Franchising in America

FRANCHISING IN AMERICA Follow us @MDGadvertising A SNAPSHOT OF AMERICA'S FRANCHISING WHERE WE ARE AND WHERE WE'RE HEADED The U.S. Census Bureau recently reported that in 2007, the most recent year for which data is available, franchises represented a significant portion of the economy. Franchising in America has enjoyed a rich history. Franchise businesses now account for a significant number of businesses in the country, employing $1.3 trillion millions of people. We take a look at 10.5% how the franchise sector is doing, as well as challenges it's encountering. of all businesses with paid employees were franchises. Franchises generated $1.3 trillion in annual sales. THE ROAD TO RECOVERY IMPROVING INDUSTRIES Franchises are returning to growth after suffering setbacks due to the recession. The number of establishments, employees, Lodging, automotive, and retail product and service industries are projected to enjoy the greatest growth in establishments this year. and output are projected to grow more in 2011 than in the two years prior. *2011 forecasted Real estate and business service industries are forecasted to have the slowest growth. ESTABLISHMENTS 2010-2011 ESTABLISHMENTS PERCENT CHANGE BY INDUSTRIES 791,560 LODGING AUTOMOTIVE 763,094 4.4% 3.9% 765,723 784,802 COMMERCIAL & RESIDENTIAL SERVICES RETAIL PRODUCTS & SERVICES EMPLOYEES (in thousands) 3.9% 3.7% 7,792 7,572 QUICK-SERVE RESTAURANTS X 3.2% RETAIL FOOD 7,614 2.6% 7,808 OUTPUT (in billions) PERSONAL SERVICES FULL-SERVICE RESTAURANTS $680.7 2.5% 2.3% $683.2 $706.6 FOR SALE BUSINESS SERVICES REAL ESTATE 1.1% -0.2% $739.9 KEYS TO NEW GROWTH Despite the recession, some franchises were thriving. Entrepreneur points to three things that rapidly growing franchises have in common-and that buyers are increasingly looking for. LOW INVESTMENT Buyers in today's franchise market are looking for lower investment levels. Three years ago, average franchise startup investment may have been about $250,000, but many rapid-growth franchises today have total investments of $125,000 or less. RAPID BREAK-EVEN Today, buyers are looking for quicker paths to profits. Traditionally, businesses that reached profitability by the second or third year were considered a success. Many fast-growing franchises tout a break-even point within the first year of operation. HIGH MARGINS %24 Being able to deliver high profit margins is also important in today's franchise market. The average business might put five or ten cents of every dollar after break-even toward the bottom line, but today's buyers are looking for profit margins at least three five times that. KEY CHALLENGES A PricewaterhouseCoopers survey of franchise systems-all of which had 20+ franchisees-identified two major challenges facing franchisors. 75% 73% said recruitment of suitable said problems with potential franchisees franchisees remains a challenge securing credit slows growth Despite a generally positive outlook, franchisors and franchisees alike have some concerns about various aspects of doing business. FRANCHISORS FRANCHISEES LABOR ISSUES HEALTHCARE 9% 11% HEALTHCARE 13% 30% 24% 16% FINANCING/ ACCESS TO CREDIT SAME-STORE SALES FRANCHISE UNITS/ SAME-STORE SALES 12% 17% TAXES 19% 22% GOVERNMENT REGULATIONS 12% COMPETITION FRANCHISE SALES/ DEVELOPMENT FINANCING/ ACCESS TO CREDIT 15% COMPETITION INSIGHT FOR FRANCHISORS Now that franchisors are focused on rising out of the recession, the following four strategies can help expedite and ease the road to recovery. INNOVATIVE FUNDING IDEAS Consistent access to credit has been a challenge for franchisees. That credit crunch affects franchisors as well. Fifty-five percent of franchisors surveyed said lack of credit has had a "significant" or "moderate" impact on their ability to expand. Roughly two-thirds reported that they have seen “no improvement in credit access in recent months." As a result, some franchisors have begun offering in-house financing and other creative funding options. BETTER COLLABORATION The success of both franchisor and franchisee depends in part on how the two can work together. Franchisors must manage the relationship through monitoring, contracts, and enforcement strategies. A study entitled "Contracts, Extra-Contractual Incentives, and Ex Post Behavior in Franchise Channel Relationships" suggests a combination of behavior and output monitoring and enforcement activities produces the best results. MORE EXPERIENCED FRANCHISEES A lackluster job market has contributed to an increase of applicants who wish to open a franchise but don't always possess the skills or knowledge necessary for running a business. Thus, many franchisors have increased their requirements for potential franchisees. STRICTER LEGAL MANAGEMENT The relationship between franchisor and franchisee as outlined in franchise documents has come under scrutiny lately. To avoid potential pitfalls, franchisors should work with lawyers experienced in franchise law and contracts. Franchisors should also monitor changes in state laws regarding taxation and employment. This is particularly important now that multiple states have tried to find ways to tax royalty income for out-of-state franchisors. mig Sources: International Franchise Association | PricewaterhouseCoopers | Franchising World | BusinessWeek | Entrepreneur | BDO.com | iFranchise Group FranchiseMarketingAgency.com Follow us @MDGadvertising 2011 2010 2009 2008 2011 2010 2009 2008 2011 2010 2009 2008