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Franchising Growth at the Top of its Game
by Jerry Wilkerson

The U.S. franchise business economy will grow at its fastest pace since the 90s boom, according to our survey of 100 top franchise executives in America. In their most optimistic outlook in years, franchisors predict a firm seven percent growth in development of new units across the nation for 2004. According to the 13th Annual Franchise Business Development Forecast and Industry Trends Analysis conducted exclusively by Franchise Recruiters Ltd., an international executive search corporation, branded systems that have been playing defense are now thinking affirmatively about the economy.

The chorus is building, and it is packed with many sturdy franchise leaders, national business corporate officers, people who make things happen. With rare unanimity, franchisors forecast that this "Silver Lining Economy" may never be in a better position for sustained growth than this year. Franchise development is tracking momentum, and it will be sustained, say franchisors, into 2005. This growth, however, will not be a rapid leap to robust financial health. Franchisors declare this will be a year of gradual improvement of existing store sales along with new unit development. The gloomy years are behind us, franchise officers articulate, and vigilant deliberation on business plans is absolute. "Not making a decision is sometimes the most detrimental choice a franchisor can make. It's time to face the facts with short and long range plans," said one corporate officer. Otherwise, with this economy, decisions will be made for you.

As franchisors respond to the ever-changing demands of the consumer, real estate costs continue to rise while finding good locations remains a challenge for most systems. The merits of buying versus leasing are forcing some chains to employ real estate departments and construction managers. With interest rates at a 45 year low, real estate ownership becomes a key ingredient in the expansion mix. Service franchisors still look at models that allow for "at home management" or "off the alley" sites but which do not require a storefront business exposure. More and more brands are setting up ways to move the office to the "back of the lot," eliminating the need to maintain customer eyewash exposure. When concern for traffic activity, visibility, and accessibility is not critical, operation cost goes down. A franchisor needing to lease would be smart to push for a long term, fixed rate agreement with three to five year renewal options.

Business will hit the road in 2004. Franchisors see travel budgets jumping four to five percent over last year as they take sales and new unit development to the potential franchisee. Cost cutting remains in place for the best travel deal. The use of per diem is becoming popular with franchisors. Trade shows participation will slowly creep forward in franchise brand attendance with a prejudiced eye on gate traffic. Advertising, marketing and PR budgets for franchise sales and development, stretched and punished over the past four years, are starting to climb. Franchise sales managers are designing robust performance commission and bonus goals for selling new units that yield up to 100% of salary base if achieved. These are fervent moves by some chains looking to capture more market shares in specific areas of the country. "We want to catch our competition in a wait and see mode." Or, as one top food franchise executive in Chicago states, "We don't want to share the market with anyone."

Franchisors are finding that the cost of carrying inventory continues to escalate. Some find they are not keeping inventory consistently across their systems. Mature brands are installing new software that crunches numbers from daily store sales, analyzes marketing strategy, and spits out inventory control with cash register data. By drilling deeper into actual sales and inventory supplies, franchisors can control cash flow and build a better bottom line for their franchisees and themselves. Rather than reactionary, the systems become analytical by adding new sales forecasting tools while feeding sales projections into distribution centers and vendors. This approach also keeps stock handling cost down. Franchisors are instituting intranet kiosks inside stores to let shoppers order whatever they want, regardless of inventory on hand.

Overall technology spending in franchising is projected to be up about 6 percent in 2004, a notably healthier picture than in previous years. We were informed that national and international brands will be incorporating "enterprise" software, a significant shift away from cost cutting programs to more strategic planning and growth orientation. Franchisors will be implementing software to support new initiatives, security, data storage, and the way in which they interact with customers on the Internet. The Internet, according to the top 100 franchise executives surveyed, is a battlefield for customers, service, and the all important franchise sales and development agenda. We were advised that branded chains provide "more incisive franchise information to potential franchisee investors over the Internet than any sales manager could present in a week of face-to-face meetings."

Franchisors indicate that this year will be the year in which advertising begins to make a major swing from traditional 30-second spots on broadcast television to more non-traditional venues. This shift will include product placement in reality shows, sponsorship of sporting events, and more money in niche programming on cable TV for specific markets and national buys. Big international franchisors and smaller regional brands advise us that they will be spending more on digital media as younger consumers continue to expend more time online and less in front of the tube. AM radio is back with classic sound programming that hits singularly specific markets for old and young. This medium sends a rifle shot message to customers with enhanced electronic quality sound separation.

