Fast Food Franchise “A Disaster in This Market”

This article was originally written in 2010 and updated in 2015. The disaster mentioned was part of the crash in the real estate, stock market and general economy in 2008.

The hardest hit industries in these economic times are real estate agents, furniture and accessory stores, clothing stores and fast food restaurants.  The first thing consumers cut out when they are on a tight budget is their expensive coffee drinks and lattes. 

The teenagers, who are a big part of the fast food consumers, have found that they also do not have money because their parents have cut their allowances or stopped them all together.  When there is money for fast food, or the family decides to eat out, they now pick the places with the cheapest prices.  Lower priced establishments get the business and the higher priced pizza places do not.    

Fast Food Franchises Are Not Producing in this Market

My personal observation shows that sales are off 20% just since August 2009 in the dozens of fast food places that I have inspected.  The problem of decreasing sales doesn’t end with just the volume being lower.  The three largest expense items for all restaurants are food, labor and rent.  As the volume goes down the food and labor costs can be cut back, but the rent is fixed and cannot be reduced.  This creates the following situation.  As the volume drops the percentage of gross sales that goes for rent increases, making it harder and harder to make a profit.  One sandwich place in a major San Fernando mall is paying $13,500 a month rent.  When the sales were $50,000 it was 22% of the gross but when the sales dropped to $35,000 the rent became 40% of the sales.  A business cannot survive paying 25% rent much less 40%.

An observation made to me by a 30 year old buyer, who visited me to get help analyzing a sandwich shop, was that the asking prices have not dropped with the decrease in sales and profit.  Also, he noted that the advertised profit figures had not dropped.  The 2007 numbers are universally what are being conveyed, even though we are now in 2010.  A buyer looking for a steal today will not find it on the surface of what is for sale.  They must look deeper and investigate the sales and profit of each business for the most current months, while ignoring what happened in 2007.

In order to find these steals, it requires the assistance of a knowledgeable experienced business broker who will honestly work to find out the true information for each and every deal, and sniff out the ones that the sellers are motivated to sell. 

There are Unconventional Opportunities to Increase Profits for Fast Food Franchises 

The motivation of the landlords is also a major consideration today.  If the landlord lowers the rent, and the fast food business expenses drop, then the fast food’s profit increases dollar for dollar with the rent reduction. I have found that if you know how to approach a landlord from his point of view, you can make a better deal.  I succeeded in getting the rent for one client reduced from $8,000 per month to $4,000 per month and landlord told the tenant that he would not evict him for non-payment of rent because they didn’t want the empty space.

There are many hidden income possibilities or savings that can be found in businesses in this economic market.

Fast Food Franchise 2015 Update

Fast food restaurant sales are up from 2010 but still have not reached the number of 2007. It could be a number of years before that can happen. In 2010, it was estimated by fast food publications that 90% of all restaurants were losing money. Now it appears that most are breaking even with the owner still not making even $20 an hour for his time. California just put in a $1.00 per year minimum wage increase. A few counties in Northern California jumped the minimum wage to $12.00 per hour or more. Food prices of fast food franchises are not being raised enough in the current year to cover all the increased wage costs. This means profit will go down in 2015 and profits will stay down a few more years.  

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