We Have All Been In-ter-rupt-ed – Prepare for Reopening While You Still Have the Time
In dealing with the here-and-now of the Covid-19 crisis, we also have been working with our clients on how to turn their franchise systems back on once it’s over. We thought it would be beneficial to share what we have learned.
Despite the federal relief programs, Covid-19 hit franchising hard, and it did so in a fairly short time. Franchising will be smaller when it reopens than the day before it closed. Many branded locations will not reopen, many that do will close again quickly, and locations under development may not open as planned. You also can expect that more than a handful of franchise systems also will not survive.
Because it is expected that new rapid tests for Covid-19 will become widely available when the economy reopens, it most likely will be on a rolling, regional basis. Barring political gamesmanship, smaller, more rural, less dense markets in the middle of the country that did not see the brunt of the pandemic will open first. If you want to find a bright light, you can expect real estate costs and availability to improve.
Franchise sales have stalled and, for the most part, will not return to normal in the short term. We can anticipate that there will be latent fears of crowds and close contact. We expect that the adoption of virtual interactions during Covid-19 will make conferences, trade shows, discovery days, meetings, and conventions look quite different going forward.
We also should expect that there may be changes to disclosure documents (and not just in Item 19), state registration and capitalization requirements, proposed state relationship laws, and income recognition. We also will not be surprised if current Covid-19 recommendations become regulations, affecting the capacity at restaurants and anywhere that consumers are in a confined space. A formerly 60-seat restaurant retooling to a 45-seat, or even 30-seat, legal capacity is a likely outcome.
Consumers’ habits have changed in a very short time, and they may look at some products and services differently than they did in February. Therefore, the recovery demand curve will not be uniform, and we don’t expect a quick return to business as usual. Some systems in the staycation and residential and commercial cleaning industries, among others, are likely to see a surge; while others in the boutique fitness, indoor entertainment, restaurants, etc., where people gather, will not. Business travel will be significantly affected because we have become quickly accustomed to virtual interactions. The demand curve will vary, as will the speed, depth, and uniformity of the recovery. In planning, each franchise system will need to determine where they fall in the recovery demand curve.
Lasting impacts and how to prepare
While Covid-19 shut us down for a relatively short period, it will have lasting impact. There will be reviews by many franchise systems going forward, with changes in policies and practices likely related to new franchisee qualifications, franchisee financing, capital requirements, the use of 401(k) financing, geographic growth strategies, classes of franchisees targeted, and the use of franchise brokers. Discovery days, training, field support, and many other areas also will change.
Reopening successfully is going to take creativity, planning, time, and patience. Even in the same industry subsets, there will not be any fungible, one-size-fits-all approach that is going to work for all. The diversity of franchising in industry, size, resources, leadership, maturity, geography, culture, customer profiles, regulations, economics, and relationship between the franchisor and the franchisees will not make that possible. Planning and execution, therefore, must be contextual and nimble for a while.
During normal operations, the role of the field staff is relatively limited to assisting the franchisee and ensuring that brand standards, established by the franchisor, are being met. As locations begin to open again, there will be a need to push some decision-making to the field consultants for some local issues. To accomplish this effectively, the field staff will require information on the system’s overall plans, training on executing their new authority, and coordination and communication with the franchisor’s headquarters.
There will be a business risk, and quality lawyering will be required to mitigate that risk. But, great lawyering will not in itself be sufficient. Business judgment, moral suasion, communication, and trust are all going to be necessary. At this critical time, it must be understood that franchise agreements were never great management tools to begin with, and the FDD was never designed to deal with the closure and reopening of a franchise system because of a plague. Risk will be necessary.
Franchisors will incur costs and will need to develop solutions never planned or budgeted for. Develop a priority list and identify the necessary sources of human and financial resources that are now going to be required. System sustainability will be the priority in the short term, and legacy methods of measurement and support will need to change. To offset the number of anticipated single-unit closures and to mitigate damage to the brand, we anticipate that there will be internal and external roll-ups of single-unit operators with an increase in the number of locations operated by multi-unit franchisees, with incentives provided by franchisors.
The Payroll Protection Program may help franchisors and franchisees to retain some staff. However, because the federal relief program has made unemployment benefits attractive, many workers may decide to remain unemployed. Expect that labor availability and costs will be a challenge as every business will be competing for workers. Franchisees should keep in touch with their laid-off staff now because it will be important for them to understand their recruitment needs before the opening is announced.
Replacement staff training will be a challenge, and few franchisors will have the necessary infrastructure in place to train workers locally quickly enough to meet their system’s needs. Alternative methods including train-the-trainer, virtual training, and variations on soft openings will be necessary.
The supply chain, all the way back to the farmers and manufacturers, has been disrupted and will affect both the pricing and availability of some critical goods. It will be important ˆto talk to your suppliers and, where necessary, approve alternative products. Local sourcing by franchisees and flexibility in products and services are likely outcomes. Complicating things further is that the recovery demand curve will be in flux for a while, so needed quantities are going to be somewhat difficult to project for some systems. New consumer messaging may need to be developed accordingly.
Customers will expect products and services after reopening to be delivered with the same efficiency, quality, and service levels they received before. Labor, training and supply chain may not make that entirely possible. Some brand standard flexibility should be planned for. As discussed above, allowing field staff to have clearly defined decision-making authority may be a partial solution (and risk). However, being able to make quick decisions in the field may reduce some of the stress franchisees will be going through. Keep in mind that these changes are for the most part temporary, and communicating their duration is important. For some of our clients, we are developing reopening manuals to codify the temporary changes to policy, practices, and brand standards.
Communication is essential. System messaging must be factual, supportive, and positive so that all stakeholders understand that management is thinking critically. We suspect that a continuous stream of messages about system problems because of Covid-19 will soon become ineffective and destructive. Including franchisee advisory councils and franchisee associations in planning and communication is going to be essential as there will be challenges and unanticipated situations. Getting through those moments will require trust, and bringing the franchisees into the decision-making process will pay dividends. Also, having an open dialogue and not just sending out announcements, will keep everyone on the same page and minimize the potential for misleading or dangerous rumors.
If we can be of any assistance or provide you with a sounding board for some of your decisions, let us know.
MSA provides strategic and tactical advisory services, primarily to franchisors, on a global basis. Contact Managing Director Michael Seid at 860-523-4257 or email firstname.lastname@example.org; or Managing Director Kay Ainsley at 770-794-0746 or email@example.com.
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