THE 2002 FRANCHISE BUSINESS DEVELOPMENT FORECAST AND INDUSTRY TRENDS ANALYSIS

Franchising fights a battle against indecision. "We must resonate with consumers," says Jerry Wilkerson.

This is the eleventh year Franchise Recruiters Ltd. has conducted the Annual Franchise Business Development Survey and produced the Franchise Business Trends Report. One hundred franchise executives are interviewed for the yearly survey and trends report. They represent a cross section of commerce, industries, geographic regions, and expansion history. These top producers provide the trend setting data, vision, projections, and forecasts for the study. This is the only study of its kind in franchising. The following is a summary of the results of the study.

With the economy in a recession and the terrorist attacks indelibly in focus, franchisors were reticent to venture, with much exactness, into the commerce of new unit sales and growth development. Industry leaders forecasted a full spectrum of development from flat to upwards of 15 percent. The executives surveyed shared their opinions based upon their instincts, commitment to fiscal responsibility, results of senior management strategy, entrenched experience, and good old-fashioned hope. Individuals commented with somber reverence on the challenges they perceive in the first half of 2002 and the expectations of a complicated, complex economic recovery anticipated for the later half of the year. For the most part, they were trying to temper the effects of a recession on their business with the resilience of the American spirit.

A recurring premise reverberates from the 100 franchise executives interviewed. To paraphrase: "Americans and all citizens of our global society must have a sense of security and safety in their everyday lives if we are going to build our way out of a worldwide recession. Security and safety are the X-factors in the economy's future. We must all work to establish peace on earth." Franchisors designated indecision as one of their primary obstacles to overcome. They agreed that there is money available for franchise unit investment and that people must get on with their lives. We were told, "Our growth and development battle is with indecision. We can't get people to make a. [confounded] decision." For the many losing jobs and for those facing corporate downsizing, franchising offers an excellent alternative; however, given the aftermath of 9-11, many investors are paralyzed by indecisiveness.

The following are some of the trends, issues, and strategies for franchising in 2002.

• Competition for the consumer creates extraordinary pressure on product price points in an anomalous economy. Constant price review and adjustments will be prevalent throughout the year, forced by an indecisive marketplace driven through prickly, elevated points and plunging economic valleys. The strain will create a roller coaster journey for field operations management, promotion departments, and marketing. Suppliers will be forced to contribute to the larder with price shavings, new products, training, and free warehousing.
  
  
• Retail sales and services franchisors must plan market development more intensely. They will try to stay two seasons ahead of the consumer in a vapid and capricious economy. We were advised to "resonate with consumers." Again, suppliers will participate by helping to bring new products and services to the marketplace and by contributing with more than just money to support resellers as they carve out identities in an ever-changing American business environment. More than ever before, franchisees will look to their franchisors for help. Marketing and operations departments must be equipped for this exigency. It is no longer simply a question of whether or not the contractual agreement will be fulfilled, but rather will the unit, or franchisee remain in business.
  
  
• Security becomes a line item in budgets, an added cost of doing business, but one that produces little yield. Without security planning and risk assessment programs, a company can lose far more than simple budget dollars. Consumers are watching, guided by government directed awareness bulletins. Store protection for shopper confidence and executive safety are paramount. Technologically savvy workers will shore up computer hardware, infrastructure, communications, and information systems. A simple virus or a direct hacker attack can render a system helpless, destroy data, open confidential files to competition, and devastate store operations. Companies will need employees who know how to access and utilize fresh information and technology in order to work smarter, more efficiently and productively. Major hiring will take place in this arena of discipline.
  
  
• Construction of multi-brand, free standing buildings, specifically designed for competing food systems, are under development. Dual branding is the future in nontraditional growth. Projects are marshaled by national and regional independent corporate brands management teams with a common focus. Melding the chains under one roof, with the synergies of management and labor, provides consumers with options at a central cost reducing location. This concept is similar to food court dynamics, except locations are outside malls with easier vehicular and pedestrian accessibility. Look for other industries to duplicate the idea around business and shopping complexes.
  
