Last time we asked, given the high number of restaurant concept bankruptcies and money sloshing around in the sector, is there still more upside than downside in the restaurant franchising sector? We can find the answer by looking at where we have been. The U.S. economy is experiencing the second longest expansion in our lifetimes, after recovering from the greatest recession ever. We are still feeling the effects of economic stimulus, low interest rates, recent tax cuts and government deficit spending. This economic caffeine is about to be diluted. We can see it in the sales trends. We can see how to adjust to change by looking at the trends.
We are feeling good, and perhaps need to adjust to the rising headwinds. Top line revenues may appear to be rising, but that may be due to new delivery models. Some restaurants pay Grubhub and Doordash a high percentage of sales to deliver their products and increase volumes. Companies which build deliver and technology into their business increase their profits exponentially. The digital technology allow owners to gain knowledge regarding their customers by analyzing data coming from scan-to-pay systems, order-ahead applications, consumer facing technology and delivery arrangements. The better companies will know their customers better through the use of technology. They will use social influencers to drive customers from the internet to the store fronts.
Increased labor costs and management attention will also challenge restaurant growth, however, there are apps for this as well. Franchisee enterprise systems often can predict and manage labor schedules for franchisees. On resale and financing, technology is one of the strongest selling points, so it pays to invest in technology. Restaurants have even gone as far to provide platforms for their customers, that than relying on Facebook and LinkedIn. But even technology cannot hold back the tide of increased labor costs and responsibilities. Technology cannot eliminate competition through value meals, value pricing and giveaways.
The structural changes involve structuring how we invest in restaurant chains. Technology which educate the operators how to better cater to customers, and help adjust labor and menus will be in demand. Increases in efforts of the operators to improve the customer experience, as the internet has replaced word of mouth referrals. Finally, economic adjustment is needed, to build equity in the business to hedge against the overleveraging of hard assets. You need that equity there when you need it, and you need to start building it now.
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