With the clock ticking down on 2009, franchisees—those who are left, that is—are looking ahead to what undoubtedly will be a better year in 2010. But how much better?
At this point, my advice is to hope for the best but expect the worst. Here’s why.
While the recovery seems to be gathering steam and most forecasts are calling for a return to growth, the economy is far from out of the woods. At the outside, most forecasts are calling for modest growth in 2010, but hardly any improvement in the nation’s unemployment rate.
For franchises and other small businesses that depend on sales, the key metric to watch is the unemployment rate. Without some movement there, 2010 will be a hold-the-line year at best, because consumers are unlikely to increase spending until they feel more secure in their jobs.
One of the industry’s key surveys, the International Franchise Association’s “Franchise Business Economic Outlook for 2010,” is calling for a modest return of growth and employment.
It sees marginal increases in the number of jobs, economic output, and the number of new establishments. On the downside, it says, the continuing credit crunch will keep the lid on the growth that franchise businesses experienced after the 2000-2001 recession. Back then, the franchise industry led the recovery and grew by more than 40 percent between 2001 and 2008, according to the report.
In contrast, the industry lost more than 400,000 jobs in 2009 and saw the economic output of franchise businesses fall by $5.7 billion, or just under 1 percent. Against that backdrop, almost anything looks good.
PricewaterhouseCoopers, which conducted the IFA study, sees a net 2 percent gain in franchise establishments in 2010, rising to 901,093 compared with 883,292 this year.
It also sees a slight increase in net new jobs, up 36,000 or 0.4 percent, over this year’s level, and a 2.8 percent, or $23.6 billion increase in goods and services produced by the industry, pushing the total to $868.3 billion.
But here’s the catch: The numbers are predicated on a 3.8 percent increase in the nation’s gross domestic product next year and a 0.4 percent increase in employment, according to Drew Lyon, principal in PwC’s National Economics and Statistics practice.
Are the report’s basic assumptions overly optimistic? Well, here’s what the International Monetary Fund (IMF) sees for 2010, according to its latest forecast.
The international lending agency projects the U.S. economy to decline by 2.6 percent in 2009, and then grow by a scant 0.8 percent in 2010. And, that’s an improvement from its forecast in April for a 2.8 percent decline in 2009 and zero growth in 2010.
If the IMF’s forecast is accurate, the IFA’s growth projections are only so much smoke and mirrors. But at least the franchise organization has one thing in its favor—consumer and business confidence is rebounding.
According to the organization, the report’s overall forecast aligns with the results of its new IFA Franchise Business Leader Survey. More than half (51.3 percent) of those surveyed say the economy will be better in 2010, compared with one quarter (24.6 percent) of respondents who said the same last year about prospects in 2009.
The finding also meshes with at least one new survey of consumer confidence. The Conference Board, a private research group, said its index of consumer expectations for the economy six months from now rocketed upward to a reading of 75.6, the highest since the recession’s start in December 2007.
The findings of both groups are encouraging, but another survey may provide a better read on what to expect in 2010. Duke University and CFO magazine conduct a quarterly survey of chief financial officers, and its latest findings are a marked contrast to the upbeat IFA and Conference Board reports.
The CFO survey has proved over its 13-year history to be a better indicator of job growth and capital spending over the next 12 months than any other survey, according to its co-author John Graham, a professor of finance at Duke.
More than 1,431 chief financial officers across a variety of industries in the United States, Europe, and Asia participate in the survey, which includes both public and private companies, large and small.
On the job front, U.S. executives said they expect to reduce their domestic workforce by 1.6 percent next year. In Europe, the cutbacks are expected to be an even higher, 2.6 percent.
In contrast, 45 percent of franchise executives surveyed by the IFA said they plan to increase employment moderately to significantly next year; half plan to hold the line on hiring and about 5 percent plan to decrease employment moderately.
An overwhelming majority of CFOs surveyed said pre-recession staffing levels are unlikely to return before 2011, or later. And, most CFOs say they are unlikely to restore wage cuts, suspended 401(k) matches, or other benefits cuts in the coming year.
On the plus side, the CFOs predict a 7 percent increase in earnings and a 2 percent rise in capital spending, but both are still well below historical norms, according to the survey.
The upshot: Be wary of rosy economic assumptions. But more importantly from a policy perspective, be wary of any suggestions to pull back government stimulus programs next year because of overly optimistic forecasts about the economy.
As we saw with the real estate industry, once the government’s first-time home-buyer tax credit program neared an end, home sales plummeted. Congress wisely decided to extend the program until next June and should keep the same open mind to other stimulus programs well into 2010.