2010 will be a comeback year for franchising — though the good news is hardly going to be flooding in.
In his review of the newly-released Franchise Business Economic Outlook 2010, IFA President Matthew Shay said franchising will see “slow, incremental growth” in the coming year as it struggles with challenges that fall into two camps: economic and policy. Economic challenges include depressed consumer demand and spending, and limited access to credit; policy challenges include health care reform, climate change issues and taxes. “All [these] unknowns create a level of uncertainty,” said Shay, “and are having a chilling effect on entrepreneurs.”
Prepared by PriceWaterhouseCoopers, the Outlook seeks to quantify these challenges and present a forecast for establishments, employment and economic output in 10 industry sectors: quick-service restaurants, table/full-service restaurants, retail food, lodging, real estate, business services, personal services, automotive, commercial and residential services, and retail products and services.
Overall, economic output is projected to grow the most — by 2.8 percent in 2010, said PricewaterhouseCoopers’ Drew Lyon, a principal from PWC’s National Economics & Statistics practice. All 10 sectors project growth in economic output, with personal services leading the pack at 4.4 percent; the lowest growth was projected for personal and residential services, at 1.5 percent.
The total number of establishments is projected to grow by 2 percent overall — encouraging, considering that from 2008 to 2009, growth in establishments was essentially flat, Lyon said. However, 2 percent is still far below the growth rate of 5 percent annually that the industry averaged from 2000 to 2008. Within sectors, quick-service restaurants had the highest projected growth (3.1 percent). Lodging was the only sector projected not to grow, but rather to shrink by 0.8 percent.
The outlook for employment was least favorable, Lyon said. Although eight of 10 sectors project growth in employment, overall growth is projected at just 0.4 percent. Lodging and commercial/residential services were projected to shrink in 2010, while real estate had the highest projected growth (1.3 percent).
“Most economists believe the recession will be dated as having ended somewhere between June and August 2009,” said Lyon, explaining that this is based on when production reaches its lowest point. “Normally after a severe recession, much more robust growth is expected. What we’re seeing in this recession is unemployment continuing to rise after the official end of the recession. Unemployment is expected to continue to rise into 2010 as more people enter the work force.”
Still, Lyon noted, “Things are heading in an improved direction.” Shay agreed, noting that this year’s Outlook was a dramatic improvement from last year’s.
Along with the quantitative results of the Outlook, the IFA also presented a qualitative survey, its November 2009 Franchise Business Leader Survey. “The survey respondents’ outlook is much rosier this year than in our 2008 survey,” said Shay. Fifty percent believe the economy will improve in 2010, compared to just 24.6 percent in last year’s survey. And only 5.6 percent expect the economy to worsen, compared to 43.7 percent who did last year.
In terms of expectations for same-store sales, franchise unit growth and employment, respondents were generally optimistic — but more cautiously so than in 2008’s survey. For example, while nearly 75 percent of those surveyed expect sales to increase next year, 54.5 percent of those expect modest increases (under 6 percent). Shay said franchisees are taking a more “realistic” attitude this year and have “scaled back their expectations.”
What are franchise leaders’ biggest concerns going into 2010? Nearly 50 percent said their biggest concern was access to credit; 24 percent said it was franchise sales and franchise development. “All together, [that means] almost 75 percent were concerned about issues related to access to credit,” said Shay. The next biggest concern, at 14 percent, was underperforming franchise units — but Shay noted that most franchisors are actively working to help these franchisees get back on track.
Rieva Lesonsky is CEO of GrowBiz Media, a content and consulting company that helps entrepreneurs start and grow their businesses. Follow Rieva on Twitter @Rieva. Visit SmallBizDaily.com to read more of Rieva’s insights on small business and to buy her newest book, Marketing 101: Quick Tips for Marketing Your Business.