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Franchise Industry on the Path to Recovery

Two reports published by the International Franchise Association in March show positive signs that the franchise industry is on a path to recovery after years of very sluggish growth.
The Franchise Business Index or FBI, a new economic index that provides a monthly reading of the economic health of the franchise sector, was up 1.4 percent in February compared to one year ago. Following a period of flat to declining economic indicators in mid-2011, the FBI turned up in September of 2011 and showed increases of 0.3 percent in three out of five months through February 2012.
Designed to provide timelier tracking of the growing role of franchise businesses in the U.S. economy, the index was developed by IHS Global Insight on behalf of IFA. The FBI combines indicators of growth in the industries where franchising is most prevalent and measures the general economic environment for franchising. The research for the FBI is underwritten by a generous grant from Jani-King International to the IFA Educational Foundation.
The report noted that increases among the components of the index tied to the labor market and small-business optimism contributed most to the February gain in the FBI. An improvement in consumer demand, which had been flat at the end of last year, gave a small boost to the index. Credit conditions showed no change as of February 2012.

Update of 2012 Economic Outlook
IFA also released an update of the 2012 economic outlook prepared by IHS Global Insight in December 2011. The updated forecast shows little change from the initial forecast. The report identified a number of positive factors that are contributing to franchise business growth and negative factors that are restraining growth.
Among the positive factors, successive employment reports showing 200,000-plus new jobs per month, points to a sustained economic recovery. Negative factors include rising gas prices, which is creating a drag on consumer spending, and weak global growth, which limits rising exports. The forecast expects weak growth in consumer spending, with some areas improving, such as food services and accommodations.
The forecast for new business formation–in the economy as a whole and in the franchise sector–was revised slightly downward. The number of franchise establishments is expected to increase by 1.6 percent in 2012 (down from the December forecast of 1.9 percent). Employment in franchise establishments in 2011 was revised up slightly to show a 2.0 percent gain in 2011 and a 2.1 percent gain in 2012. Economic output in nominal dollars in 2011 was revised down slightly in 2011 to 4.9 percent and is expected to grow by 5.0 percent in 2012.

Highlights of the IHS Global Insight Forecast

The Business Services category ranks first in franchise job growth at 3.3 percent. The Personal Services category ranks first in terms of economic output (6.0 percent), second in terms of establishments (2.2 percent). Quick Service Restaurants, the largest business line in the franchising industry, will see growth in economic output and employment that are near the franchise industry overall average.
The report analyzes the components of value added to each of the industries where franchise businesses are concentrated to calculate the contribution to U.S. GDP. Franchise businesses accounted for approximately 3 percent of U.S. GDP or a total of $439 billion in 2011. The forecast for nominal GDP of the franchise sector in 2012 is an increase of 4.9 percent to $460 billion. 

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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