Whether through political action, basic supply and demand or some combination of the two, it doesn’t take much foresight to see that labor costs are going to increase. Companies that take a proactive approach and plan around increased labor costs will be at an advantage. It’s time for companies to review compensation and benefits policies compared to the costs associated with high turnover.

Simply raising wages and improving benefits may reduce turnover, but companies aren’t taking full advantage of the opportunity if that’s all that is done. Recent studies have shown that employee engagement has a significant impact on customer satisfaction, and customer satisfaction is critical to the success of companies in the QSR industry. A more comprehensive approach that combines improvement in benefits and wages with programs to develop and empower employees will be more effective.

Tools to Assess Profitability and Techniques to Improve It

While increasing food and labor costs will stress the industry, it’s important to remember that there are also many positive trends impacting the industry such as increased consumer spending, improving economic fundamentals and continuance of a longer term trend of more consumers than ever before dining out. As companies work to mitigate the impacts of rising costs, it’s also important to ensure that revenue and profitability are tracking to plan at the store and product level. Just because the overall trend is positive for the industry doesn’t mean that a rising tide is going to lift all boats, especially in an industry with such a fickle consumer base.

To understand profitability and cost drivers, franchisees need to first turn to standard tools and analysis such as four wall analysis, product level contribution margin and unit contribution margin as well as to benchmark volume and profitability, internally and against competition. Stores and products that aren’t performing relative to internal goals or relative to competition need to be considered for improvement or rationalization.

To this point, the focus has been on mitigating the impact of rising costs and protecting profitability through unit and product level rationalizing and improvement. There’s only so much that can be done on the cost side, and franchisees also need to focus on improving traffic and revenue. With social media, the advertising landscape has drastically changed. Adept companies can quickly reach millions of potential customers with messages tailored for specific demographics or localities relatively inexpensively. As the economy improves and more consumers spend more on dining out, competition for those consumers will likely increase dramatically. This trend can already be seen with the downward same store traffic trend diverging from the upward same store sales trend. People are spending more, but traffic is down as customers venture to new stores and concepts. Renovations may improve sales over the long term and should be considered as part of any strategic plan, but the quickest way to drive higher sales is through successful marketing to drive traffic, optimizing price to maximize sales and updating the menu to maintain interest.

With social media and point of sale information, franchisees can quickly measure the impact of promotions, price changes and menu updates in test markets and either change course or roll out to a larger market. Having in-house expertise or utilizing an outside provider for social media and data analytics is no longer a luxury, it’s a necessity for franchisees looking to win and retain customers.

Despite the many challenges facing the industry, the macroeconomic picture looks promising for the industry as a whole. The key for franchisee owners and lenders is to make sure your company is positioned to capture market share and thrive. Understanding the company’s current position and exposure to rising costs is the first order of business. Next, a plan to strategically mitigate exposure and optimize the cost structure should be developed. Finally, driving revenue and traffic through smart advertising and promotions, pricing and menu updates will help with near term profitability while longer term strategies are developed.