Brands in the quick service restaurant (QSR) industry – together with adjacent sectors such as coffee and convenience retail – have in recent years transitioned to structures that allow, in some cases, for the possibility of bad behaviours and toxic cultures to take root. At the heart of the issue is the franchise model that the majority of QSR, coffee and convenience retail brands have moved to. Today in the UK, 95% of KFC sites, 88% of McDonald’s sites and more than half of Burger King sites are run as franchises. Nearly three-quarters of Starbucks sites are operated by franchisees as well as most Nisa, Londis and Costcutter stores.

In many ways, the franchise model has historically been a “win-win” partnership. For entrepreneurs, franchising a brand presents a straightforward way to buy or grow a business. While running a franchise isn’t easy (and “winning” a franchise has become progressively harder as competition for the most lucrative franchises has increased over the past two decades), those lucky enough to secure sites get instant power of a global brand – and can immediately go to market with guaranteed footfall, a defined proposition, awareness and brand reputation. 

Likewise, for global brands, a franchise model allows for a huge international footprint with minimal capital deployment. Brand owners can therefore operate with relatively light central overheads, allowing their corporations to be streamlined, agile and more customer-centric. The complexities and challenges of day-to-day store operations are outsourced to franchise partners, each contractually committed to providing customers with a uniform brand experience and operating standards. What could possibly go wrong? 

While there are some large-scale franchisees (Soul Food Group in the UK, for example, runs 400 Starbucks, KFC and Taco Bell sites), many franchisees are small or mid-sized businesses. In some cases, franchisees operate just one single site, a set-up common with brands more early in their franchising journey. Worryingly – and at the root of this issue – many of these smaller franchise operators can lack the operational sophistication of more established and scaled businesses. 

While there are many phenomenal franchise partners, some franchisees – particularly those operating a small number of sites – don’t have a single dedicated HR resource. Many lack their own rigorous training programmes and do not have a solid system of checks and balances to hold managers to account, or processes to call out bad behaviour. As one very senior QSR chief executive told me this week: “We need to trust our franchise partners, but some of them aren’t the most sophisticated of operators. Most of them don’t have HR teams, or the right set of skills and experiences to stamp out this type of behaviour.” 

Against this backdrop, it’s not hard to see how abuses of power can take hold – especially in an industry that’s powered by such a young workforce. When speaking up could risk losing shifts, it’s not surprising that some young workers feel scared and ill equipped to ask for support when they see or experience bad behaviour. 

How did we get here? When franchise models were first established, global brands dedicated significant resource and expertise to supporting, mentoring and managing their franchise partners. Today, however, this level of oversight has diminished. There are a couple of factors at play. Firstly – particularly for listed QSR businesses – there have been huge cost pressures on central expenses in the past few years. As a result, over the last decade, we’ve seen significant cuts to the size and quality of operational support for franchise partners, despite continual expansion.

In many of the brands there therefore simply isn’t enough resource to hold franchisees to account properly. As another QSR chief executive confided in me: “These types of abuses could definitely be happening within our franchise partners – but we would have no idea. Our franchise agreement would allow us to terminate a relationship with a franchise partner if we had evidence of any type of abuse, but even spot checks don’t really present a good picture of what is actually happening in each site.” 

One QSR master-franchisee I was talking with over the summer outlined how they were only visited by their brand once a year – and no one from the brand ever went out to their stores in their market. While I am sure this is an extreme situation, and I know most brands are more “present” with their franchisees, how can this brand claim to have oversight of operations in this territory? Brands must reinvest in their operational infrastructure, get much closer to their franchise partners – including spending more time in stores – and be better at “sniffing out” issues before they arise. 

Secondly, as brands have moved to majority-franchised models, they are simply no longer academy schools for operational talent. Operations is a tough trade, and the QSR industry was once a net exporter of talent to the rest of the hospitality sector. But today, many QSR brands lack best-in-class operational talent, and therefore are starting to lack the internal skills and ability to hold franchise partners to account. Without upweighting and investing in their own operational talent, it is unlikely QSR companies will have the capability to properly hold franchisees to account in the future. 

Crucially, QSR brands must have greater oversight of their franchise partners. This means investing in more, high quality resources to better manage franchisees – and allowing for the added associated costs. As part of this, brands should consider having a greater presence themselves in stores, rolling out more robust whistle-blowing systems and establishing direct channels of communication with shop-floor workers. 

