What's Ahead for Franchising in 2013: Slow and Steady Toward Recovery

What's Ahead for Franchising in 2013: Slow and Steady Toward Recovery
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Entrepreneur Staff
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The overall attitude of the franchise world for 2013 might be best described as cautious optimism. On the plus side, 2012 saw the first positive growth in the number of franchise establishments since 2008, according to the IFA's annual Franchise Business Economic Outlook report, compiled by IHS Global Insight. And that growth is expected to continue in 2013 at about the same rate (1.4 percent) and even to outpace the rest of the private sector.

But franchise industry leaders are frustrated, believing the growth rate could be much greater if franchisors and franchisees weren't bogged down by numerous uncertainties regarding public policy and the pace of the economic recovery.

The Big Issues
The health-care question appears to be the biggest hindrance to confidence in the franchise industry. According to the IFA Annual Business Leader Survey, conducted in November, the biggest concern for franchisees, and second-biggest for franchisors, is the Affordable Care Act. Franchisees are particularly uncertain about how it will affect their business long term, and 31 percent plan to cut jobs to get under the Act's 50-employee threshold. (The rules require that employers with 50 or more full-time employees provide health insurance to workers or pay a fine.)

Related: 2013 Entrepreneur Franchise 500 List

Taxes are another big concern, with 79 percent of franchisees and 73 percent of franchisors saying a failure by Congress to extend Bush-era tax rates at every level would negatively impact their hiring and growth plans. The IFA applauded the passage of the recent agreement to avert the fiscal cliff, but the rising rates for those earning over $400,000 could still hurt some franchisees.

Access to credit remains a challenge for franchisees as well. It continues to loosen little by little, but over half of the franchisees surveyed still cited a lack of small-business lending as having a negative impact on their businesses.

The Players
Despite of these challenges, modest growth is still expected in 2013 in the areas of employment, output and gross domestic product for franchised businesses. And some sectors within the franchise industry are expected to perform better than others, thanks to the current economic climate.

With the U.S. housing market finally starting to show signs of life again, a strong performance is expected from real estate franchises in the year ahead. The areas of commercial and residential services will likely thrive as well, and demand for business services continues to grow as the economy slowly recovers. Quick-service restaurants, already the largest sector in franchising, will continue to lead the way in growth as consumers continue to seek out budget-friendly dining options.

Related: The Top 10 Franchises for 2013

On the downside, the automotive, retail products and services, and food retail sectors are all expected to see less than one percent growth in the franchise numbers. All are suffering as consumers consider more carefully where to spend their money and try to stretch the life of vehicles and household goods rather than replacing them frequently.

The Predictions
The IFA's survey shows that franchisors are more optimistic about the future than franchisees, and it's largely a matter of scale. If a franchisor loses one unit, it's usually only one of many and doesn't affect its bottom line greatly. If a franchisee loses one unit, that may be its whole business.

Multiunit franchisees are in a stronger position. Recognizing this, franchisors are expected to increasingly seek out area developers and master licensees instead of single-unit "mom and pop" franchisees to build their systems. But even multiunit franchisees are hesitant about expansion. In an IFA conference call timed with the release of the IFA's Economic Outlook report, one multiunit quick-service franchisee, Aziz Hashim, said, "Franchisees are getting hit from every angle. We will expand in 2013, but at a far slower rate than if some of these uncertainties weren't facing us. We're cautious about taking a risk in this environment and plans have been curtailed."

Nevertheless, even single-unit franchisees have the support, training and experience of a franchisor behind them, and that may explain why the growth of franchised businesses has outpaced growth in the rest of the private sector year after year and will likely continue to do so. Growth in 2013 may still not be at a pace that franchise industry leaders would prefer, but if slow and steady wins the race, it appears that franchises will continue to lead the way toward economic recovery.

Related: Biggest Franchise Trends for 2013

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