THE 2003 FRANCHISE BUSINESS DEVELOPMENT FORECAST AND INDUSTRY TRENDS ANALYSIS

A year of reality based decisions in the "new normal economy" will set the course for a solid 4 to 5 percent expansion in franchise growth and development in 2003, according to the 12th Annual Franchise Business Forecast and Trends Analysis conducted by Franchise Recruiters Ltd. Franchise executives, responding to the survey nationwide, project a year of surprises as franchise unit expansion plows through an economy in transition. Franchisors contend that nothing appears to change in a phlegmatic business cycle, and yet, nothing stays the same as this economy evolves. According to these knowledgeable brand executives, they will "carve out growth opportunities" in markets to make their systems more profitable.

Leadership in major franchised chains agreed that low interest rates, investment cash amassed on the sidelines, and a dire need for jobs present a great climate in which franchising will flourish. However, according to responding executives, some marginal franchise systems in various industries may be culled out this year. They will file for protection or be hastily integrated into stronger, cash accessible brands. These possible scenarios, we were told, will involve rather substantial, generally recognized franchisors. When multiple franchised brands are positioned together and made financially sound, credible economies of scale can be built.

Positive franchising growth was projected in many service sectors including health care, personal well being, education and training, home and business to business services, specialty retailing, technology, and anything to do with the boomer generation. The population over 50 has $750 billion in buying power and controls three-quarters of the country's financial assets. We were often advised to remember what the consumer has had to deal with over the past year including terrorism, war in Afghanistan, the threat of war with Iraq, corporate malfeasance, soaring costs for insurance and health care, higher fuel prices, a weak stock market, and for some, devastating losses in personal retirement funds. Yet, consumers and entrepreneurs remained resilient, and franchising continued to expand in 2002.

Distress was expressed over franchisee loan default issues. Some franchisors and their franchisees are grappling with cash flow problems as business, equipment, construction, and real estate related loan failures endure for another year. Hardest hit are hotel and restaurant groups with even more unit closures slated in 2003 as "the squeeze on overcapacity" continues. A number of business models will be rehabilitated. Franchisors look for ways to help franchisees by easing royalty payment schedules, reducing costs associated with inventory, and by creating new bottom line enhancement programs. At the same time, industry surveys found that 3 out of 5 franchisees expect their businesses to be better in 2003.

Equally troublesome are the sizable state budget shortfalls and federal deficit spending. Operators dread imposition of new taxes, fees, or other levies against all businesses. Of special concern is the quest by states for taxes on royalty revenue. One franchise executive calls this quest a "government obsession for dollars."

Expensive market-share battles persist in regional and national segments and will, inevitably, cause strain on net unit system growth. Revenue used for media buys is siphoned from franchise sales and development budgets. Executives reported that consumers' fickle buying inclinations, from auto repairs to hotel rooms, from lawn care to food service, are perpetually driven by price and value. A marketing manager declared, "No one really knows what's next in the marketplace these days, but our customers will be doing it." She added, "We do anything and everything to hang on to customer traffic. However, price wars solve nothing."

Franchising is a foremost force in the creation of the U.S. entrepreneurial economy, a phenomenon unmatched by any other country. It is this entrepreneurial revolution that continues to fuel the lethargic economy, producing new business owners and jobs. Franchisors are known for their deftness in finding new franchisees, and today they are locating these investors in several fascinating environments.

Superior prospects are now found in clubs, churches, libraries, job counseling centers, and educational facilities; anywhere in which weekly business and job search networking take place. Even substitute teacher lists provide potential recruitment assets. Layoffs and compensation cutbacks have created an army of experienced, educated, and motivated former employees, many of whom will decide to start their own business. Resourceful franchisors are discovering them. This new wave of middle-class jobless is straining the resources of non-profit centers in populated communities across the country. Neighborhood-based organizations provide excellent sources for qualified, innovative franchise sales.

