What FRANdata Thinks

Buying Time. How will inflation affect your business?

November 11th, 2021 by Darrell Johnson

As you begin to plan for 2022 and beyond, you now have another consideration. It’s been so long since we’ve had inflation concerns, it’s time to understand what that means for the economy, business, and your company’s profitability. As I noted in FRANdata’s annual economic forecast presentation at the Multi-Unit Franchising Conference in early September, there is a high likelihood we will have rising interest rates in the coming months and years.

Most economists are predicting a moderate rise in inflation. Perhaps. However, we are in the midst of a huge stimulus flood of government-issued debt, not just in the U.S. but across the world. We have serious and continuing supply chain bottlenecks that now are more likely to take years rather than months to resolve because of the difficulty of overcoming the pandemic, especially in the developing countries we depend on for so many inputs. Domestically, we are having what appears to be a more permanent shift in labor availability that adds pressure to rising wage rates. I find it hard to assume all this is a temporary combination of events.

Inflation (simply defined as rising prices for products and services) within a reasonable range isn’t inherently good or bad; rather, it’s a matter of perspective. For some businesses, inflation could force a rise in their product/service prices in the short term to combat higher input costs that would otherwise lead to a loss of profitability. In turn, those actions might contribute to a competitive loss in customers and therefore revenue. For others, it could be a benefit, spurring activity in their industry that would not otherwise occur if prices were lower (think residential real estate agents).

Buffering against inflation

Let’s assume we have more inflation than is currently anticipated (which I believe is a reasonable assumption). With rising input costs, including wages, what are your options? The pandemic has pushed many toward a solution to a significant aspect of inflation pressures: increased productivity. Because you couldn’t (or weren’t allowed to) run your business units normally, you improvised. This meant engaging customers differently. You invested in technology solutions to a much greater degree than you had planned on. Sure, many of you were on an evolutionary path of capital investment to gain efficiencies. The pandemic accelerated the need to do so. Evolution became revolution. And that is how you are building a buffer to some of the negative consequences of inflation.

Two more factors

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

Regarding labor, it’s not at all clear how the post-pandemic labor force will look. We’re seeing accelerated retirement of the Baby Boomers, and we’re seeing a shifting set of interests and motivations from members of Generation Z. We’re also seeing difficulty in getting second household income employees out from under child-care responsibilities as part of the work/life balance that includes WFH challenges. The labor pool is in flux and it’s far more complicated than a simple rise in wage rates.

As I’ve noted previously, consumer behavior is something to pay close attention to in the coming years. The pandemic has forced changes in behavior, and some of those changes will not revert. Consumers are now accustomed to product and service engagement in different ways. Each of you is now confronted with making investments with a 5- to 10-year payback—and with much more uncertainty of what customers actually might want 2 or 3 years from now.

Capital ideas

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

Most technology investments are a scale issue. You can’t afford to do a lot off a low use base. But multi-unit operators have a bigger base from which to spread those costs. (I suspect you will also partner with other multi-unit operators or suppliers to do even more.) Added to the pressure from labor challenges and the willingness of consumers to embrace such substitutions, you now have the need for increased productivity coming from likely longer-term inflation pressures. All these add up to a much greater focus on productivity, and that means bigger capital budgets.

Perhaps the adage “This time it’s different” really does apply this time. The pandemic is handing you an opportunity. Now you have an additional justification for focusing on capital investments. With inflation likely to be an issue over the next few years, I suggest you consider planning in the context of this longer-term set of implications to your business.

*This article originally appeared Multi-Unit Franchising Magazine. You can view it on their website here.

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