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Teetering on brink of economic downturn: What QSRs should do now

If an economic downturn occurs, as so many believe will happen relatively soon, this checklist can help QSR leaders get their brands in the healthiest position now to weather the storm later.

September 24, 2019 by Carty Davis — Founding Partner, C Squared Advisors

As economic expansion moves into record territory, signs are building that a downturn may also be coming. Whether it be U.S/China trade issues, fallout from Brexit, attacks on Saudi oil facilities or the run-up to U.S. presidential elections, the varied stew of influences on global business and industry seems to be simmering just below the boiling point.

And while many restaurant franchise leaders are taking a patient, wait-and-see approach toward the upcoming business cycle, there are, in fact, actions that franchisors, franchisees, investors and owners can take now to better position these businesses when and if a downturn occurs. 

Labor

While labor continues to be the greatest challenge for most restaurant brands, companies can take decisive action to cut turnover and build a more productive, consumer-focused team. Often, one of the few business bright spots in a downturn is lower turnover. But, with unemployment at a 30-year low, this time could be different. 

New behavioral hiring tools can help ensure businesses are hiring the right person for the job, then improve the chances they will stay with the company. Consider strongly taking advantage of things like applications and software that will improve shift flexibility for employees, while also researching the array of tools available to reduce overtime. 

Similarly, seek ways to upgrade staff. As competitors struggle in a downturn, talented employees may be looking for a different brand or opportunity. Be flexible in recruiting new talent.  

Cost savings 

Cost-savings firms that review trash, electricity, gas, insurance, bank and service fees, telecommunications, maintenance and other expenses might be especially worth a look at this time. Such companies usually can produce cost savings between $250 and $400 per unit per month for QSRs, while possibly even more depending on their scope of review. 

Small changes such as reducing the frequency of trash pickup for lower volume units or eliminating unused phone or fax lines can yield big results. In fact, these firms generally share in cost savings over 12 to 24 months and charge no upfront fees. 

Look at using a zero-based budget for planning purposes. After all, just because you spent money in one area last year doesn't mean you need to spend it the same way this year. 

Dig deeper into operations for lower-tier cost savings and contract reviews, while shopping everything needed to keep your vendors competitive. Likewise, make sure you're getting all rebate dollars available to your brand and also consider an audit of your beverage contract. With beverage contracts more complicated than ever, discrepancies may end up falling on the beverage supplier's side of the ledger.

Consult your accountant or tax advisor to ensure you are taking advantage of tax credits, which sadly are all-too-often left on the table. Look for work opportunity tax credits, opportunity zones and other credits. 

Though some finance executives are reluctant to explore such opportunities, assuming any such finding might suggest they've failed in some way, top finance executives understand that they cannot monitor every opportunity, so third-party assistance can be a real aid to their work and the business's financial value. 

Facilities

Review leases for overlooked opportunities, like those that permit landlords to extend lease terms or provide tenant improvement dollars to help businesses to stay under contract and remodel. Look for expansion opportunities in desirable markets that may have previously been too expensive or unavailable. Conversions might make more sense as lower-tier competitors fail or look to close underperforming locations. 

On marginal sites, seek opportunities to close, especially if sales can transfer to nearby locations. Marginal units rarely improve in economic downturns and tier-one franchisors have made it increasingly tough to close sites without building new or replacement units. 

Thus, work with your franchisor early on to identify both closure and new build opportunities. Review maintenance and capital expenditures plans and policies. Delay any unnecessary capital expenditures and focus on spending dollars that impact the customer.

Key stakeholder communication

Communicate often and transparently with key financial stakeholders, like lenders, equity partners, investors, and franchisors. No one likes surprises and if lender covenants will be breached or shareholder distributions stopped or delayed, impacted stakeholders are almost always more willing to lend support when they are aware of problems. Anticipate problems and come to the table prepared with potential solutions. 

In a challenging economic environment, having lender discussions early on is critical. Look to extend maturities and rework credit facilities to allow for interest-only payments to provide some cash flow relief. Borrowers with minor issues may have credit facilities canceled or development/remodeling lines of credit terminated in a downturn. 

Borrowers with maturing credit facilities are most impacted. Furthermore, almost all companies that haven't recapitalized in the past 12 months should strongly consider reviewing loans and credit lines for pricing, collateral, term and interest rate protection possibilities. The credit markets are liquid and debt is inexpensive now: Ensure your company has the most competitive facility currently in case the economic environment changes. In this realm, dramatic changes can often occur quickly and unexpectedly.

Franchisor relations are especially sensitive when franchisees miss development or remodel targets or default on franchise obligations. Generally, if you are struggling, chances are others are having challenges, as well. Communicate with the franchisor about the status of new restaurant development, remodeling projects and financial obligations to determine whether any temporary relief can be provided. 

Opportunistic expansion, growth

For companies with modest debt and strong liquidity, a downturn can be an opportune time to acquire great assets and markets. The ability to move quickly usually provides buyers an advantage in a downturn. But go into this endeavor knowing that cash is king and well-heeled operators with strong balance sheets, credit and franchisor relations stand to benefit most from the advantages downturns often offer for business expansion. 

The bottom line in all this is that although no one is capable of identifying the timing of a downturn, it's more certain than not that one is coming. Economic expansions don't last forever and storm clouds are forming. It pays to be ready. 

Photo: iStock 
 

About Carty Davis

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Carty Davis is a founding Partner with C Squared Advisors, a boutique investment bank with a dedicated focus in the multi-unit franchise and restaurant industry.

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