Restaurant Industry Shows Positive Growth, But Caution Still Key
Written by Tim Morral
The latest Restaurant Performance Index monthly benchmarking analysis demonstrated positive gains and optimistic outlook for restaurant owners, but other reports highlight potential risks.
Performance in the restaurant industry was strong in August and restaurant owners feel optimistic about business growth, according to the National Restaurant Association's Restaurant Performance Index (RPI). A gauge of the current status of the restaurant industry, the RPI index is released at the end of every month, measuring same-store sales, traffic, labor, capital expenditures and owner optimism.
Restaurant traffic and sales were positive in August, which contributed to a 1 percent increase and the first gain for the index in three months. This could be a positive sign for restaurant owners and franchises as 62 percent of restaurant operators reported same-store sales growth from August 2013 to August 2014. Only 21 percent of operators reported a same-store sales decline.
Although positive sales growth and customer traffic is always a good sign in the restaurant industry, and franchising remains a viable opportunity for many, current and potential franchisees must exercise caution when considering purchasing or expanding a franchise.
The Wall Street Journal recently analyzed the rate of default in the last decade for franchise loans backed by the Small Business Administration. The report discovered 10 franchise brands with more than double the rate of default compared with SBA borrowers who invested in other chains. Three restaurant chains topped the list, including Quiznos, Cold Stone Creamery and CiCi's Pizza. The best performers included Jimmy John's, Little Caesar's Pizza and Days Inn, with less than 2 percent of franchisees with SBA loans in default. However, the economic crisis likely played a role in the high default rates.
There are many other factors to consider aside from these reports before buying a franchise. The Wall Street Journal noted that it can be difficult to assess each franchise chain because of a growing number of franchise chain options and a limited amount of information available. Chains do not need to release franchisees' first-year average sales and failure rates, according to the report.
Potential franchisees need to understand the unique risks and opportunity involved in each franchise chain before jumping in, and talk to other franchise owners in the industry. The best approach is to take time to explore your options, make an informed decision and create a solid business plan.
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