Franchise Businesses to See Slow Growth in 2010
Industry Forecast Predicts Increases in Jobs, Economic Growth and Number of Establishments
WASHINGTON, D.C., Dec. 16, 2009— The 2010 economic outlook for the nation’s franchise businesses forecasts a slow recovery with marginal increases in the number of jobs, economic output and the number of establishments, but the continuing credit crunch will limit the amount of growth that franchise businesses have seen relative to prior recoveries.
The Franchise Business Economic Outlook for 2010, prepared by PricewaterhouseCoopers LLP (PwC) for the International Franchise Association’s Educational Foundation, forecasts that the number of business-format franchise establishments will increase in 2010 by 2.0 percent, from 883,292 to 901,093—a net gain of nearly 18,000 establishments. Jobs in franchise businesses are expected to grow 0.4 percent for a gain of 36,000 jobs after losing over 400,000 jobs in 2009. Overall economic output, the gross value of goods and services produced by franchise businesses, is forecast to increase 2.8 percent to $868.3 billion—an increase of $23.6 billion in 2010.
“The U.S. economy is expected to experience slow growth in 2010 as the nation begins to recover from the recession. The Franchise Business Economic Outlook for 2010’s macro view of the economy anticipates nominal gross domestic product (GDP) to grow 3.8 percent, while economy wide employment is projected to increase 0.4 percent in 2010,” said Drew Lyon, principal in PwC's National Economics & Statistics practice. “Our forecast is for output of all franchise business sectors to expand modestly in 2010 as the recovery takes hold.”
The report estimates that in 2009 franchise businesses reduced employment by 4.1 percent, resulting in a loss of 409,000 jobs as declining consumer spending caused owners to reduce costs. The number of franchise establishments in 2009 was estimated to have stayed relatively flat, declining 0.1 percent. Output of franchise businesses was estimated to decline by 0.7 percent in 2009, for a loss of $5.7 billion.
“We are pleased that the 2010 outlook for franchise businesses is projected to be more positive than 2009, but access to credit remains a major hurdle to increase jobs and economic output at the levels we have seen during past recoveries,” said IFA President & CEO Matthew Shay. “An expected $3.4 billion shortfall in lending to franchise businesses in 2010 will result in 134,000 jobs not created and $13.9 billion in economic output lost. We urge Congress to quickly pass bills currently on the table that would close this lending shortfall and allow franchise businesses to operate at their full economic potential.”
The lending analysis report prepared for the IFA Educational Foundation by FRANdata and released Dec. 2 estimates that banks are expected to lend $6.7 billion to franchises in 2010 versus the $10.1 billion that would meet 100 percent of demand. The shortfall can be attributed to banks’ conservative approach to a weak economic outlook and uncertainty in the commercial real estate market. At 100 percent lending, franchise business could create or maintain 305,000 jobs and $32 billion of annual economic output in 2010.
Shay said that after the recession of 2000-2001, the franchise 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, with annual output expanding by more than 9 percent annually.*
Different Effects on Franchise Business Sectors
All 10 franchise business lines examined in the report are forecast to see increases in the amount of economic output with Personal Services (4.4 percent), Quick Service Restaurants (3.2 percent) and Businesses Services (2.6 percent) forecast to see the largest percentage increase.
Employment is forecast to decline in Lodging (-2.4 percent) and Commercial and Residential Services ( -0.9 percent) and increase in the other eight sectors, with the largest percentage increases expected in Real Estate (1.3 percent), Quick Service Restaurants (0.8 percent), Retail Food (0.7 percent) and Personal Services (0.7 percent).
Lodging (-0.8 percent) is the only sector expected to experience a decline in the number of establishments. The sectors predicted to experience the largest percentage increases in the number establishments include Quick Service Restaurants (3.1 percent), Real Estate (3.0 percent), Retail Food (2.4 percent) and Retail Products and Service (2.3 percent).
Franchise Business Leaders More Optimistic for 2010
The reports’ overall forecast aligns with the results of a new IFA Franchise Business Leader Survey. Franchise business leaders are more optimistic about how the U.S economy will perform in the next 12 months than they were a year ago. More than half (51.3 percent) of survey respondents say that the economy will be better in 2010, compared to only one quarter (24.6 percent) of respondents in the November 2008 survey. These business leaders have a less optimistic outlook for unit growth than 12 months ago due to ongoing challenges in accessing credit for new franchise prospects and for existing franchisee expansion. While more than 78 percent of those surveyed expect moderate to significant increases in franchise units, this compares to nearly 86 percent of those surveyed a year ago.
The survey shows the issues of greatest concern currently and in the year ahead are financing and access to capital. Nearly half of the survey respondents (49.2 percent) ranked “financing and access to capital” as their greatest concern, followed by nearly one-quarter of survey respondents (23.8 percent) who ranked “franchise sales/development” as their next greatest concern.
Survey respondents are somewhat optimistic about business conditions in the next 12 months than those surveyed a year ago. More than 40 percent of respondents stated that they expect business conditions will be “somewhat good” in the next 12 months, compared to only 25 percent of those surveyed in November 2008. Less than 20 percent (18.8 percent) stated they expect business conditions to be “somewhat poor,” compared to one-third (33.5 percent) in November 2008.
Half of the franchise business leaders surveyed indicated their employment levels will “stay about the same” in the year ahead, while 45 percent stated they plan to increase employment moderately to significantly, and only 5 percent stated they plan to decrease employment moderately.
* Volume 2 of the Economic Impact of Franchised Businesses report includes product distribution franchises. The 2010 Economic Outlook for Franchise Businesses studies business format franchises only.
to view the Franchise Business Economic Outlook for 2010 Fact Sheet.
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