Author- Kartik Gill
Introduction
Franchisees are typically required to operate their business according to the franchisor’s guidelines and standards, which is known as the Franchise Agreement. Franchising can be a good option for people looking to start their own business because it provides a proven business model and established brand, as well as ongoing support from the franchisor. However, it’s important to carefully research about the economic environment of the country before starting a franchise and inflation is one of the major elements that influences the economic environment of a country.
Inflation is the rate at which the general level of prices for goods and services is rising and subsequently purchasing power is falling. Inflation affects every aspect of the economy, from consumer spending to the investment cycle and government policies which impact the functioning of businesses like franchises so investors must understand the impact of inflation and look for ways to mitigate its impact. In this blog, the researcher aims to analyse the impact of inflation on Franchises.
The Impact of Inflation on Franchises
Inflation has both negative and positive impacts on franchises like on one hand inflation refers to a situation of increased demand for certain goods and services. For example, if the prices of other goods and services are going up, people may be more likely to eat out at restaurants, which could potentially benefit food service franchises. However, on the other hand, inflation also led to higher interest rates which can make it more expensive for a franchisee to borrow money for expansion or other purposes. Inflation also increases the costs of raw materials, labour and rent which can make it more difficult for a franchise to maintain profitability. In a recent report of the International Franchise Association around 90% of Franchises around the world have experienced substantial impact of inflation on their businesses and the franchises that have faced the biggest impact of inflation are retail stores, beauty-related brands, child-related brands and maintenance services.
Advantages of Franchise System in times of Inflation
Even though inflation can have detrimental impact on “franchises” but as we discussed in the previous section that there can be some positive impacts of inflation on franchises and apart from that the franchise system itself has many benefits for the franchisee. As per report of International Franchise Association, many franchise systems are helping to ease the burden on franchisees. Around 47% of franchisees have expressed that they are getting support from the franchise system especially franchisees in the hardest hit industries like child-related franchises and retail stores.
Franchisors have helped franchisees by assisting them in purchasing supplies, resolving supply chain disruptions, recruiting labour and increasing customer marketing. This kind of support by franchisors has helped franchisees in alleviating many hardships experienced during this period of economic slump. Franchisees feel more supported as compared to what they would have felt if they owned businesses on their own which would have had significant impact on industries.
Many franchise owners have also coped up with this situation by increasing the amount that consumer pays in order to pay for higher prices of raw materials, labour and other things. Whereas, some franchise owners have decided to reduce their profit margins by keeping their pricing low to retain customers. Therefore, the franchise system provides various methods to cope with inflation and shows that opting to start business in the present economic situation through the franchise route can help one to keep going growing in the right direction.
Conclusion
In this blog the researcher aimed at analysing the impact of inflation on franchises and how they fare against it. In conclusion we can say that franchises can fare well against inflation because they often have established pricing and business models in place, established customer bases and ongoing support from the franchisor. Hence, franchises can be a good option for people looking to start their own business, however, it is important to do your due diligence and research the specific franchise, its history, and the industry it operates in before making a decision to invest. Apart from this, one should also have a realistic financial plan in place and be prepared for the long-term keeping in mind the potential impact of inflation when assessing the franchise’s viability.
