The world of fast-food is changing dramatically. Cut-throat competition and a flurry of new regulations is casting a cloud over the future of the average American owner-operator. Your local fast food operator is likely feeling the pinch coming from every direction. There’s little doubt that the game is changing with minimum wage hikes, the growing power of labor unions, sky-high food prices, and rising healthcare costs. Some claim that the franchising model, which has empowered millions for generations, may be on its way to going extinct.
Seemingly, it used to be so easy to make it in the fast food industry. Labor was plentiful, and the laws where on the business owner’s side. The formula for success was beautifully simple: serve economical fried-fare, invite a well-recognized clown to amuse the youngsters, and then proceed to hurl the children into a ball-pit. In all seriousness, the fonder days of yesterday are gone, because the new competition alone is greatly affecting established chains in the industry. Some are even boldly claiming that McDonald’s is facing certain doom. According a survey taken this year, a shocking 30% of McDonald’s are probably insolvent.
Small business owners looking to join the fast-casual restaurant revolution will find themselves with few options. The chains that are seeing high growth and are capturing market share increasingly don’t allow franchises. High-growth chains like Chipotle and Starbucks don’t franchise–they all run 100% corporate stores.
In a world where Americans are concerned about the growing gap between the rich and the poor, the trends are disturbing. The success of small business owners is critical to the sustainability of a thriving middle class. In the past, a well-traversed path to financial security was opening a franchise. It’s been well-documented that the franchise model has been especially pivotal for empowering minority ethnic groups. According to the Competitive Enterprise Institute, one out of five franchise owners is a member of a minority group.
The biggest threat to the franchise model is the rise of excessively labor-friendly politics. The labor movement has been emboldened by a number of developments in the past year. Most notably, a landmark ruling by the National Labor Relations Board this past summer opened the floodgate to unionizing fast-food workers. In sum, the ruling deems parent corporations as active employers of workers, even if they work for a franchisee. It makes it easier for these workers to unionize, as they can bargain with the parent company instead of having to bargain individually with each franchise owner. It also opens up large corporations to liability if one of their franchisees is sued.
Many expect this Obama-era decision to have far reaching financial consequences. In an era where where protesters are demanding $15 an hour to do menial fast-food preparation, this is a frightening prospect. Additionally, the Obamacare mandate and minimum wage hikes across the country certainty aren’t improving the financial prospects for small business owners.
Unfortunately, the odds are increasingly stacked against the small-scale entrepreneur, which doesn’t bode well for employment growth. Keep in mind that small business is the primary driver of employment growth. The big-win for the labor movement may be short lived, as the end game in the fight for higher wages may be significantly less employment in the fast food industry.
In the short-term, we can all expect a great deal of pain for entrepreneurial franchisees. In the long term, you can expect more automation as wages surge. A study by Oxford University claims that computerization will displace low-skilled workers. If franchisees can’t make money, they’re likely to turn to mechanization.
The take-away from this changing landscape is bad news for everyone. Perhaps what was a well-intentioned move to increase wages and lift millions out of poverty will inadvertently precipitate the disappearance of millions of jobs. Franchisees also may not be able to survive in this brave world of fast-food, which could lead to the death of a business model that was a once one-way ticket to a financially secure middle class existence.