Franchise businesses will grow at a slightly slower pace in 2013 than in 2012, yet the industry will continue to outpace growth in other business sectors, according to an IHS Global Insight report prepared for the International Franchise Association Educational Foundation (IFAEF).
Compared to 2012, “The Franchise Business Economic Outlook: 2013” forecasts very similar growth rates in new franchise business formation, job creation, output, and contributions to U.S. gross domestic product (GDP).
“While we are pleased the industry continues growing at faster rates than other sectors of the economy, we could be growing much faster, creating more new jobs and businesses, if Washington addressed the tax, spending, and regulatory uncertainty plaguing the small-business community in a meaningful way,” says IFA president and CEO Steve Caldeira.
“Franchise businesses emerged from the recession stronger due to the strength of the franchise business model and the strong support of franchisors working with franchisees to sustain profitability,” he adds. “Franchise businesses are now poised to accelerate growth plans, but industry leaders say the 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.”
According to the report, the macroeconomic outlook for 2013 is another year of only 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.
The expected resolution of the fiscal cliff will eliminate some of the uncertainty that has restrained the franchise sector, but it will also bring higher taxes that create a drag on growth.
The basic indicators of the health of the franchise sector will show a slight slowdown. Yet, the franchise sector will continue to do well within the industries where franchise businesses are concentrated.
According to the forecast:
- The number of franchise establishments in the United States 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 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.
The IFA Annual Business Leader Survey, conducted November 13–28, indicates that investing in franchise businesses is still a good option for aspiring entrepreneurs, and franchisors remain generally optimistic about expansion in 2013.
Some 81.3 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.
However, the survey confirms that franchisors and franchisees remain frustrated with the pace of the economic recovery and the uncertainty of numerous regulatory and public policy challenges.
Asked to identify their top issue of concern in 2013 among a range of business and policy challenges, 27 percent of franchisors cite franchise sales and development, and 20 percent cite the Affordable Care Act.
Among franchisees, the Affordable Care Act was cited by 31 percent as their top concern, followed by taxes (17 percent).
Healthcare 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.
Some 64 percent of franchisors report the Affordable Care Act will create some significant uncertainty in long-term planning. Healthcare reforms will create significant uncertainty in long-term planning for 71.6 percent of franchisee respondents, and 10.4 percent agreed with the statement: “We are no longer confident that our business model is profitable.”
Franchise business growth could grind to a screeching halt if the nation does not extend current tax rates scheduled to expire at the end of 2012 as part of the fiscal cliff. Among respondents, 79 percent of franchisees and 73 percent of franchisors believe failure by Congress to extend current tax rates at all levels will have a negative impact on hiring and growth plans moving forward.
While improving slightly, limited access to credit continues to hamper the ability of franchisees to get financing, with 52.9 percent of franchisees indicating the lack of small-business lending continues to have a negative impact on their business, compared to 55.5 percent one year ago.
The franchisor outlook for same-store sales is almost identical to 2012. Among franchisors, 77.9 percent expect some increase in same store sales in 2013, compared to 77 percent in 2012.
In another economic indicator, the IFA monthly Franchise Business Index (FBI), an index of the economic health of the franchise sector, fell 0.3 percent in November. The index declined to 108.5 (January 2000=100).
Compared with November 2011, the index was up 1.3 percent. The fall in the index was driven by a large decline in the small-business optimism index, precipitated by the impending fiscal cliff.
These research reports were underwritten by a grant from Jani-King International to the IFA Educational Foundation.