The Global Economy, the Labor Force and Franchising’s Future
Have short-term contingency plans, but be prepared for profitable growth opportunities as the future unfolds.
By Jeffrey A. Rosensweig
Franchise executives face great uncertainty as they plan for 2011 and beyond. The economic recovery from the “Great Recession” of 2008 and the first half of 2009 seems weak and fragile. Will it pick up steam, or could the U.S. fall back into the dreaded double-dip recession? Geopolitical turbulence and associated risks from two ongoing wars in Iraq and Afghanistan, and unstable nations (e.g. North Korea, Iran, Israel and Gaza) plus an upcoming U.S. election spell further uncertainty.
This article will present a global economic forecast, but by way of a methodology which takes account of these turbulent times. Business plans usually incorporate just a one-point forecast for the economy; for example, “The U.S. economy will grow 3.4 percent in 2011.” Indeed, the first graph included here presents the point forecast for the world’s largest economies. The forecasts are made by the Economist Intelligence Unit, the highlyrespected consulting arm of The Economist. The overall picture is somewhat promising, as discussed later.
Beyond point forecasting, the methodology to be shown here is called scenario analysis. Along with economic and geopolitical fears, 2010 will be known as the year of the disastrous BP oil spill. Rarely has a business cutting corners caused such damage to the natural environment and smallbusiness owners, including BP convenience store franchisees. The BP mess illustrates quite vividly that global oil companies are prime examples of firms buffeted by economic and geopolitical factors, and in this case by a self-inflicted scenario which has had tragic human and ecological consequences. Thus, it should not be all that surprising that it was an oil company (Royal Dutch Shell) that was a pioneer in the use of scenario analysis for its business planning. Factors such as the rise of OPEC, global recession, and others could render point forecasts meaningless. Instead, the idea is to work with a team to envision the most likely scenarios which could unfold, and then put differing strategies in place to handle each. Each strategy would be optimal contingent upon which scenario actually occurs.
Consider volatility in oil prices. The price of oil was roughly $36 a barrel in early 2005, but then it quadrupled in just three-and-a-half years before the world economy went into a tailspin, with manufacturing and construction especially hard hit. The demand for oil and other commodities used intensively in such industries plunged, and the oil price fell 75 percent within six months. Today,mostof the world economy has surprisingly recovered, and the oil price has doubled in a mere 10 months. Clearly, an oil firm needs to use scenario planning, to have contingencies in place for such swings.
Figure 1 (
Page 35 in September 2010 issue of Franchising World) shows the widespread recovery in almost all big economies along with the forecast continuation of growth in 2011. Indeed, the EIU along with the IMF and most other major forecasters have point forecasts of world economic growth over 4 percent this year, decelerating a bit in 2011, and then maintaining about 4 percent growth for the succeeding few years. Along with the global return to growth, we see that the fastest growing nations are the emerging markets, denoted with striped bars. Of great interest to many franchisors, the “BRICs” (Brazil, Russia, India and China) continue to lead the way, especially the two biggest, China and India. Franchise executives should also note the return to growth of Canada and Mexico. Not surprisingly, Europe is lagging behind. Indeed, the economic and financial risks in Europe may have an impact on the United States, which is one reason three scenarios are presented in Figure 2 (
Page 36 in September 2010 issue of Franchising World).
The most likely scenario accords with the common point forecasts of continued growth near 3 percent. I ascribe about a 65 percent chance of this occurring. The lower line presents the pessimistic scenario, the feared “W” pattern, whereby the United States falls into a double-dip recession. The second dip should not be nearly as deep or prolonged as the recent recession. Still, businesses should have a contingency plan, as this scenario may have up to 25 percent odds of occurring.
Finally, the top line presents an optimistic scenario, the hoped-for “V” pattern. I only ascribe 10 percent probability to it, given all the financial and fiscal problems in the United States and Europe. However, we have seen instances of such a V pattern, after both the OPECinduced 1974-75 recession and the second and deeper of the double-dip recessions which spanned 1980-82. The odds of a repeat great recovery are not high, but we can hope and we should have a plan ready.