The hot new trends in franchising will come from a number of industry sectors, e.g. home improvement services, from brick and grout replacement to garbage disposal repair, from room additions, driveway architecture, and patio enclosures to outside lighting. On the technological side, equipment around the globe is being replaced like never before. We are generating mountains of obsolete electronic devices. The Environmental Protection Agency estimates that 250 million PCs will be junked between 2000 and 2005. Some of this gear contains hazardous materials that cannot be thrown out in regular trash. New and existing franchise chains already in the disposal industry will offer cradle-to-grave solutions for these products.

Companies in the vending machine business are looking at franchising and betting on automatic convenience stores as the answer to declining sales. These sites afford products for rent or sale at countless locations that are not serviced by retailing. Americans are convenience driven. Drivers can pull up to ATM-like kiosks and purchase a six pack of beer, soap, diapers, shaving cream, eggs, bread, milk, or diet pills. Machines will be in airports, hotels, shopping center lots, and neighborhoods. Even prescription drugs will be coming soon to a vending machine near you. The definition of convenience retailing has changed, and the competition for control is driven by technology. Installation of machines with the concomitant reduction in labor costs transports the vending machine business into franchising focus nationally and internationally. Japan and much of Europe have twice as many vending machines per person as does the U.S.

Other technology-based businesses are in the hunt for franchise growth. Cybercafes are finally doing it right and keeping costs down while improving services. Creative, theme related retail and restaurant concepts are hot spots in the future of franchising. Also included in this group are wine bars and highly specialized wine retailers tuned into the community and geographics they serve. Personal services in niche markets will resume their position of high interest. Skin care, individual therapy, fitness, nutritional services, health care, in home care, and personal shoppers, all offer a tailored feel to the customer.

For the growing number of people who need to work deep into their 60s or who flunk retirement, get bored and want a job, franchising is making things modestly brighter. Recruiting older franchisees is an obvious advantage. But the real story is that franchisors will also be spotlighting these golden silver hairs for employment within the community. Existing franchise employment services and new franchise personnel services will be expanding to include the recruitment and placement of older workers. This huge resource of experienced personnel will help sell ideas to colleagues and customers, balance the need for profits with consumer satisfaction, have credibility in their fields, and sport a track record for getting things done on time and under budget.

Malls and the department stores that anchor them are losing retail business to stand-alone discount chains faster than experts predicted. Mall retailers lost almost half their market share in seven years, from 38 percent in 1995 to just 19 percent in 2002. Retail sales in the U.S. totaled $766 billion last year, excluding food and auto sales. This trend illustrates the wholesale revamping of how America shops. As shoppers become over-stored and over-bored because of sameness in prices, merchandise, and store design, franchisors will be approaching consumers with a flair for the unusual. Look for continued elevated interest in locating franchised branded services and products within the big box chains.

Scores of people remain out of work. To them the talk of economic recovery is as credible as a mirage. Economists, at least the ones that are employed or working for Washington and Wall Street, are cheerleading everyone on in an election year. Twenty- eight percent of American workers say they plan to find a new job in 2004. Many who are working say they are dissatisfied and frustrated with their jobs. Some have placed their aspirations on hold as the job market tightened. This year they will venture out, look for new career advantages, and some will turn to franchising. Franchisors believe this interest will produce a tangible harvest of new franchisees enhanced with drive, determination, funding, and resolve to make a better life for themselves. Savvy franchisors are developing ways to identify and confront these prospects.

Forget about those grim unemployment numbers we have tussled with for the past three years. Demographic forces are about to put a squeeze on the labor force that will make it feel like 1999 all over again. The 90s will seem like a minor irritation, according to franchisors. They are worried about how the labor supply in just a few years will affect their franchisees' unit operations, new entity development, and the franchisors' own human resource departments. The largest generation in American history now constitutes about 60 percent of the prime-age workforce, workers between the ages of 25 and 54. The Generation X groups that follow the high volume old-timers are just too small a force in numbers to take the gray hairs' places. More jobs than workers will force the geezers and near-geezers to keep functioning on payrolls. The Baby Boomers create a seismic effect on the landscape of the American economy, and that will be a good thing according to franchisors. The forever-roaring Boomers told us that, "only a fool thinks price and value are the same."

We will not be able to ignore this people problem. The numbers are based on certain disciplines of sheer demographics in the U.S. Within six years, 30 million people now in the workforce will be older than 55. What these projections reveal is a passing of the workplace torch unlike any other in American history. Until now, each generation to enter the workforce has been larger and better educated than its predecessor. The number of workers in the prime-age category, the years when skilled, educated workers are at their peak productivity, will hardly budge during the next two decades. Even with 1 million legal and illegal immigrants added per year, the labor pool will show little growth. At the same time, the percentage of prime-age labor force that has been to college will flat line at about 60 percent.

