Franchise executives are an optimistic lot and project
that franchising will see a 6 percent growth in net new unit development
during 2005. This projection of significant system expansion is
the forecast of 100 of the top U.S. franchise executives surveyed
for the 14th Annual Franchise Business Development Forecast and
Industry Trends Analysis. Each year, Franchise Recruiters Ltd.,
an international executive search corporation with offices in the
U.S. and Canada, conducts this one of a kind study and analysis
of the world of franchising.
Franchise Recruiters asked franchise executives a
series of questions about current business concerns and strategic
initiatives they foresee in 2005. The responses review branded system
forecasts and opinions for chains, nationally and internationally.
The statistics collected incorporates personal projections, calculations,
and business planning data compiled through Franchise Recruiters'
27 years of professional relationships within the franchise business
Net unit growth is the result of subtracting real
unit closures from new unit sales; this figure provides the accurate,
annual new unit growth for systems in 2005. Ignoring the extremes,
top management projects a consistent opinion for development and
expansion within the business of franchising. This commanding economic
engine continues on an Oz- like quest up and down the Yellow Brick
Road, producing sustained mutual success for franchisees along main
street America and around the globe.
Franchise executives spoke of "softness"
in overall revenue growth for units through 2005. Despite solid
new unit expansion, sales numbers are flat or predicted to be less
than same-store sales last year (2004). The executives, however,
are still pleased with new unit construction growth figures projected
for 2005. Furthermore, they point out that the foreseeable, formidable
challenges include slower overall economic retail expansion, relatively
high energy prices, real estate tribulations, and rising interest
rates. Pricing, however, emerges as their greatest worry, and it
is within this area that they feel the impact of competition as
consumers lose the lubrication that new tax cuts and incentives
brought to business in 2004. Franchise chains will also be hit with
shipping cost surcharges, outlays that will add to bottom line erosion
The U.S. gross domestic product growth is projected
to slow to 3.3 percent in 2005, well behind that of 2004, according
to government statistics. Consequently, an increase in same-store
sales will be difficult to achieve for many brands. Shoppers, regardless
of income or where and how they live, demand that they not overpay
for anything; consequently, price points will be particularly significant.
Throughout 2005, the field of major brand ownership
will be thinned as more national chains acquire competition. An
overcrowded market, especially in the food and hotel venues, means
brutal competition to win consumers. Franchisors articulate that
they intend to save substantially through improved merchandising
and non-merchandising purchasing scale, a more efficient supply
chain, and more effective administrative and operational systems.
This commitment to savings will force suppliers to yield to franchisors'
buying power, lest they go elsewhere.
Retail franchisors are selling products at the counter
that, in the past, may have seemed out of place as they stretch
to catch consumers at the point of sales with their wallets open.
We are told a number of chains will no longer stick to just staples
when it comes to selling "stuff." Almost anything goes
to please the customer as merchandisers blur the lines of retailing
to squeeze out more sales.
New revenue channels will be urbanized to meet the
changing needs of consumers by stocking products not usually found
in the branded store. They buy limited numbers of special goods
to sell through and then move on to the next new thing. Channels
are fusing; franchisors can now say that they are getting into new
businesses and effectively selling to enhance bottom line efficiency
for their franchisees. Examples are Ace Hardware selling products
such as ice cream and fresh flowers, coffee franchises offering
top selling music CD's, and video rental brands with electronic
stores sharing the retail floor selling cell phones and accessories.
Franchise decision-makers report that in an increasingly
self-service economy, computer kiosks are moving well beyond common
financial tasks. Franchisors are turning to kiosk technology to
allow customers to send branded goods across the country. As they
become central to franchise operations, the kiosk will become ubiquitous
for retailing products, packaged food, hotel reservations, and franchisor
branded gift cash cards. The consumer is moving to a more self-service
strategy, and kiosks are becoming an integral part of the sales
strategy for chains. Time starved consumers will use them near parking
lots, outside big box stores, in office campus environments, gas
stations, convenience stores, and malls.
Revamping, rehabilitating, and regenerating older
branded systems will engender new customer loyalty in 2005. Franchisors
that have not executed new restructuring plans for consumer contentment
face loss of market share. The "doom loops" cycle has
shocked a number of national and international franchisors into
reality. We have seen it in the Goliath brands around the planet
in recent years. Once a company is in the loop, a turnaround becomes
much harder to achieve. Franchisors keep cutting expenses; morale
suffers, product and service erode distancing the brand from the
customer. Too often franchisors spend their time protecting their
turf rather than moving forward with new products and services to
suit the capricious consumer in a mercurial marketplace.
Systems fail to break the cycle, and the spiral down
continues until they become a meal for competing chains or are forced
to seek bankruptcy protection. In recent years, some franchisors
have fallen into a funk, not because management took a "stupid
pill" but because the competitive landscape had changed. The
vicious cycle breaks down when disrupters emerge in the system offering
customers less for less.