Plentiful Supply of Labor for Franchisees
When the economy is booming, as in 2000 or early 2007, good workers may be scarce. Conversely, most franchisees now are swamped with job applications, as roughly 15 million people are officially unemployed, which entails actively searching for work. Even more telling, roughly 25 million are underemployed, a group comprising the 15 million officially unemployed plus those who want a job, but are no longer actively searching (some are too discouraged to keep searching) plus the millions who want full-time work, but can only find part-time work. Of course, there are always millions of people unemployed. Some are between jobs, others are displaced by structural changes in the economy, such as a decline of manufacturing jobs and increased outsourcing, and some fall victim to the efforts to keep the economy from overheating and causing inflation. But at this time, it is the magnitude of the unemployed, especially long-term, which is chilling.
Franchisees often create the first job for teens, defined as those age 16 to 19 years old. The current job market is particularly poor for teens. The data, which are adjusted for seasonal variations, show that fewer teens had a job this summer than any since data collection began in 1948. Only one-fourth of teens had a job, even a part-time one. Tragically, only one in seven black teens has a job. Is this because teens just don’t want to work? No. A much higher share of teens had a job in the summers immediately preceding the recent recession. Further, masses of teens need income and so continue active job searches while unemployed this past summer at the rate of 26 percent for all teens and 40 percent for black teens—both records.
Looking at potential workers of all ages, we see that many have simply withdrawn completely from the labor force due to early retirement, long-term disability, or discouragement at job prospects. How many more would be employed if the growing U.S. population had the same share working as in January 2001? My own estimates range from 14 to 17 million missing jobs, a massive gap this decade which shows just how many potential workers have been sidelined.
Even with the need to address many financial and fiscal issues, such as the gargantuan federal deficits leading to burgeoning debt, the United States must focus first on helping small business create jobs, particularly through extending credit at good terms and also subsidizing training.
Demographic Trends and the Future Growth of Franchising
Franchises, such as those in the fast-food industry, often rely on young workers and young customers. Analyzing Census forecasts of the U.S. population and age structure, we can imagine a paradox. Right now, the United States has a tragic surplus of young people without jobs. Tragic, because studies show that the job skills and discipline learned by those who start working part-time at age 16 or so increases lifetime productivity and thus earnings. However, most analysts also focus on the aging U.S. labor force, as the baby boom generation approaches retirement age, fearing that the United States will lack young workers, eventually. They claim that the aging demographic structure could mean a dearth of labor, for franchises, and to support the growing ranks of retirees.
In contrast, Figure 3 (
Page 37 in September 2010 issue of Franchising World) sheds light on the realistic future. The top line, the population in the main working years of 20 to 64, will rise every year to 2050 and beyond, contrary to popular view. Indeed, the total will rise nearly 20 percent by 2040.
Of course, these workers will have many more retirees to support. The lower line shows that U.S. residents age 65 and above will double by 2040. Given the massive and growing federal debt, the comparatively faster growth of the older group implies that retirement ages must rise. It may not be popular, but it will be driven by financial necessity.
The finding of crucial impact for franchising is that, despite talk of “aging America,” the United States will see a steady increase in residents under age 20. There will be an enduring pipeline of future young workers and customers, as this age group will increase one quarter by 2040. Less far off, notice the forecast rise of one-sixth by 2030.
Finally, a prime demographic for most franchises is the population aged 15 to 24. Despite the undeniable U.S. aging trend, this prime group will consistently maintain its 13 percent share of the growing U.S. population right through 2050, rising from 43 million teens and young adults now, to 49 million in 2030 and 53 million in 2040. Thus, the most likely longer-term scenario for your business is an optimistic one.
Franchising is a primary route to smallbusiness creation, and it is the growth of small business which creates jobs and fuels the American dream. Have contingency plans short-term, but don’t take your eye off the ball of profitable growth opportunities as the future unfolds.
Professor Jeffrey A. Rosensweig is the Director of the Global Perspectives Program at Emory University’s Goizueta Business School in Atlanta. He can be reached at