Brands could also consider upweighting their franchise partners – a journey that the likes of McDonald’s and Yum! started on many years ago. Brands could look to work with more corporate franchise operators, like SSP (which operates more than 600 branded food and beverage and convenience outlets in travel outlets) or WHSmith (which operates M&S, Costa Coffee and Well Pharmacy stores). Service station groups such as Moto, Welcome Break and EG Group provide the right level of operational sophistication. Private equity funds as “master franchisees” also can be attractive partners – bringing systems and codes and a track record of holding themselves, and therefore their investments, to a high standard. Bridgepoint, which is the master franchisee for Burger King in the UK, is a good example here. Working with corporate partners would, hopefully, guarantee that certain operating principles and standards are honoured. 

Lastly, brands could consider the unthinkable: to start operating more of their own sites again. Not only would this guarantee full control and allow companies to guarantee certain standards, but it would also rebuild the operational bandwidth and bench strength that QSR chains were once known for. This capability and operational muscle could then be deployed to run company-owned restaurants, and to govern franchise partners. 

QSR brands carry huge weight and resonance with consumers globally – and the brands themselves are now worth billions of dollars. Most franchise partners seek to do the right thing by their teams and customers, and to adequately represent the brands they uphold. But it doesn’t take many bad apples in the franchisee community to destroy decades of brand and reputation building. 

Arcade games have really never been my thing, but having grown up in the era of the first home computers in the early 1980s (and studied computer science at university) when video games became a thing, I have more than a passing interest in those early pioneering games such as Pong, Space Invaders, Pac Man, Asteroids and Frogger.

 

Taking a tour around the cavernous 10,000 square-foot basement of the NQ64 arcade bar in London’s Shoreditch, it was a joy to see these classic arcade games running in their original upright wooden cabinets. The site houses 45 arcade games straddling various generations of gameplay – from my own era of shoot ‘em classics through to the likes of Guitar Hero and Point Blank. There is also a bank of consoles including PlayStation and Xbox running a plethora of games known to other generations.

 

NQ64 is clearly part of that newer breed of hospitality business that falls into the camp of competitive socialising, along with a variety of companies offering tech-supported versions of things like darts, shuffleboard, Formula 1, cricket, axe throwing and golf alongside a food and beverage offer. 

 

I’m not particularly upbeat on many of these propositions. They tend to be very capital intensive, partly as a result of the proprietary technology behind them and the complex fit-outs, and the actual competitive element seems to represent only a modest amount of a customers’ time during a visit, whereas the food and drink is the real revenue-generating heart of the business. The jury is still very much out on whether the sector will have longevity or be a fad that runs out of steam, having failed to drive sufficient levels of repeat visits.

 

For NQ64, there is a group of regulars that visit six to seven times per year, which Clint Ghent, operations director at NQ64, says the company is happy with as it operates destination bars that people will travel to. This will no doubt be a description given by other competitive socialising businesses. But where it undoubtedly stands out from the pack is in the simplicity of its model versus the complexity involved with many of the others.

 

The concept is no more complicated than a bar housing an average of 30 arcade games (powered by tokens purchased at the bar) serving a range of beer and cocktails. Until the Shoreditch unit teamed up with renowned burger specialists Burgerism to run a concession, the business had no food offer whatsoever across its currently 11 bars.

 

Food is certainly not going to be the focus going forward as it’s the games that will remain the key. They represent 25% of revenue, and despite the age of many of the machines, they are easier to run than a kitchen, and probably an indoor golf course too. Ghent reveals they are sourced from a global network of contacts built up by a single person on the team – whose identity he would not reveal, and who he suggests is the “secret sauce” of the business. He is supported by a team of four, which sometimes build new games units from spare parts, as well as maintaining the games across the estate.

 

The acquisitive activity of NQ64 has pushed up the prices of retro games, but the company has insulated itself from further increases by building up a stockpile of 400 to 500 arcade units in a warehouse that will be sufficient stock for it to open ten more bars. This will take it to its intended threshold of 20 to 25 bars. This is a sensible approach because the appeal of these older games has not gone unnoticed, and only last week, Ready Burger announced its new flagship restaurant in Watford includes four retro arcade machines and three Nintendo 64 consoles.

