Franchising in the face of inflation

7 December 2022

Against a backdrop of supply disruptions and inflation, with soaring energy prices and consequent rises in the cost of raw materials, franchisors and franchisees need to move forward hand in hand.

“All retailers are faced with the problem of rising energy, raw material and payroll costs,” says Nathalie Dubiez, co-founder of Alyxir, a consultancy specializing in supporting managers and organizations. “As a franchisee or franchisor, we’re doing our utmost to stabilize our results in a situation of high inflation, the likes of which we’ve never experienced before,” confirms David Giraudeau, General Manager of La Mie Câline, a sandwich and fast-food network with over 240 outlets in France. Energy-intensive sectors such as bakeries and restaurants are particularly hard hit. In this inflationary environment, the impact of overheads on the income statement is going to be felt more and more,” notes Stéphanie Pizzutti, a chartered accountant at Fiducial. Subtle trade-offs are going to have to be made to maintain a decent margin and an acceptable result, while retaining the customer”.

2023, “the great unknown

La Mie Câline has chosen to concentrate on its entry-level and mid-range formulas – “Malin” and “Extra” – by increasing them by €1.20, and to offer fewer “chic” formulas. However, as a “popular brand”, the brand must continue to offer “prices that are acceptable to customers, to avoid volume losses”, explains the franchisor. It is imperative that networks succeed in maintaining the attractiveness of their outlets, by “improving services or the customer experience”, says Nathalie Dubiez.

La Mie Câline has chosen to maintain the same supply policy, neither reducing its volumes nor changing its sourcing: “We have to keep our promise to the consumer, without changing the quality of the product or the quality of our welcome,” admits David Giraudeau. Until now, in response to inflation, some networks had anticipated not only the shortage of raw materials and the resulting disruption in supply, but also the rise in prices. To achieve this, they have either “overstocked certain products, thereby securing supplies and purchase prices until the end of 2022, or negotiated a purchase price or volume with suppliers until December 31”, explains Stéphanie Pizzutti. But for the chartered accountant, 2023 remains “the great unknown”.

Energy bills triple

If La Mie Câline, which has increased its rates by around 10% in its stores in 2022, has managed to absorb the increase in its suppliers’ rates, in 2023 we need to add the cost of energy. Véronique Buhot, General Delegate of the Fédération française de la Franchise (French Franchise Federation), wrote in the columns of Le Figaro about certain networks “which are undergoing rate increases multiplied by five or ten [et] risk having negative net results”.

As a franchisor and manufacturer, our energy bill will rise from 1.5 to 4.5 million euros on January1, 2023,” announces David Giraudeau. For franchisees, the impact will depend on their individual situation and the renewal date of their energy contracts. In this sense, the network is establishing economic models, considering that “for the less fortunate, the cost of energy will be multiplied by three compared to 2022”. As the network’s main supplier, these are incompressible costs that the brand cannot avoid. “We consume a lot of energy in production and storage, because we work with frozen products and store them for all our franchisees,” he explains. In response, the company is planning a further 7-8% rate increase on January 1. Although franchisees are free to set their own sales prices. Despite a number of best practices, such as energy savings through maintenance of refrigeration compressors, the use of LED lighting and optimized, controlled lighting, the network faces the same problems as its franchisees.

“Sharing the effort

“Even if some franchisors have been able to absorb part of the increase in certain costs over 2022, such as delivery costs due to the rise in fuel prices, they won’t be able to continue to do so over the long term,” acknowledges Stéphanie Pizzutti. All the more so as La Mie Câline’s price adjustments remain lower than the inflation suffered by the brand: in 2022, the network passed on only 60% of the total increase suffered to its franchisees. His golden rule? “Sharing the effort.

In addition to this financial aid, the network head also supports its stores. “It’s particularly complicated for retailers to assess the impact of this situation on their business model,” admits David Giraudeau. It deploys its teams in the field and its certified accountants to help franchisees build a pricing policy that will enable them to have a sustainable business over 2023. Nathalie Dubiez laments: “Few chains have a system for monitoring business, economic and financial ratios. They need to enable their franchisees to keep track of them, as well as their cash flow, with precise monitoring to cope with the ups and downs of the business”.

In a tight situation, these management tools and information systems are essential for monitoring business activity and steering margins and cash flow. Retailers can also implement innovative tools and technological solutions to lighten and improve traditional administrative processes and gain in productivity by reducing their costs. What were once “nice to have” have become “must have”. “One way of restoring profitability at network head and franchisee level is to digitize and automate certain functions, such as inventory management or operational processes, and even those specific to franchising, such as development – digital application tools, modeling of legal processes or know-how,” concludes Nathalie Dubiez.

Another negative effect of inflation is rising wages. While companies are obliged to pass on successive increases in low salaries, particularly the minimum wage in personal services networks, there are “other solutions such as savings or provident packages to provide a form of financial security for employees”, asserts Nathalie Dubiez. The La Mie Câline network, for its part, has decided to increase salaries by 7% within the network head office. But the risk is of entering “an inflationary spiral”, warned Emmanuelle Auriol, economist and professor at the Toulouse School of Economics (TSE) on franceinfo on June 24.

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