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Franchise Businesses Show Signs of Recovery in 2012 After Years of Restrained Growth

Franchise Businesses Show Signs of Recovery in 2012 After Years of Restrained Growth

Franchise business jobs projected to grow 2.1 percent, an increase of 168,000 jobs.

By John R. Reynolds, CFE

After three years of restrained growth, due to the recession and its lingering effects, franchise businesses show signs of recovery in the year ahead, according to a report by IHS Global Insight for the International Franchise Association Educational Foundation. The Franchise Business Economic Outlook: 2012 forecasts modest growth in the number of establishments, employment, output and contributions to U.S. gross domestic product.
According to the report, franchise business growth has been restrained over the past three years due to underlying factors, such as the weak rebound in consumer spending, that have been a drag on the economy as a whole. In addition, tighter credit standards have limited the formation of new franchise small businesses and the expansion of existing businesses. As these conditions improve, the IHS Global Insight report forecasts an acceleration in the number of franchise businesses in 2012 and continued modest growth in employment and economic output.
“The forecast for modest growth is good news for the franchise industry and the overall economy, given franchising supports 12 percent of the U.S. private sector work force,” said IFA President and CEO Steve Caldeira, CFE. “However, the rate of growth is far below the growth trends we experienced before the recession. Pro-growth policies out of Washington, D.C. to provide certainty to the franchise industry, such as comprehensive tax reform that lowers the corporate and individual tax rates, as well as increasing the flow of credit to small businesses by the lending community, will help to get us on a more aggressive path of growth and job creation.”
The forecast for modest growth is consistent with the overall macroeconomic outlook, according to the report. The report estimates real GDP to increase 1.8 percent in 2012, consumer spending growth at 2.2 percent, a continued sluggish recovery in the housing market and slower economic growth abroad. However, the report indicates some acceleration in the number of franchise businesses in 2012, accompanied by continued modest growth of employment and output in the franchise industry.

2012 Franchise Businesses Forecast for Establishments, Employment, Economic Output and GDP
Establishments. The number of franchise establishments will increase by 1.9% in 2012 from an estimated 735,571 to 749,499—an increase of 13,928 establishments.
Employment. The number of direct jobs rebounded in 2011 to post a gain of 1.9%. In 2012, franchise business employment will increase by 2.1%, from 7,934,000 jobs to 8,102,000 jobs—an increase of 168,000 jobs.
Economic Output. The output of franchise businesses increased 5.3% in nominal dollar terms in 2011. Output will grow by 5.0% in 2012—from $745 billion to $782 billion—an increase of $37 billion.
GDP Contributions. The report presents for the first time estimates for the contribution to U.S. gross domestic product by franchise sector. Franchise businesses account for 3.0% of U.S. gross domestic product. Growth of GDP originating in the franchise sector will increase 4.8% in 2012, from $439 billion to $460 billion, for an increase of $21 billion.

The outlook for growth differs significantly among franchise business segments. Personal Services franchises are expected to be a growth leader in 2012, with 6.2 percent in output growth, followed by Retail Products and Services at 6.1 percent. Real Estate will also show growth of 5.8 percent. However, the industry is starting from a low base and will not reach its 2007 output levels. The number of establishments in each business segment is estimated to increase in 2012, from a low of 0.1 percent (Retail Products & Services), to a high of 3.1 percent (Lodging).
All segments will experience job growth in 2012, with Business Services franchises growth the highest at 3.6 percent. The two groups that account for 50 percent of all jobs in the franchising industry—Quick Service Restaurants and Table/Full Service Restaurants—will also experience job growth of 2 percent and 1.8 percent respectively.
Franchise Business Leader Sentiment
The IFA annual Franchise Business Leader Survey, conducted in early December, suggests franchisors and franchisees, frustrated with the slow pace of the recovery, are somewhat less positive about the outlook for the year ahead.
Franchisors and franchisees continue to identify access to credit as the major hurdle to business growth. Two-thirds of franchisors say they have seen “no improvement in credit access in recent months,” compared to nearly the same result in an August survey (67.6 percent). More than 80 percent of franchisors say that limited access to credit continues to have a negative impact on their ability to expand. Nearly half (44.4 percent) of franchisees report “no improvement in access to credit” in recent months. More than half (55.5 percent) of franchisees say that limited access to credit continues to have a negative impact on their business.
While franchisors are optimistic about plans for expansion in the number of establishments in 2012, they are less optimistic about an increase in same store sales or adding jobs, compared to the survey one year ago.
Nearly 85 percent of franchisors say they plan to increase the number of establishments in 2012, with more than one-third (34.9 percent) saying they plan increases of 6 percent or more. No franchisors expect a significant decrease in the number of businesses and 4.7 percent expect a moderate decrease (less than 6 percent). On the other hand, 77 percent of franchisors expect some increase in consumer sales, compared to 81.4 percent of franchisors one year ago. No franchisors expect a sales decrease in the coming year, compared to 4.5 percent who expected sales to decrease in the 2010 survey.
In general, franchisees are less optimistic than franchisors about the prospects for improved consumer sales in the year ahead. Two-thirds (66.6 percent) of franchisees expect to see moderate to significant increases in sales in 2012. One year ago, 76.4 percent of franchisees expected to see some increase in same store sales. No franchisees expect to see a decrease in same-store sales in 2012, compared to nearly 12 percent one year ago who expected a sales decrease.
Similar to the survey one year ago, about half of franchisors and franchisees plan to add jobs in their businesses in the year ahead. Fifty-four percent of franchisors say they expect to increase employment, with 18.4 percent saying they expect a significant increase (6 percent or more). One year ago, 53 percent of franchisors said they expected to increase employment, with 14.2 percent who said they expected a significant increase.
Nearly half (46.2 percent) of franchisees say they expect to add jobs in the year ahead, with 15.4 percent saying they expect a significant increase in the number of jobs (6 percent or more). One year ago, nearly half (47.1 percent) said they expected to increase the number of jobs, with 5.9 percent who said they expected a significant increase.
According to comments from survey participants, the less optimistic outlook stems from franchise business owners who are frustrated with the pace of the economic recovery and the “lack of leadership in Washington, D.C.” that is “making things worse, not better.” Franchisors and franchisees revealed concerns about how a range of issues are impacting their bottom line—with weak consumer sales, limited credit access, energy price increases (especially commodities), and the impending health care law—all ranking highly. Survey comments revealed frustration with the “lack of support for pro-growth small business policies,” and the “uncertainty created among consumers and investors” by the “negative rhetoric coming out of Washington.”
To review the full report, summary fact sheet, and the Business Leader Survey, visit www.franchise.org. 

John R. Reynolds, CFE, is president of the IFA Educational Foundation. He can be reached at 2020-662-0764 or jreynolds@franchise.org.

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