FRANCHISE BUSINESSES PREPARE FOR ECONOMIC CHALLENGES
Industry Remains Cautiously Optimistic
WASHINGTON, D.C., Jan. 7, 2009— The nation’s franchise businesses that employ millions of American workers and generate hundreds of billions of dollars of economic output are preparing for economic challenges in the New Year.
The industry is expected to experience a decline in the number of establishments, jobs and economic output in 2009, according to a report released today by the International Franchise Association’s Educational Foundation. Despite this outlook, franchise business leaders remain cautiously optimistic about the prospects for their own businesses, the report found.
The Franchise Business Economic Outlook for 2009, prepared by PricewaterhouseCoopers LLP, forecasts that the number of business format franchise establishments will decline in 2009 by 1.2 percent, from nearly 865,000 to less than 855,000—a net loss of some 10,000 establishments. Jobs in franchise businesses are expected to fall by 2.1 percent, for a loss of 207,000 jobs. Overall economic output, the gross value of goods and services produced by franchise businesses, will likely decline by 0.5 percent—a loss of $4.2 billion in 2009.
These estimated declines can be attributed, in part, to the unfolding credit crisis. The report refers to a preliminary study by FRANdata, a firm that specializes in franchise industry data. The FRANdata study predicts borrowing by franchises will fall by approximately 27 percent in 2009 compared to the previous year, limiting the expansion of existing franchises as well as new establishments. Another factor is the sharp drop in consumer spending, which according to the PwC report, is expected to continue well into 2009 with adverse impacts on many sectors of the economy.
“The U.S. economy is in the midst of the most severe recession since at least the early 1980s, with adverse impacts on a broad range of sectors of the economy, including franchise businesses,” said Drew Lyon, partner in PwC's National Economics & Statistics practice. “The report’s macro view of the economy anticipates a continuation of the sharp downturn well into 2009 with a slow recovery.” Overall, nominal gross domestic product (GDP) is expected to decline by 0.7 percent while employment is projected to fall by 1.9 percent in 2009, according to the report.
Despite these predictions, franchising veterans remain optimistic. Responding to an IFA Franchise Business Leader Survey in November, many noted that the industry has emerged from previous recessions even stronger. As credit markets stabilize, they see many opportunities for growth.
“Franchising industry veterans know that the current conditions, although extremely challenging, are temporary,” said Matthew Shay, IFA president and CEO. “Our survey shows that franchise business leaders have confidence in the entrepreneurial spirit of their franchisees and the fundamentals of the franchise business model as factors that will help them weather the economic storm.”
Franchising has withstood such turmoil before, Shay said. After the recession of 2000-2001, and the tragic events of September 11, 2001, the industry created more than 140,000 new businesses and 1.2 million new jobs over a five-year period. The February, 2008 Volume 2 of the Economic Impact of Franchised Businesses documented that franchising grew at a faster pace than many other sectors of the economy from 2001 to 2005, expanding by more than 18 percent.
Different Effects on Franchise Business Sectors
The adverse impact of the recession will have different effects on growth in establishments, employment and economic output within each franchise business sector, according to the PwC report.
While most of the business lines are estimated to experience reductions in the number of establishments, the quick-service restaurant and table/full service restaurant sectors are expected to have a small net increase in units (1.5 percent and 1.3 percent respectively).
The sectors that are estimated to experience the largest percentage reductions in employment are automotive, retail food and retail products and services, each contracting employment by more than 5 percent.
The sectors that are projected to see the largest percentage reduction in economic output are lodging (3.2 percent), business services (2.8 percent), and real estate (2.1 percent).
Franchise Business Leaders “Cautiously Optimistic”
While the U.S. economy is expected to continue to struggle in 2009, franchise business leaders remain cautiously optimistic about the prospects for their own business. The Franchise Business Leader Survey found that franchise executives see both challenges and opportunities in the year ahead.
While only one-quarter (24.6 percent) of the survey respondents believe that the economy will do better in 2009 than in 2008, nearly half (49.1 percent) believe that their own businesses will do better in 2009. To help meet these expectations, franchise executives reported that they are tightening budgets, cutting overhead costs and implementing other strategies to deal with the economic downturn, such as providing direct financing for franchisees. In addition, some franchise systems may see opportunity for growth and expansion, especially if they offer products and services to meet the needs of consumers during the recession.
Franchise business leaders have lowered expectations for growth in system-wide same-store sales, unit expansion and employment in 2009.
• In a May survey of IFA members, two-fifths (39.8 percent) predicted significant increases in same-store sales (an increase of 6 percent or more), while in November, less than one-fourth (24.6 percent) predicted same-store sales of 6 percent or more.
However, business leaders have not significantly changed their expectations for unit growth.
• More than 85 percent of the survey respondents expect to see unit growth in 2009. Forty percent expect significant increases of 6 percent or more and 45.5 percent expect moderate increases of less than 6 percent. Nearly 15 percent of those surveyed expect a decrease in the number of units, 12.5 percent expect a moderate decrease by less than 6 percent, while less than 2 percent expect a significant decrease of 6 percent or more.
Just over 70 percent of franchise business leaders surveyed expect to increase employment in 2009, while just under 30 percent expect to reduce employment.
• One quarter (25.7 percent) of survey respondents expect a moderate decrease in employment by less than 6 percent, while 3 percent anticipate decreasing employment by 6 percent or more.
Looking Ahead – Five-Point Economic Recovery Plan
The top three issues of concern in 2009, based on Franchise Business Leader Survey responses, are the business climate, the financial crisis/credit crunch and franchise sales and development. A number of top concerns can be grouped under the general category of government regulations and legislation, including issues such as minimum wage, mandated health care and union organizing schemes.
Shay stated that IFA is implementing a Five-Point Economic Recovery Plan that aims to leverage the strength of franchising to stimulate economic growth. The plan calls for increasing the amount of credit available to franchise businesses by strengthening secondary markets, increasing access to capital by changes in Small Business Administration loan programs, reducing tax burdens and uncertainties in the tax code that restrain business investment, making small-business health insurance more affordable and increasing support for veterans as small business owners.**
“It is critical for Main Street, Wall Street and Washington to work together to provide the policies and actions that will stimulate business growth, business ownership and greater levels of innovation, productivity and employment,” Shay said. “The franchising community is prepared to lead the way out of this economic downturn.”
About The International Franchise Association
The International Franchise Association, the world’s oldest and largest organization representing franchising, is the preeminent voice and acknowledged leader for the industry worldwide. Approaching a half-century of service with a growing membership of more than 1,250 franchise systems, 10,000-plus franchisees and more than 500 firms that supply goods and services to the industry, IFA protects, enhances and promotes franchising by advancing the values of integrity, respect, trust, commitment to excellence, honesty and diversity. For more information, visit the IFA Web site at www.franchise.org.
Editor’s Note : Copies of the PwC report and other supporting information can be accessed by clicking here.