Inflation in Franchising – The Perils and Advantages!

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Inflation is predicted to rise over the next 5 years at more than 2% per year. For some, this could be concerning. For others, like those in the world of franchising, it could be an opportunity.

What is Inflation?

Inflation occurs when the price of goods and services increase over a sustained period of time. When this happens, the purchasing power of a country’s currency is reduced. So, in simple terms, inflation is when the value of the dollar falls while the price of everyday items rise. Inflation is described as a percentage, which is the rate at which this purchasing power and price increase occur.

 

While many people view inflation as a negative, there are some advantages to inflation. In fact, a steady inflation rate over time is actually good for an economy to grow. Traditionally, the United States, and other stable countries around the world, have experienced an inflation rate of approximately 2 percent each year.

 

When inflation rates increase too quickly, we can experience hyperinflation. Hyperinflation is when the value of the dollar is extremely low and the cost of goods and services is very high. When inflation rates decrease too dramatically, we can experience deflation. Deflation is when the value of the dollar increases and prices decline. Both of these extremes negatively affect the economy.

 

The Advantages of Inflation in Franchising

When it is steady and controlled, inflation can be good for business, particularly franchising.

 

Currently, businesses are experiencing inflationary pressure with increasing business costs, rising real estate costs, rising wage rates and a weakening dollar. For a while now, consumer expectation has not increased in line with business costs. The ability for consumers to utilize technology to source cheaper products and services with faster delivery times has given consumers more control over pricing.

 

This puts pressure on businesses as they are needing to increase their prices to cover their rising business costs, but consumers aren’t keen to pay more.

 

However, economists are seeing the beginnings of a shift toward consumer expectation rising and a softening towards potential price rises. And according to franchise expert Derek Cafferata, franchising has holds an advantage over other businesses.

 

“Customer service and satisfaction is considered more important to Millennials than the lowest price,” says Derek Cafferata, CEO and President of All State Franchise Finders. “Franchising has the advantage of being able to place focus on achieving consistently high levels of customer service across an entire franchise.”

 

And what’s more, a franchise can utilize its marketing power across a large regional, national or international market to promote its focus on achieving consistently high levels of customer service and satisfaction.

 

Using its powerful brand marketing, a franchise is able to test a price increase to see how well it is tolerated by consumers. If it works, then it can be progressively pushed to other locations. If it doesn’t work, the franchise can take a different tact and test that.

 

The Disadvantages of Inflation in Franchising

One of the disadvantages of inflation for franchising is when increasing business costs make it difficult to stock inventory. The cost to hold stock at typical levels can become financially burdensome when the price to buy the stock has increased but consumer purchase prices have not.

 

“This is where smart buying and reliable product sourcing is vital to keeping sales flowing,” says Derek. “ A good franchise will be able to support each franchisee in sourcing viable stock.”

 

Another disadvantage of inflation is the lack of investment available to put into a business. If interest rates rise and lenders tighten up on who they lend to and how much they lend, investing in the business can become out of reach. Upgrading software, increasing online presence, pushing a new marketing campaign or upgrading a shopfront may be necessary to keep up with competitors, but may not be financially viable.

 

For a franchisee, there is support from the head franchisor in many of these areas of business. Pushing a new marketing campaign comes with the backing and expertise of the entire franchise marketing team, with a combined budget to promote a good campaign. Upgrading software, systems and processes are usually carried out across every franchise unit. Online presence is increased franchise-wide. This means that each franchise unit benefits from the power of the franchise as a whole.

 

Franchising Experts All State Franchise Finders

Derek Cafferata heads up a team of experienced and knowledgeable franchise experts at All State Franchise Finders. Based in Fort Worth, TX, Derek has more than 30 years of experience in the franchising industry, both in the United States and around the world.

 

If you are looking for the right advice when it comes to franchising, whether it be as a franchisor or as a franchisee, then contact All State Franchise Finders on 1-800-544-2161 or visit demo.allstateff.com today. All State Franchise Finders are your franchise experts!