 

Whereas in my younger years these arcade games occupied rather nerdy territory, this has very much changed, and the world of video games is now a seriously mainstream activity. It is also making more money than the music and movie industries combined, according to SuperData Research, which calculates the global gaming market (console games, PC games, mobile games and esports) at $159.3bn in 2020. 

 

This broad appeal is reflected in NQ64 having an even male/female split across its core 25 to 40-year-old customer base, which bodes well for the future. For some competitive socialising business models, there will no doubt be some serious challenges ahead that could result in game over. But for those businesses leveraging arcade and video games, I reckon there is likely to be plenty more to shoot for.

Pub closures are again hitting the headlines, with the latest figures from property analysts Altus Group showing that 383 public houses were demolished or converted to another use during the first half of 2023. That’s around the same number as for the whole of 2022.

 

In a way, this is just the other shoe dropping. Coincidentally, this metaphor has its roots in property. In the late 19th century, residents of shoddily-built New York tenements used to hear the shoe of their upstairs neighbour hit the floor before they went to bed. They knew that a second shoe must follow.

 

We’ve been waiting since the pandemic for this one. Pubs were essentially put on life-support for the period of lockdowns. Insolvencies in the sector fell. It was inevitable that once all that was switched off, there would be casualties.

 

One thing that covid did was make us reflect on what is important to us. When they closed all the pubs, it was arguably the biggest crisis the sector had ever faced. Even in the 20th century’s world wars, pubs stayed open. In the second, they were viewed as vital to maintaining morale on the home front.

 

For a moment in the spring of 2020, people wondered whether pubs would survive – whether we would get out of the habit of using them and not really miss them at all. But what we saw was a realisation that we couldn’t allow that to happen. It wasn’t just about saving businesses. Pubs were reappraised as essential social spaces, binding together communities and providing company for the lonely.

 

Industry bodies made the case and government listened, more or less. Publicans themselves proved their worth by finding ingenious ways to continue to serve people with food and drink, through takeaways and deliveries to the vulnerable, and even provided online entertainment in the age of the Zoom quiz.

 

Many used the time to strengthen their role in their localities, to build loyalty, and it’s paid off since as people have eagerly returned to the pub.

 

Everywhere I go, I’m hearing the same story. Trade is back to pre-covid levels or better. Pubs are in demand. The problem is turning footfall into profit.

 

Costs have risen more sharply than anyone might have imagined, and they continue to rise. According to the CGA Prestige Foodservice Price Index, food inflation alone for operators is still north of 20% and falling only very slowly. Licensees have to make a difficult decision about how much of those increases they can pass on to their cash-strapped customers, and they have chosen to reduce their already slim margins.

 

Some good publicans are concluding it’s no longer worth the effort. As I write, a pub down the road I care a lot about stands closed. It was remarkably busy through the week thanks to tenants who knew their customers and were able to optimise their relationship with the brewery. A new tenant has been found, but will they be able to perform the same trick?

 

The pub is in a vulnerable location, at the top of a steep hill. You see people gasping for breath at the summit before they get their face around a well-deserved pint. They make the effort because it’s a great pub – for reasons that aren’t very easy to define. The gents’ toilet is outside, for instance, and food was served only twice a week.

 

Its success came down to the people behind the bar. What are the chances of that being replicated? And what happens if it’s not? We could have another statistic on our hands, and much more than that in social cost, of course.

 

It’s these individual examples that bring it home. Even I’m getting worried now. Before, it was the bad pubs that were closing. Now, businesses that should be healthy, if you measure health by a busy bar, are at risk. It’s no longer a matter of “use it or lose it”. We’re using it and we’re still losing it.

 

The evidence of this in the closure figures has prompted fresh calls for government support, for laws to prevent developers from wrecking good pubs, for continuing relief on business rates, for a reduction in VAT. 

 

If any of that is going to happen though, we must appreciate pubs not simply as units of capital that stand or fall on whether they can turn enough profit in a market that’s wildly hurling challenges at them from all directions. As a society, we have to remember what we felt in the pandemic. Ask ourselves not whether we can afford to help good publicans survive, but whether we can afford not to.