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Franchise Growth Lags as Fiscal Cliff Threatens Expansion

New franchise business formation for 2012 is down from previous forecasts and job creation remains flat.  The contributing factors for this state of the industry include uncertainty about the impending fiscal cliff, anticipated higher taxes and lack of credit. These findings are part of a third quarter update of the International Franchise Association’s economic forecast, “Franchise Business Economic Outlook: August 2012.”

“There is a wealth of job creation waiting to be tapped in the franchise sector, but existing and prospective franchise business owners are waiting on the sidelines to open new stores until they have more certainty and confidence that Congress will not raise their taxes,” said IFA President and CEO Steve Caldeira, CFE. “A short-term deal that prevents the fiscal cliff at the end of the year would serve as a critical bridge and provide some much-needed short-term certainty, until lawmakers in the next Congress can consider a comprehensive overhaul of the tax system, so extending the current tax rates would be a great place to start.”

Despite the declines from IFA’s initial 2012 economic forecast released in May, growth in the number of new franchise establishments, jobs and output are expected to outpace the overall economy. Modest growth is forecast across the 10 major business lines in the franchise sector. According to IFA’s report, prepared by IHS Global Insight:

  • The number of franchise establishments in the United States will increase by 1.5 percent in 2012 (down from the initial forecast of 1.9 percent growth), to 736,114, or 10,955 new businesses. This growth compares to a decline of 3,984 establishments in 2011 and is the first time since 2008 the industry will add new units. Since 2008, the industry lost more than 23,000 establishments due to the recession and its lingering effects on consumer confidence, the housing market, credit access and jobs.
  • Direct employment in franchise establishments will increase by 2.1 percent in 2012, from 7.9 million to 8.1 million, or 167,000 new jobs. This growth compares to 150,000 new jobs in 2011. The rate of job growth compares favorably to the overall private sector, with an estimate of only 1.8 percent in 2012.
  • The economic output of franchise establishments has been revised slightly downward to show a 5.2 percent increase in 2012 (down from the midyear forecast of 5.3 percent).  Output of the franchise industry will increase by $39 billion in 2012 compared to a $35 billion gain in 2011.

“Despite the headwinds facing small businesses, the franchise industry is still growing at a faster pace than the overall economy, signaling the strength of the franchise business model,” said Caldeira. “New franchise businesses will be opening across all 10 business lines for the first time since 2008. If policymakers want to find more ways to support job creation, they should look at ways to help spur more growth in the franchise industry by pursuing pro-growth policies including comprehensive tax reform.”

Franchise Business Sectors

Growth in establishments, employment and output varies widely by franchise business sectors.

Establishments

Sectors that are adding establishments above the overall industry average of 1.5 percent are Business Services (2.2 percent), Lodging (2.2 percent) and Quick Service Restaurants (1.9 percent), Personal Services (1.9 percent) and Table/Full Service Restaurants (1.7 percent).

Employment

Sectors that are adding jobs above the overall industry average of 2.1 percent are Business Services (3.5 percent), Personal Services (2.3 percent) and Retail Food (2.3 percent). The Quick Service Restaurant sector, with the largest number of jobs in the franchise industry, will add jobs at a 2.0 percent pace, followed by Table/Full Service Restaurants, the second largest provider of jobs in the franchise industry, at 1.9 percent.

Economic Output

Sectors that generated economic output greater than the overall industry average of 5.2 percent are Commercial/Residential Services at 6.2 percent, Real Estate at 6.2 percent, Personal Services at 6.0 percent, Lodging at 5.9 percent, Business Services at 5.5 percent and Retail Products & Services at 5.5 percent.

Gross Domestic Product

Franchise businesses accounted for more than 3 percent of U.S. GDP or a total of $438 billion in 2011, according to IHS estimates. Based on the employment and output forecasts for franchising in 2012, IHS projects that GDP of the franchise sector will increase by 4.9 percent to $460 billion in 2012. ⎯

John R. Reynolds, CFE, is president of the International Franchise Association’s Educational Foundation.  He can be reached at 202-662-0764 or jreynolds@franchise.org.

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