Veteran operators have learned to be circumspect about
their customers' on-again, off-again behavior and brief infatuation
with new things. We were informed that there are two American public
minds: one that drives short-term fads and the other that shapes
long-term behavioral trends. The test in franchising is to spot
and separate the non-market drivers from those of real change. For
example, if taste is important, remember that "it starts with
the food your mother made for you, and those tastes don't change
This year, executives touted a number of franchising
trends. One of particular interest to all sales and development
department heads is the high level of interest in franchising from
uniquely qualified prospects--"they are better capitalized,
have better management experience, better education, and are increasingly
diverse investors." Franchise concepts continue to evolve to
meet changing U.S. demographics. Age, convenience, and the omnipresent
blooming boomers squeezing the pocketbook are driving forces behind
special service franchising. Interest in this focused area generates
more cost effective and efficient solutions in adult day care, health
care, home care, beauty, skin and aging treatments, spas, lifestyle,
and entertainment. Franchisors predict that health care insurance
companies will be entering the market through franchising business
plans in order to achieve the cost savings so necessary to improved
health care delivery. Senior care franchising systems have more
than tripled in units between 2000 and 2004, from 434 to nearly
2000, an annual growth of almost 40 percent.
Seniors are a thriving part of franchising today,
and their presence will explode in coming years as record setting
retirements take place. For many older Americans, retirement is
not a viable option; many are postponing the gold watch party and
going back into the work force as franchise employees or franchisees.
According to the U.S. Bureau of Labor Statistics, the number of
workers age 55 and above rose to nearly 24 million in 2004, up from
22 million in 2003, and from 20.7 million the year before. At the
same time, the government is forecasting a significant labor shortage
nearing the end of this decade. Franchisors tell us they want and
need seniors as a reliable work force for years to come.
Synergistic concepts that combine, under one roof,
healthful eating with product retail concepts have launched a splinter
co-branding arrangement that brings two consumers groups to the
store. As this is taking place, the public and private financial
communities continue to move to a more favorable view of franchising
as a successful business method.
Equity and investment firms will boost heightened
levels of interest in franchising as the perfect model for investors
because of solid management, high positive cash flows for franchisors,
and clean, straightforward balance sheets. Private equity firms
have found franchising to be their new golden goose, a discovery
that has fostered more interest than available deals. "Lots
of financial firms are buzzing around, trying to find the buried
treasure." Private capital from innovative monetary sources
is available for low investment franchising, specifically franchises
that can be turn-keyed for less than $400,000. Examples of such
franchise systems are E-Bay-type drop off stores that have low barriers
to entry and require limited entrepreneurial experience.
Across the country and around the world, affinity
programs are on the rise in an effort to hold customers close to
the brand. By offering perks, franchisors can make sure their core
patrons don't defect to another venue. Franchisors offer rewards
as a critical part of building marketing relationships with customers
and audit customer buying habits to elicit the necessary data to
better target and serve consumers as well as to stock inventories,
institute sales, and implement special seasonal programs.
The battle for your mind is taking place in the franchise
boardroom today. Market position is not easy to obtain or retain.
A franchise brand commitment to success has to be different from
that of the competitors. "If you don't have something that
separates you from the pack, then you better have a good price."
There is a problem with going cheap. Your competition can mark things
down as fast as you can. The problem with discounting is that once
prices are set low, consumers expect them to stay low and will shop
around until they find their price. Franchisors believe that corporate
fortunes depend on their ability to empathize with customers' changing
desires---the internal working of our cranial computers is vital
to the bottom line directed mental calculations of the franchise
In an increasingly litigious society, franchisors
are ever wary of employee conduct. Employees who drive on the job
will be required to be exceedingly careful when talking on a cell
phone for business purposes, particularly delivery oriented concepts.
Accident victims are winning multimillion-dollar settlements against
firms whose employees are proved negligent while driving and using
phones. A formal written policy for cell phone use must be in place
to defend litigation.
Chains that delete electronic mail without consideration
run major legal risks. In litigation between franchisees and franchisors,
all can count on e-mails being subpoenaed, and compliance is mandatory.
Policies must be in place to clarify which business e-mails (including
instant messaging through interoffice communications) should be
deleted or retained. A clear, definitive statement of policy becomes
especially important when recalcitrant franchisees are involved
in the discussions. A sizable amount of legal action and adjudication
between franchisor and franchisee will pivot on this issue in years
to come. Vendors can help with archiving electronic communications.
More and more systems are trying to offer forms of
health care insurance to their chain's hourly employees. They are
hopeful that the plans will pay for themselves through reduction
in turnover. Employee bank accounts are also on the wing. About
30% of hourly employees do not have banking relationships. Franchisors
contract with financial institutions to open accounts with debit
cards for workers. They process payrolls by directly depositing
funds into accounts, saving check cashing charges and processing
fees, while cutting down on lost or stolen checks.
