Major franchise growth on hold from uncertainty on Capitol Hill

The International Franchise Association Thursday released "The Franchise Business Economic Outlook: 2013," projecting the number of establishments and employment numbers that the U.S. franchise industry will contribute in the New Year.

The franchise sector is projected to create 162,000 new jobs in 2013, buoyed by a 1.4 percent increase in the number of franchise establishments. This growth is expected to be slightly slower than 2012 numbers, which included a 1.5-percent increase in number of establishments.

During a conference call Thursday, franchise sector leaders discussed why these numbers are projected to stagnate or fall.

"Although we're pleased that we continue to outpace other business sectors, we could be growing faster if Washington (D.C.) addressed the uncertainty plaguing the industry. Franchise businesses emerged from the recession stronger due to the strength of the model, and businesses are now poised to accelerate growth plans. But a lack of confidence in our leaders in Washington to address the fundamental challenges facing our economy is keeping them and prospective investors on the sidelines," said Steve Caldeira, president and CEO of the IFA.

He added that the association is hopeful there will be a Fiscal Cliff resolution soon, which would eliminate some of this uncertainty. "However, we also expect higher taxes (in the New Year) which would be a drag on growth," Caldeira added.

The IFA champions an aversion to the Fiscal Cliff, even if it means passing a short-term deal.

Franchisees express frustration over uncertainty
Although the lodging and restaurant industries are considered among the brighter spots in the 2013 forecast, Steve Joyce, president and CEO of Choice Hotels International, and Aziz Hashim, from NRD Restaurant Holdings (Popeyes, Domino's Pizza, Checkers/Rally's multi-unit franchisee), also expressed trepidation during the call.

"One of our biggest concerns is inaction in Washington. Many are standing by just to see what our economic policy is going to be. (Franchisees) want to grow; everybody wants to hire. But you can't be a responsible business leader and make decisions if you don't know what rules will be in place in 2013," Joyce said.

Hashim added that franchisees are more pessimistic than franchisors over the gridlock on Capitol Hill. This sentiment is mostly based on the uncertainty of the tax policies, the cost of implementing new health care rules, the rising cost of energy and "other regulatory concerns."

"Franchisees are getting hit from every angle. We will expand in 2013, but at a far slower rate than we would if some of these uncertainties weren't facing us. We're cautious about taking a risk in this environment and plans have been curtailed," Hashim said.

Franchise business leader survey
Still, the IFA Annual Business Leader Survey, conducted Nov. 13-28, indicates that franchisors remain generally optimistic about expansion in 2013. About 81 percent say they plan to increase units, with 29 percent saying they plan to increase units by 6 percent or more and 52.3 percent saying they expect a moderate increase in the number of units (less than 6 percent). A small percentage of franchisors (8.4 percent compared to 4.7 percent one year ago) expect to see a decline in units.

Asked to identify their top issue of concern in 2013, among a range of business and policy challenges, 27 percent of franchisors cited franchise sales and development, and 20 percent cited the Affordable Care Act. Among franchisees, the Affordable Care Act was cited by 31 percent as their top concern, followed by taxes (17 percent).

Health care continues to be the top concern for franchisees and is the second-biggest concern for franchisors. Thirty-one percent of franchisees and 20 percent of franchisors plan to cut jobs to get under the Affordable Care Act's 50-employee threshold. About 64 percent of franchisors report the Affordable Care Act will create some significant uncertainty in long-term planning. Health care reforms will create significant uncertainty in long-term planning for 71.6 percent of franchisee respondents.

2013 outlook by the numbers
According to the outlook report, the macroeconomic forecast for 2013 is modest improvement in employment and consumer spending, with overall economic growth held back by slower growth of business investment and a bigger decline in federal government spending.

In the New Year:

  • The number of franchise establishments in the U.S. will increase by 1.4 percent in 2013, just short of the 1.5 percent growth in 2012, from 746,828 to 757,055 (an increase of 10,227).
  • The number of jobs in franchise establishments will increase 2.0 percent in 2013 (following a gain of 2.1 percent in 2012) from 8.1 million to 8.262 million (an increase of 162,000).
  • The output of franchise establishments in nominal dollars in 2013 will increase 4.3 percent (following a 4.9 percent increase in 2012) from $769 billion to $802 billion (an increase of $33 billion).
  • The gross domestic product (GDP) of the franchise sector is projected to increase 4.1 percent in 2013 (following a 4.6 percent increase in 2012) from $454 billion to $472 billion (an increase of $18 billion). This is approximately 3.4 percent of U.S. GDP in nominal dollars.

"While we're looking at another year that looks very much the same for both the economy and the franchise sector within the economy, we have planted some seeds of growth and that will be a positive thing. And if the outcome of fiscal cliff discussions makes a move toward a credible long-term deficit reduction, we think we'll see growth accelerating toward end of 2013 and stronger growth in 2014," said Jim Gillula, from IHS Global Insight, which published the report.

QSR forecast is positive
Looking at the restaurant franchise industry specifically, the annual percentage growth trend is:

  • 2010, 1.9 percent;
  • 2011, 3.4 percent;
  • 2012, 2.8 percent;
  • 2013, projected 1.5 percent.

According to the report, high unemployment rates have continued to hinder substantial growth in much of the restaurant industry.

"The number of people unemployed and under-employed remains enormous, and lower-income consumers still have to allocate their limited financial resources," the report states. "There will not be enough improvement in 2013 to draw current customers who are economically challenged to more expensive restaurants."

However, the forecast anticipates the return of some customers, particularly to lower-cost restaurants.

"A number of quick-service restaurants have been quick to tweak their offerings recently to boost sales and respond to changes in the pricing climate," according to the report. It estimates QSR franchise growth to be at 5.2 percent in 2013, from 5.1 percent in 2012 and 4.2 percent in 2011.

For franchised full-service restaurants, sales have steadily accelerated since the recession, with gains of 3.8 percent in 2010; 6 percent in 2011; and an estimated 7 percent in 2012. The report expects this growth to slow in 2013.

Meanwhile, retail food sales are forecasted to grow by 3.9 percent in 2013, following a 2.7 percent jump in 2012. This is due to the prospect of higher food prices that will boost the dollar value of sales, the report concludes.

Employment numbers
Each of the 10 reported franchise categories have posted gains in employment numbers throughout the past two years. The report forecasts this to continue into 2013. Total franchise employment grew 2.1 percent in 2012, and the estimated 2013 growth rate is 2 percent.

The employment trend for the QSR franchise segment is:

  • 2,888,554 in 2007;
  • 2,919,701 in 2008; up 1.1 percent;
  • 2,887,550 in 2009; down 1.1 percent;
  • 2,882,638 in 2010; down 0.2 percent;
  • 2,948,939 in 2011; up 2.3 percent;
  • 3,016,765 in 2012; up 2.3 percent; and
  • 3,083,134 in 2013 (projected); up 2.2 percent.

The employment trend for full-service restaurants is:

  • 1,001,184 in 2007;
  • 1,003,208 in 2008; up 0.2 percent;
  • 985,999 in 2009; down 1.7 percent;
  • 988,044 in 2010; up 0.2 percent;
  • 1,010,906 in 2011; up 2.3 percent;
  • 1,034,157 in 2012; up 2.3 percent; and
  • 1,056,908 in 2013 (projected); up 2.2 percent.

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