A majority of franchisees across various industries are expecting costs to continue rising in 2025.
In its annual franchisee survey, the International Franchise Association, in partnership with FranData, found that 65 percent of respondents were preparing for another round of cost increases over the next 12 months, up from 51 percent in 2023. Twenty-five percent, meanwhile, expect costs to stay the same, down from 34 percent last year.
“Though inflation has moderated, more franchisees are concerned about price increases due to the current high price levels and slowdown in consumer spending,” the report stated.
Included in the survey was input from 1,407 respondents across 26 industries, representing 290 brands. Collectively, the franchisees surveyed have more than 8,200 units, with 57 percent owning one location while 43 percent have multiple units.
Cost increases have become a commonality for franchisees given high inflation over the last several years. In the survey, 87 percent of franchisees said they were experiencing a moderate to substantial impact from inflationary pressures, consistent with 2023, which was at 86 percent.
Of those who said inflation had an impact, 51 percent described it as substantial, up from 46 percent in 2023, while 36 percent called it moderate, down from 40 percent. When digging into specific expenses, the report found that 29 percent of franchisees cited rising utility costs as having a large impact, while 26 percent highlighted higher rents.
Of those surveyed, 25 percent cited inflation as the most significant business challenge. Finding and retaining labor, meanwhile, dropped from 47 percent to 26 percent. Inflation also appeared to be hitting consumers, as 22 percent of franchisees cited a slowdown in customer demand as the largest hurdle, a jump from 12 percent last year.
The survey comes at a time when inflation is slowing. At the end of August, the inflation rate was at 2.5 percent, the lowest since spring 2021, and down from a high point of 9.1 percent in June 2022. The decline in inflation led to the U.S. Federal Reserve cutting interest rates for the first time since March 2020.
With prices still higher than pre-pandemic levels, though, franchisees have taken several steps in response. Of those surveyed, 86 percent said they increased the price of goods and services this year, up from 83 percent in 2023.
Additionally, 59 percent said they had to reduce employee-related costs, from compensation to the number of employees, up from 23 percent in 2023. Plus, 37 percent said they were switching to lower-cost materials and goods, up from 16 percent in 2023. Franchisees also noted an increase in the use of part-time employees and streamlining overall staffing levels.
The costs also led to shifts in support from franchisors. In the survey, 77 percent said franchisors made an effort to share best practices throughout their networks, as slight uptick from 76 percent in 2023 and 68 percent in 2022. Marketing was also a factor, with 67 percent of franchisees noting strong campaigns from brands, a decrease from 74 percent in 2023 but still higher than 57 percent in 2022.
Looking ahead, a large segment of franchisees plan to monitor government action on tax policy. The Tax Cuts and Jobs Act of 2017, signed by former President Donald Trump, has several provisions set to expire in 2025, including a 20 percent pass-through deduction and a depreciation incentive for capital investments.
Of those surveyed, 20 percent said uncertainty around the expiration of the provisions is affecting their business planning, while 38 percent intend to explore the impacts further.