  
• Mature systems are establishing new criteria for store grading programs. Unannounced visits by mystery shoppers and multiple scheduled appointments with corporate operations teams report on unit customer service, quality, and cleanliness. Toll free numbers for consumer feedback are set in place. Operations management checks how well store managers are motivating employees with bonuses paid on total unit grade points. The top franchisee performers haul up the bottom quarter of system units. Brands capture new market shares through customer appreciation. Ultimately, tough, dynamic franchisees could be pitted against weak, under-performing franchisees for ownership of units. There will be considerable legal backlash to this strategy as systems push for sustained improvement. Some franchisees call the approach punishment as management reviews operations and enforces contracts. Performance standards must be met, or a culling of the systems will occur.
  
  
• Charting the course for locations has become a social science for franchisors. Besides the usual demographic and geographic requirements, add to the mix health club memberships, health care facilities, real estate offices, financial institutions, churches, civic clubs, Internet connections, cell phone penetration, and retirement households. Catering to the boomers, new businesses, ranging from education to entertainment to health care and other services, will germinate with continued expansion in metro markets.
  
  
• Watch for franchisors to start cluster development around grocery stores and neighborhood centers. Repeat and constant customer traffic dictates address. What was old is new again. Service industry, take out food, entertainment, and downsized retail stores will figure prominently. Franchisors will continue development inside mass retailers with kiosks and small footprint customer centers. Tests with Wal-Mart, Home Depot, and other big box retailers have proved successful for fast food, lawn care, home cleaning, and services sector franchising, an approach providing one stop shopping for home and hearth.
  
  
• The ripened methods of a franchise sales lead generation are sputtering. Print advertising response is flat; discovery nights are horizontal, too; traffic at franchise opportunity brokerage offices has slowed; and trade shows may never be the same. In fact, trade shows have become business seminars with only a dozen or so selected franchisors participating in individual markets. Produced by professional show organizations, the seminars replace show booths with roundtables for afternoon and evening assemblages. More one on one face time with prospects, prudent qualifying periods, and personal minutes can be spent on potential franchisees. Special use, resale, or specific locations may be targeted for development. Franchisors get big show promotion, advertising, and PR, for half the overhead costs of exhibit halls.
  
  
• There could be a winnowing of a few franchisors through the year as consumers retrench and adverse business factors take hold. The exigent economy will cashier systems with large debt service requirements. Lenders are quick to maneuver. Rival chains can step in and immediately improve their current market penetration through mergers and acquisitions. Sorting out franchisor and franchisee ongoing legal responsibilities is going to demand forbearance and is not for the faint at heart. Franchisees feel the pain, too. Large franchisee organizations, multi-unit operators, will seek bankruptcy protection, an action guaranteed to throw franchisors into a tizzy. Do the "Ors" stand with their "Ees" or force a sell off of locations to new franchisee operators?
  
  
• Shuttered units become a daily dirge for big and small, old and new systems. The problem crosses all spheres of franchising. This adverse economic consequence can create golden opportunities for other chains. Fair to good locations prove to be a boon and abet stronger operators to expand in markets. Site cost reductions are in play. Landlords are forced to haggle over lease terms. Local municipalities suddenly become welcoming allies to franchising as the prospect of renewed business, new jobs, and tax revenues benefit community interests.
  
  
• Compelled by economic descent, franchisors resolve to review closely international development plans and to adjust foreign expansion targets. Unit closures overseas continue with under-performing locations impacting expansion in certain high profile political and social market areas. Expect to see more foreign governmental agencies initiate closer review of contracts and franchisee/franchisor relationships within their jurisdiction. It is requisite that franchisors fulfill their contractual agreement to the letter as foreign administration officials record a growing number of international franchisee complaints.
  

Things that we felt absolutely sure about before 9-11 are now, for sure, not absolute. We are discovering exactly what it means to live for today, dream of tomorrow, and learn truth from the past. A franchise decision-maker reminded us that without freedom, there could be no such thing as franchising. The executive stated, "Freedom is what makes franchising work; freedom of choice and an intelligent use of a person's experience for the purpose of another's progress and success are the underpinnings of world franchising."