Retailers and many franchisors flocked to the suburbs through the 90's, leaving inner cities and their inner-ring suburbs ravenous for fundamental services and retail. The "border land" between cities and suburbs is where various savvy franchisors tell us they are focusing their expansion this year. Locations are available with limited rehab, and landlords are disposed favorably to negotiate leases and terms. Special markets can be targeted with slimmed down adaptations, super efficient franchise venues that require less square footage, smaller inventories, fewer employees, and shorter hours.

Successful global development is requiring more attention to infrastructural issues related to suppliers, dependability of franchisees, and the political and economic stability of the foreign country. Interest will center on Asia with a strong emphasis on China. Latin America will prolong "a year of living dangerously" for franchising, although Mexico continues to build. Franchisors will structure more area development deals internationally as opposed to master rights. Europe persists as a problematic market for U.S. franchisors.

Unearthing investment money survives as a challenge which continually tests character. Funding sources remain stubborn, asking for "more skin" to do the deal. Gone are the days of 90% financing and cash flow lending. Operators will be hard pressed to borrow against assets. A few new financial players are targeting the franchise arena with equity deals. They "get the picture" on potential. As the economy initiates growth through 2003, to no surprise, more funding sources will be accessible to well-capitalized groups. A finance officer declared with vexation, "If you can collateralize the loan 100%, you may well get approved."

Today, within franchise systems, profitability is the driving force for improvement in IT spending. Technology investment will be relatively slow and modest as franchisors gradually move to upgrade their aging computer systems and look for people to maintain them. This trend will accelerate in 2004. Only a quarter of the PC's in use today are powerful enough to run Microsoft's Windows XP operating system. Outsourcing will climb, as franchisors farm out IT needs. On the horizon, potential franchisees are computer literate, use them all the time, and expect technology to be a part of their new businesses. These technological expectations and experience will require franchisors to integrate technology in their franchise offerings or risk losing the prospective investor to another "more with it" industry or brand.

Consumers are a prism of truth. Often, we were reminded by franchise executives of the importance of knowing the customer. The competitive nature of the mercurial marketplace today demands that consumer tracking be in place for purchase patterns through using technology, by simply soliciting shopper suggestions on comment cards, or by holding focus groups on a regular basis. "Consumers are the Atlas," we were told. "They tell you where they want to go, and what they want when they get there." It's not always easy to understand. "Listening is a valuable commodity." Consumers are no longer as homogenous as they once were. Substantial care and attention to the customer, backed by rich employee personal service, are compulsory. Franchisor produced training and customer relations policy and procedure plans must be efficiently updated and taught on a standard monthly schedule in order to stay apace with customer needs and lifestyle changes.

On the subject of employees, franchisors indicated a decisive shift in health care plans to include more coinsurance with employees paying part of the costs, rather than flat copay. Employers struggle with a record 18% cost hike over the year and with the prospects of health costs doubling by 2008. Unless they are multiple unit operators, most franchisees today can't afford health insurance for employees. Franchisors believe Congress will need to literally grow older with the population before health care is taken seriously as voters agonize over health cost containment issues. An executive declared, "Washington does not want to understand."

Franchising will lead the economy out of recession according to the majority of our survey respondents. Franchising has demonstrated this capacity over the past three decades. Franchise business growth and development are consistently six months to a year ahead of the pendulum swing, and in 2003 we will witness the resurgence once again. The market is ripe for new development. A veteran franchisor keenly observed, "Job advancement in most corporations is blocked because fewer employees are changing jobs. Raises are limited. Workers realize there is no guarantee their extra effort on the job will assure job security. People don't have job security, unless or until they run their own business, and nothing helps achieve that security better than franchising."

Those comments crystallized the core of future franchising. People do not feel secure inside corporations. Trust is illusive. They want control of their lives, and many are eager to assume responsibility for the future. True, not everyone believes in himself or herself enough to make the change, yet, more now than ever before seek change. The beginning is always today. Our choices, far more than our abilities, show what we really are. In 2003, franchising offers choice and a future.