On the issue of management compensation, franchisors
report some slight alterations to past practices. More franchise
corporations are opting for "pay for performance" compensation
plans, shifting resources away from strict annual bonus payments.
These plans are more incentive driven and call for departmental
participation. They are paid at specific intervals over the fiscal
year, not at the end of the year, following an annual audit of the
company's performance. These plans eliminate entitlement issues,
encourage increased production, and reward improved individual performance.
This matrix can be overlaid at the franchisee unit level as well.
Finally, training, the cradle to grave mainstay of
franchising, takes on a new appearance through "learning by
doing" principles. Operations manuals and videos are still
superlative in the training mode. However, franchisors have learned
that people retain more through doing something with team members,
a "show me and I will learn faster" theory. "The
desire to learn is second only to the sex drive," according
to one franchise executive within the food industry. "If you
tap into that desire to learn, you create an environment of continuous
On the international front, China, the mother of all
franchise markets, comes into play, sporting a new franchise regulation
in effect in 2005. This franchise business regulation provides several
innovative shields for franchisors and their significant intellectual
property, trademarks, and contractual relationships. The allures
of the mysterious Orient are not lost on entrepreneurs. With a gross
domestic product of $1 trillion and a soaring economic growth rate
of nearly 10 percent annually, China beckons as a fabulous place
in which franchising will flourish.
Relationships are the key to doing business with this
population of 1.3 billion, and a winner-takes-all principle is in
play. China is home to about 20 percent of the world's population,
yet, produces only about 5 percent of the world's total output which
suggests just how high "up" might be for the Chinese economy
as it matures. The 21st Century could well become the "Chinese
Century" as the country now graduates substantially more engineers
and scientists than the U.S.
Franchisors are granting province level versus country
level Master Franchises in China and are focusing on Shanghai as
the point of entry. The survey shows an evolution in this marketplace
of new middle and upper-class consumers who are demanding quality
and brand before price.
In the past five years, over 5 million new homes have
been sold in China. Yet, only 4 percent of the country's people
have household incomes of more than $20,000. That translates into
a market of more than 50 million who are spending increasing amounts
of money on such things as services, education, health care, travel,
food, telecommunications, and packaged goods. Concentration for
franchise development is in big eastern cities near the coast, an
area that represents 58 percent of the economy, but only 37.8 percent
of the population.
China's stock market is the second largest in Asia,
after Japan's. The People's Republic of China (PRC) attracts more
than $50 billion a year in foreign direct investment, second only
to the U.S. In 2004 more Buicks were sold in the PRC than in North
America. Interested franchisors will move quickly because Chinese
markets evolve swiftly, and the best deals take place before the
competitive free-for-all starts. Caution is advised though; western
business approaches that fail to match China's reality won't work.
Franchisors must respond nimbly to fast-changing market dynamics
and rely heavily on skilled local managers who are still rare in
the land of emperors and dragons.
International franchising continues global expansion
by embracing the Internet and on-line communications, as service
franchises become a primary focus. The U.S. is the best in the world
at business systems and services. Prospects in far-flung countries,
small and large, entice moderate and mid-sized franchisors to consider
expansion through master licensing deals. Growth venues are in industries
such as auto, business services, chemical application, executive
education, logistics, pet care, retail, sports training, moving,
residential and personal service franchise concepts as well as in
the food and lodging sectors. At the same time in various countries,
foreign franchise associations are developing beyond consultant
clubs to become bona fide business organizations that benefit franchisors.
The exclamation point in the annual survey this year
was piercing for franchise system growth plans. An exceedingly poignant
comment from a franchise executive sums up the report around the
engine that pulls the train of franchise development and growth.
He was addressing investors as well as franchisees. "One thing
I have noticed in the post-September 11 era is that people are thirsty
for finding a purpose. I recently heard business authors Ken Blanchard
and Rick Warren give a presentation.
"It took Blanchard 20 years to sell 10 million
copies of The One Minute Manager, the best selling biz book of all
time. It took Warren 20 months to sell 20 million copies of The
Purpose Driven Life. Blanchard stops at showing managers what to
do; whereas, Warren shows people why they should be doing it and
from where they should be doing it. Give your investors (franchisee
and corporate financier) a good return plus a reason why, other
than money, and people will be throwing money at you. Investors
(and franchisees) want to know that their lives, careers, and capital
stand for something."
From my observation at 30,000 feet after flying the
friendly franchising skies for 27 years, I view the legacy of franchising
as a doctrine that inspires us to dream, learn, accomplish, and
flourish, one and all, while giving us a chance to achieve a successful
life purpose and a substantial piece of the American pie.