A year of reality based decisions in the "new
normal economy" will set the course for a solid 4 to 5 percent
expansion in franchise growth and development in 2003, according
to the 12th Annual Franchise Business Forecast and Trends Analysis
conducted by Franchise Recruiters Ltd. Franchise executives, responding
to the survey nationwide, project a year of surprises as franchise
unit expansion plows through an economy in transition. Franchisors
contend that nothing appears to change in a phlegmatic business
cycle, and yet, nothing stays the same as this economy evolves.
According to these knowledgeable brand executives, they will "carve
out growth opportunities" in markets to make their systems
Leadership in major franchised chains agreed that low interest
rates, investment cash amassed on the sidelines, and a dire need
for jobs present a great climate in which franchising will flourish.
However, according to responding executives, some marginal franchise
systems in various industries may be culled out this year. They
will file for protection or be hastily integrated into stronger,
cash accessible brands. These possible scenarios, we were told,
will involve rather substantial, generally recognized franchisors.
When multiple franchised brands are positioned together and made
financially sound, credible economies of scale can be built.
Positive franchising growth was projected in many service sectors
including health care, personal well being, education and training,
home and business to business services, specialty retailing, technology,
and anything to do with the boomer generation. The population over
50 has $750 billion in buying power and controls three-quarters
of the country's financial assets. We were often advised to remember
what the consumer has had to deal with over the past year including
terrorism, war in Afghanistan, the threat of war with Iraq, corporate
malfeasance, soaring costs for insurance and health care, higher
fuel prices, a weak stock market, and for some, devastating losses
in personal retirement funds. Yet, consumers and entrepreneurs remained
resilient, and franchising continued to expand in 2002.
Distress was expressed over franchisee loan default issues. Some
franchisors and their franchisees are grappling with cash flow problems
as business, equipment, construction, and real estate related loan
failures endure for another year. Hardest hit are hotel and restaurant
groups with even more unit closures slated in 2003 as "the
squeeze on overcapacity" continues. A number of business models
will be rehabilitated. Franchisors look for ways to help franchisees
by easing royalty payment schedules, reducing costs associated with
inventory, and by creating new bottom line enhancement programs.
At the same time, industry surveys found that 3 out of 5 franchisees
expect their businesses to be better in 2003.
Equally troublesome are the sizable state budget shortfalls and
federal deficit spending. Operators dread imposition of new taxes,
fees, or other levies against all businesses. Of special concern
is the quest by states for taxes on royalty revenue. One franchise
executive calls this quest a "government obsession for dollars."
Expensive market-share battles persist in regional and national
segments and will, inevitably, cause strain on net unit system growth.
Revenue used for media buys is siphoned from franchise sales and
development budgets. Executives reported that consumers' fickle
buying inclinations, from auto repairs to hotel rooms, from lawn
care to food service, are perpetually driven by price and value.
A marketing manager declared, "No one really knows what's next
in the marketplace these days, but our customers will be doing it."
She added, "We do anything and everything to hang on to customer
traffic. However, price wars solve nothing."
Franchising is a foremost force in the creation of the U.S. entrepreneurial
economy, a phenomenon unmatched by any other country. It is this
entrepreneurial revolution that continues to fuel the lethargic
economy, producing new business owners and jobs. Franchisors are
known for their deftness in finding new franchisees, and today they
are locating these investors in several fascinating environments.
Superior prospects are now found in clubs, churches, libraries,
job counseling centers, and educational facilities; anywhere in
which weekly business and job search networking take place. Even
substitute teacher lists provide potential recruitment assets. Layoffs
and compensation cutbacks have created an army of experienced, educated,
and motivated former employees, many of whom will decide to start
their own business. Resourceful franchisors are discovering them.
This new wave of middle-class jobless is straining the resources
of non-profit centers in populated communities across the country.
Neighborhood-based organizations provide excellent sources for qualified,
innovative franchise sales.
