesses, putting more people back to work.

During stagflation, the Fed’s hands are somewhat tied. Raising rates risks causing more unemployment, and lowering rates makes inflation more likely.

How would stagflation affect franchisees?

One of the first budget items people cut back on during lean times is eating out. Customers may turn to QSRs as a way of lowering spending if they typically go to sit-down restaurants. Others may cut-out restaurant dining all together and eat at home more often. There could be a switch from delivery to drive-through or carry-out if customers want to save money by picking up their meals themselves.

Prices of food and supplies would increase, and there would be a demand for higher wages to keep up with inflation. Operators would see pressure on their bottom lines from those increased costs.

One bright spot

In at least one area, stagflation could help franchise restaurant owners. For years, the restaurant industry has struggled with staffing shortages, but with high unemployment, stagflation could provide some relief to that problem.

Employers would have a larger pool from which to hire, and the quality of the candidates would likely be higher.

How can franchisees weather a stagflation storm?

There’s no sugar-coating it: if stagflation occurs, it will cause a lot of economic pain. It doesn’t have to spell disaster, however. Taking steps to prepare for and deal with the fallout from stagflation can be the difference between surviving and going under. Here are some tips for making it through:

• • Monitor your cash – Stagflation will bring increased costs of doing business, so it’s important to keep an eye on your cash flow. If you’ve been thinking about opening a new location, you might consider updating an existing store instead. First Franchise Capital can help with store development loans to finance remodeling projects or update equipment.
  • Be strategic with menu pricing – When customers are feeling the pinch of inflation, the last thing they want to see are higher restaurant prices, but they may be unavoidable. Keep prices within reach of your clientele and offer discounts and free items whenever possible.
  • Make the most of loyalty programs – In 2024, 48% of diners surveyed belonged to restaurant loyalty programs. Most reported that they joined loyalty programs to get discounts and coupons. Reach out to your loyalty program members often and give them reasons to visit your store frequently.
  • Save on swipe fees – The National Restaurant Association reports that 70% of off-premises customers say they would use cash if offered a discount. Consider offering a cash discount to reduce your credit card swipe fees and bring in more customers.
  • Remember why people go to restaurants – Customers go to restaurants for convenience, of course, but they also go in order to have a good time. In a stagflation period, diners will be looking for ways to relax and take their minds off the economy. Keep your restaurant upbeat and offer outstanding customer service so diners will enjoy their meals and want to return

Moving ahead in uncertain times

No one knows for sure if stagflation will occur. Fed Chairman Jerome Powell said in a May 7 speech that "If the large increases in tariffs that have been announced are sustained, they're likely to generate a rise in inflation, a slowdown, and an increase in unemployment." The Trump administration is negotiating trade deals with several countries, however, which could reduce the size and impact of tariffs.

To ride out a potential stagflation storm, keep an eye on your cash, be creative in bringing more traffic through the door, and focus on customer service.

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