Buying time. How will inflation affect your business?

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As you begin to plan for 2022 and beyond, now you have another consideration. It’s been so long since we’ve had any inflation issues, it’s time to understand what this means for the economy, business, and profitability of your business. As I noted in FRANdata’s annual economic forecast presentation at the multi-unit franchise conference in early September, it is highly likely that interest rates will rise in the months and years to come. to come.

Most economists expect inflation to rise moderately. May be. However, we are in the midst of a huge influx of government-issued debt, not only in the United States but around the world. We have severe and persistent supply chain bottlenecks that are now more likely to take years than months to resolve due to the difficulty of overcoming the pandemic, especially in the developing countries we depend on for so many inputs. Inside the country, we are witnessing what appears to be a more permanent shift in the availability of labor which adds upward pressure to wage rates. I find it hard to assume that this is all a temporary combination of events.

Inflation (simply defined as the rise in the prices of goods and services) within a reasonable range is not inherently good or bad; it is more a question of point of view. For some companies, inflation could force an increase in the prices of their products / services in the short term to combat higher input costs which would otherwise lead to loss of profitability. In turn, these actions could contribute to a competitive loss of customers and therefore of revenue. For others, this could be a boon, spurring activity in their industry that wouldn’t otherwise happen if prices were lower (think residential real estate agents).

Buffer against inflation

Suppose we have more inflation than what is currently expected (which I believe is a reasonable assumption). With rising input costs, including wages, what are your options? The pandemic has pushed many people towards a solution to an important aspect of inflationary pressures: increased productivity. Because you couldn’t (or weren’t allowed to) manage your business units normally, you improvised. It meant engaging customers differently. You’ve invested a lot more in technology solutions than you anticipated. Of course, many of you were on an evolving path of capital investment to become more efficient. The pandemic has accelerated the need to do so. Evolution has become revolution. And this is how you create a buffer against some of the negative consequences of inflation.

Two other factors

You have been encouraged to do so because of two other consequences of the pandemic: 1) dramatic changes in the labor pool and 2) long-term changes in consumer behavior.

When it comes to work, it’s not at all clear what the post-pandemic workforce will look like. We are seeing an accelerated retirement of baby boomers, and we are seeing a changing set of interests and motivations on the part of Gen Z. We are also seeing difficulties in removing second-family workers from their care responsibilities. children as part of the work-life balance that understands the challenges of the WFH. The labor pool is on the move and it is much more complicated than a simple increase in wage rates.

As I noted earlier, consumer behavior is something to watch closely in the years to come. The pandemic has forced changes in behavior, and some of those changes will not be reversed. Consumers are now accustomed to engaging products and services in different ways. Each of you are now faced with investments with a 5-10 year return on investment and with much more uncertainty as to what clients might actually want in 2-3 years.

Capital ideas

The implications of the pandemic on labor and consumer behavior create an opening for you to make strategic capital investments. The use of technology to reduce labor requirements has now become more attractive because consumer behavior is more accepting of this substitution. And now you have another reason to increase your capital budget: a buffer against some of the consequences of inflation.

Most technology investments are a matter of scale. You can’t afford to do a lot with a low usage base. But multi-unit operators have a larger base from which to allocate these costs. (I suspect that you will also be partnering with other operators or multi-unit vendors to do even more.) In addition to the pressure from workforce challenges and the willingness of consumers to adopt such substitutions, you now need increased productivity probably stemming from more inflationary pressures over time. All of this adds up to a much greater focus on productivity, which means larger capital budgets.

Maybe the adage “This time is different” really applies this time. The pandemic offers you an opportunity. You now have an additional rationale for focusing on capital investments. With inflation likely to be a problem over the next few years, I suggest you consider planning in the context of this set of longer-term implications for your business.

Darrell johnson is CEO of FRANdata, an independent research firm providing information and analysis for the franchise industry since 1989. He can be contacted at 703-740-4700 or [email protected]

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