How food franchising will weather the storm

With a shift in spending habits affecting all sectors on the high street, a new report sponsored by McDonald's points the way ahead for food franchising

The future of food franchising is bright, according to a new report produced by industry analysts Allegra Strategies and sponsored by McDonald's. Eating Out in the UK, 2009 is the most extensive ever analysis of the UK's informal eating out sector and its findings offer some valuable insight into those businesses best-placed to survive the downturn.

The report, which focuses on pubs, coffee shops and fast food restaurants, paints a vivid picture of the future of the high street, which is equally relevant for the wider food service and retail industries. It reveals that eating out accounts for 22 per cent of our spend on food and drink, compared to just 14 per cent in 1969, and has long been considered resilient to downturns. However, having surveyed thousands of consumers and senior industry executives, Allegra Strategies found that the sector had contracted for the first time in 40 years, with 35 per cent of people eating out less in the last 12 months and 20 per cent planning to cut back in the next year.

The good news is that growth is expected to return in 2010 and eating out will be worth £47.5 billion by 2014, thanks to rising trends in affluence, mobility, more youthful older customers and an Olympics boost. But the recession will leave a lasting legacy. Consumers will continue to demand better value and an enhanced experience - but they won't be willing to pay more for it. Only those businesses which can meet this growing expectation will survive.

With the retail sector set to remain under pressure for some time to come, informal eating out will have an important role to play in pulling the UK out of the downturn through growing employment, with 57,000 new jobs set to be created over the next five years. It will also help revitalise the High Street, which will become increasingly leisure-oriented, with casual dining establishments often taking the place of empty retail units.

Relevant for franchise owners is that, according to the research, branded chain concepts are better placed to ride out the recession than smaller independents. These establishments are prospering fundamentally because they are selling an 'experience' that consumers buy into. The combination of the relaxing atmosphere, a carefully designed in-store environment and, increasingly, free newspapers and Wi-Fi, offer a proposition that cannot be recreated at home.

Business models which are built around a unique or unusual concept have long been considered a perfect match for franchises and it is precisely these businesses which are beginning to steal a march on the competition. The marketplace will become more specialised and segmented, with successful operators focusing on what they are good at. The poorly differentiated middle ground will become a riskier positioning for generalists.

Healthy eating is - and will continue to be - a hugely important consumer trend. Buying British, seasonality and authenticity will also remain popular. Already, 58 per cent of people prefer to eat food which is sourced from the UK. Operators will respond to this with more frequent changes to menus. Issues around sustainability and environmental impact will also rise up the consumer agenda.

I'm pleased to say that McDonald's franchises continue to do well despite the downturn, which we partly attribute to a major investment (made jointly by us and our franchise owners) in our restaurants and our menus as we respond to consumer demands for high quality and experience, but at a reasonable price. Last year alone, £79 million was invested in the modernisation of 178 restaurants.

Now more than ever, franchise owners are thinking carefully about the right business model to back. They will be facing greater challenges to improve profitability than has been the case over the past decade. It will be harder to increase prices and improved efficiency will be more important. As Eating Out in the UK, 2009 shows, the winners in the recession-hit High Street are more likely to be those businesses that have a good track record of profitability, built around a unique or unusual informal concept and with a strong customer focus. Happily, all of these are also the ingredients of the vast majority of successful franchises.

Reported by McDonald's Director of Operations Richard Forte