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2010 Outlook for Franchising Is Brighter, but Challenges Remain

Serving as chairwoman of the International Franchise Association (IFA) this year has provided me a front row seat during a very dramatic year for our country and for franchising. As 2009 comes to a close, a few observations come to mind as we prepare for the new year.  First, we all know 2009 has been an incredibly tough year for everyone in franchising. According to a new report

by PricewaterhouseCoopers (PwC) for the IFA Educational Foundation, franchise businesses reduced employment by 4.1 percent in 2009, resulting in a loss of 409,000 jobs as declining consumer spending caused owners to reduce costs. The number of franchise establishments in 2009 was estimated to have stayed relatively flat, declining 0.1 percent. Output of franchise businesses was estimated to decline by 0.7 percent in 2009, for a loss of $5.7 billion.

In spite of these losses, franchise business leaders took the necessary steps to keep businesses open and prepare for the economic recovery expected to begin in 2010. The last year clearly demonstrated the importance of strong communications and relationships between franchisors and franchisees. Neither group can tackle challenges such as we have seen this year alone. And as I have talked to business leaders across the franchise industry, they agree that strong communications and working through challenges together have helped them weather the economic storm.

The second observation centers on the power of grass-roots advocacy in our industry. Another challenge for 2009 has been access to credit. A recent report prepared by FranDATA for the IFA Educational Foundation estimated that lending to franchise businesses dropped 40 percent this year. To help ease this fall-off, IFA implemented a plan to ensure that Congress understood the importance of credit access to franchise businesses and why franchise businesses are so important to the U.S. economy and the recovery.

We testified multiple times before Congress, met with key administration officials including participating in the President’s credit summit last month, and generated thousands of contacts with Congress from our members. These efforts are having an impact. President Obama endorsed our proposals, including raising the Small Business Association’s loan limit from $2 million to $5 million. However, the change requires an Act of Congress, and we continue to urge both the Senate and House to pass bills currently before them.

Our enhanced grass-roots program, Franchise Congress, was key in publicizing the importance of franchising to the economy. The intense lobbying on credit access, health-care reform, taxes, and labor laws this year has positioned IFA as one of the most-respected associations in Washington, recognized for our leadership and our ability to provide clear and relevant information on a broad range of issues. This positions us well for 2010.

The economic outlook for franchising in 2010 shows some improvement. PwC forecasts that the number of business-format franchise establishments will increase in 2010 by 2.0 percent, from 883,292 to 901,093 — a net gain of nearly 18,000 establishments. After losing over 400,000 jobs in 2009, jobs in franchise businesses are expected to grow 0.4 percent, for a gain of 36,000 jobs. Overall economic output (the gross value of goods and services produced by franchise businesses) is forecast to increase 2.8 percent to $868.3 billion — an increase of $23.6 billion — in 2010.

And franchise business leaders are more optimistic about 2010 as well. In a survey conducted by IFA among franchise business leaders, more than half (51.3 percent) of survey respondents say that the economy will be better in 2010, compared to only one-quarter (24.6 percent) of respondents in the November 2008 survey. These business leaders have a less optimistic outlook for unit growth than 12 months ago, however, due to ongoing challenges in accessing credit for new franchise prospects and for existing franchisee expansion. While more than 78 percent of those surveyed expect moderate to significant increases in franchise units, this is a drop from nearly 86 percent of those surveyed a year earlier.

The survey shows that the issues of greatest concern, both now and in the year ahead, are financing and access to capital. Nearly half of the survey respondents (49.2 percent) ranked “financing and access to capital” as their greatest concern, followed by nearly one-quarter of survey respondents (23.8 percent) who ranked “franchise sales/development” as their greatest concern.

The data show that these concerns are real. FranDATA is predicting a $3.4 billion lending shortfall in 2010. Banks are expected to lend $6.7 billion to franchises in 2010, compared to the $10.1 billion that is needed to meet 100 percent of demand. The shortfall can be attributed to banks’ conservative approach to a weak economic outlook and uncertainty in the commercial real estate market. At 100 percent lending, franchise business could create or maintain 305,000 jobs and $32 billion of annual economic output in 2010.

This brings me to a third observation. As successful as our grass-roots efforts were in 2009, they will need to be turbo-charged in 2010 in order to ensure that laws and regulations do not hamper our ability to recover from the recession and realize the growth of which the franchise industry is capable.

An important mid-term election, an aggressive legislative agenda, and an economy struggling to recover will make 2010 a year when members of Congress, more than any other in recent memory, will turn to their constituents for input and guidance on the legislative agenda. With franchising facing a full legislative plate in 2010, we will need all the contact and communications with members of Congress that we can achieve.

As we celebrate IFA’s 50-year anniversary in 2010, we have tremendous opportunities for growth and influence in Washington, D.C. But we cannot do it alone. All franchise business owners, those new to franchising and those who have been involved for years, need to become grass-roots advocates in 2010. The success of the franchise industry depends on it.