Retailers and many franchisors flocked to the suburbs through the
90's, leaving inner cities and their inner-ring suburbs ravenous
for fundamental services and retail. The "border land"
between cities and suburbs is where various savvy franchisors tell
us they are focusing their expansion this year. Locations are available
with limited rehab, and landlords are disposed favorably to negotiate
leases and terms. Special markets can be targeted with slimmed down
adaptations, super efficient franchise venues that require less
square footage, smaller inventories, fewer employees, and shorter
Successful global development is requiring more attention to infrastructural
issues related to suppliers, dependability of franchisees, and the
political and economic stability of the foreign country. Interest
will center on Asia with a strong emphasis on China. Latin America
will prolong "a year of living dangerously" for franchising,
although Mexico continues to build. Franchisors will structure more
area development deals internationally as opposed to master rights.
Europe persists as a problematic market for U.S. franchisors.
Unearthing investment money survives as a challenge which continually
tests character. Funding sources remain stubborn, asking for "more
skin" to do the deal. Gone are the days of 90% financing and
cash flow lending. Operators will be hard pressed to borrow against
assets. A few new financial players are targeting the franchise
arena with equity deals. They "get the picture" on potential.
As the economy initiates growth through 2003, to no surprise, more
funding sources will be accessible to well-capitalized groups. A
finance officer declared with vexation, "If you can collateralize
the loan 100%, you may well get approved."
Today, within franchise systems, profitability is the driving force
for improvement in IT spending. Technology investment will be relatively
slow and modest as franchisors gradually move to upgrade their aging
computer systems and look for people to maintain them. This trend
will accelerate in 2004. Only a quarter of the PC's in use today
are powerful enough to run Microsoft's Windows XP operating system.
Outsourcing will climb, as franchisors farm out IT needs. On the
horizon, potential franchisees are computer literate, use them all
the time, and expect technology to be a part of their new businesses.
These technological expectations and experience will require franchisors
to integrate technology in their franchise offerings or risk losing
the prospective investor to another "more with it" industry
Consumers are a prism of truth. Often, we were reminded by franchise
executives of the importance of knowing the customer. The competitive
nature of the mercurial marketplace today demands that consumer
tracking be in place for purchase patterns through using technology,
by simply soliciting shopper suggestions on comment cards, or by
holding focus groups on a regular basis. "Consumers are the
Atlas," we were told. "They tell you where they want to
go, and what they want when they get there." It's not always
easy to understand. "Listening is a valuable commodity."
Consumers are no longer as homogenous as they once were. Substantial
care and attention to the customer, backed by rich employee personal
service, are compulsory. Franchisor produced training and customer
relations policy and procedure plans must be efficiently updated
and taught on a standard monthly schedule in order to stay apace
with customer needs and lifestyle changes.
On the subject of employees, franchisors indicated a decisive shift
in health care plans to include more coinsurance with employees
paying part of the costs, rather than flat copay. Employers struggle
with a record 18% cost hike over the year and with the prospects
of health costs doubling by 2008. Unless they are multiple unit
operators, most franchisees today can't afford health insurance
for employees. Franchisors believe Congress will need to literally
grow older with the population before health care is taken seriously
as voters agonize over health cost containment issues. An executive
declared, "Washington does not want to understand."
Franchising will lead the economy out of recession according to
the majority of our survey respondents. Franchising has demonstrated
this capacity over the past three decades. Franchise business growth
and development are consistently six months to a year ahead of the
pendulum swing, and in 2003 we will witness the resurgence once
again. The market is ripe for new development. A veteran franchisor
keenly observed, "Job advancement in most corporations is blocked
because fewer employees are changing jobs. Raises are limited. Workers
realize there is no guarantee their extra effort on the job will
assure job security. People don't have job security, unless or until
they run their own business, and nothing helps achieve that security
better than franchising."
Those comments crystallized the core of future franchising. People
do not feel secure inside corporations. Trust is illusive. They
want control of their lives, and many are eager to assume responsibility
for the future. True, not everyone believes in himself or herself
enough to make the change, yet, more now than ever before seek change.
The beginning is always today. Our choices, far more than our abilities,
show what we really are. In 2003, franchising offers choice and
The Annual Franchise Business Development Forecast
and Industry Trends Analysis is conducted each year exclusively by
Franchise Recruiters Ltd., an executive search firm with offices in
the U.S. and Canada. This is the only study and analysis of its kind
in franchising and represents the outlook and projections of growth
and development for 2003. The 12th Annual Survey of 100 top franchise
executives crosses all industries and geographics in the business