The overall outlook for the business of franchising in 2004 varies by industry. Hotels and restaurants will still feel a pinch from unit closures and tight lending policies. Inability to service debt will persist and cause loan defaults. Yet, the "Silver Lining Economy," with some dreary clouds, will produce more capital formation for financially sound systems to grow. There will be innovative sources for money as monetary players find their way to franchising and help rebuild main street America.

A myriad of legal issues is once again front and center in the franchise game. Franchisors are embroiled in a web of legal battles ranging from franchisee relations, location and market protection, class action, wage and hour lawsuits, to nasty franchise contract disputes. Overtime issues may be settled by the Congress this year. Preventing lawsuits is something franchisors must do for countless motives. Many chains are cutting back their in-house legal departments, and buying out operators they don't like rather than suing them.

Insurance issues are problematic. Insurers are growing more cautious about financial exposure in big systems. Few insurance companies will offer competitive bids today, and this reality continues to drive health care costs up about 20 percent a year. Fewer franchisors will offer insurance to workers, and many will charge more for individual coverage. Splitting the cost in half may become the standard.

On the international side of franchise development, Europe will provide more fertile ground for U.S. franchisors this year. The European economy is in recovery, and the euro is strong compared to the dollar. In the next couple of years if there is a boom area, franchisors predict that it will be the Middle East. Franchise decision makers tell us they are seeing today in the Middle East that which they experienced in Japan before the franchise development bang of 1985 and in South America in the early 90s. The majority of Middle East development is accomplished through investment groups or trading factions. These tend to be wealthy families that own vast tracts of land and that are well connected in business and politics.

Up-front fees to the "native sponsors" are usually steep, in the area of $125,000 to $175,000. Development is through area or country agreements only. Franchisors usually set up their employee supervision in the country for the first three years of development. Contracts are for 10 years because trading habits change in this area.

Adopted for the purpose of promoting further franchise development and legal guidance, increased franchise regulation will be seen as a positive move in Asia, especially in China and Korea. China is moving to restructure its lending institutions so that they can compete for loans when foreign banks are allowed to operate in China in 2006. Franchisors are already queuing up for this mammoth marketplace of the future, awaiting the time when funding is in place and entrepreneurism can take hold.

At the same time, we learned that a cluster of CEO's, COO's, presidents, and founders of franchise corporations, more than in any other previous year, will seek retirement. Companies are installing executives to function as succession planners. Blame it on the economy, good times and bad, wealth accumulation, age, or just wariness, we will see more top level franchise executives push back from the corner office desk, look out across the horizon, and call it a day.

Franchising is a series of successful habits formed by a few great thoughts. This magnificent system of business provides excellent price points and a branded quality of elevated service worldwide. Few organized business entities can consistently make that claim.

This study has carefully reviewed franchise executives' forecasts and opinions for their chains. The data are collected informally and incorporate personal projections, predictions, and highly confidential information compiled from our firm's 26 years of private and professional relationships within the franchise business community. Some sources are bullish, and some are more timid on the subject of real unit growth. (Net unit growth is the result of subtracting real unit closures from new unit sales which provides the factual annual new unit growth for a system). Ignoring the extremes, we are seeing the strongest opinion for development, expansion, and economic health within the business of franchising in nearly 10 years. Franchisors are more confident of their views today than they have been for a great while.

Lastly, a franchise company founder, a gray beard, informed us, "Success in franchising implies optimism, mutual confidence, and fair play. A franchisor must hold a high opinion for the worth of what he has to sell, and must feel that his product or service is the best he can produce for his franchisees." A multi-unit franchisee, involved in dual branding, counseled us, "As I grow older, I pay less attention to what men say. I just watch what they do, and I decide if I am going to stay with their franchise system. We have changed brands only a few times over the past 25 years."

In our 26 years in the business of franchising, we have found that franchisors must blow their horn loudly, and most do. If they succeed, franchisees will forgive their noise. If they fail, they will forget them.

The Annual Franchise Business Development Forecast and Industry Trends Analysis is conducted each year exclusively by Franchise Recruiters Ltd., an international executive search firm with offices in the U.S. and Canada. This is the only study and analysis of its kind in franchising and represents the franchise outlook, trends, and projections for growth and development in 2004. The 13th Annual Franchise Survey of 100 top franchise executives crosses all industries and geographics in the business of franchising.
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Jerry Wilkerson is a former president and executive director of the International Franchise Association (IFA), in Washington, D.C., and founder of Franchise Recruiters Ltd.®, an international franchise talent acquisition corporation with offices in Toronto and Chicago. He recently marked his 32nd year in franchising.


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