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
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
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
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
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
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.