It’s been a common theme in recent years for franchising to prove resilient during whatever rocky backdrop was in order. Last year, the International Franchise Association’s annual Economic Outlook report revealed job and unit growth outpacing 2019 levels. And of the myriad franchising fields, quick-service restaurants, along with “service-based industries,” projected as the highest-growth vehicles going forward.
Not much has changed in a year, despite ongoing economic uncertainty. The IFA’s 2023 edition of the report, which dropped recently, said franchise growth exceeded expectations last year, at 2.2 percent overall versus the 1.9 percent originally outlined (it was 1.8 percent for 2021 and 2022). The report forecasted franchises will expand an additional 1.9 percent in 2024, adding 15,000 units and 221,000 jobs country-wide. Total franchise output is expected to jump 4.1 percent, from $858.5 billion in 2023 to $893.9 billion.
Once again, quick service was tagged as the industry likely to experience the strongest growth, as was “personal services.” Growth in the Southeast and Southwest was guided to outpace the rest of the U.S., (overall franchising, not just restaurants) with the top 10 breaking down as Texas, Florida, Georgia, North Carolina, South Carolina, Tennessee, Maryland, Arizona, Colorado, and Virginia. California and Washington were projected to be the slowest-growing states for franchising at negative 4.2 and 2.3 percent, respectively. The former of which shouldn’t come as a major surprise given the regulatory concerns of late.
The Top States by Growth Rate (projected)
- South Carolina: 5.2 percent
- Georgia: 4.6 percent
- Maryland: 4.3 percent
- Florida: 4 percent
- North Carolina: 4 percent
- Tennessee: 3.5 percent
- Texas: 3.3 percent
- Arizona: 2.3 percent
- Colorado: 2.3 percent
- Virginia: 1.4 percent
But by overall franchise growth, it goes Texas, Florida, Georgia, North Carolina, South Carolina, Tennessee, Maryland, Arizona, Colorado, and Virginia. Texas has been the top state for franchising for three straight years and is projected to reach 82,463 units in 2024.
Region breakdown
Midwest
- Growth in franchise establishments: 0.9 percent
- Growth in franchise employment: 1.5 percent
- Growth in franchise output: 2.3 percent
Northeast
- Growth in franchise establishments: 1.3 percent
- Growth in franchise employment: 2.2 percent
- Growth in franchise output: 3.3 percent
Southeast
- Growth in franchise establishments: 3.5 percent
- Growth in franchise employment: 3.6 percent
- Growth in franchise output: 5.5 percent
Southwest
- Growth in franchise establishments: 3 percent
- Growth in franchise employment: 3.5 percent
- Growth in franchise output: 4.9 percent
West
- Growth in franchise establishments: 1.4 percent
- Growth in franchise employment: 1.3 percent
- Growth in franchise output: 1.2 percent
“More than anything, these reports demonstrate the resilience of the franchise business model,” Matthew Haller, IFA president and CEO, said in a statement. “Even in the face of macroeconomic factors like high inflation, labor availability and the cost of capital, franchised businesses continue to outpace the growth of the broader economy. For those considering a franchise investment or IFA members growing their brands, franchising continues to be a major driver of economic growth and small business creation.”
Focusing on restaurants, the IFA’s outlook calls for quick-service outlets to rise by 2.2. percent in 2024 (the projection was 2.5 percent last year). The organization suggested rising real estate costs and costs of buildup would lead to more units like drive-thrus with smaller footprints, such as drive-thru-only boxes or those that simply cut back on seating. According to FRANdata’s 2023 New Concept Report, smaller-footprint restaurants drop the initial investment cost to less than $500,000 for many restaurants. About 21 percent of new concepts in the report categorized as quick-service restaurants, “demonstrating consumer demand for fast food and takeout,” the IFA said.
Here’s a look at how franchise establishments have tracked in recent years:
2018
- Quick-service restaurants: 194,395
- Full-service restaurants: 32,843
2019
- Quick-service restaurants: 196,794
- Full-service restaurants: 33,160
2020
- Quick-service restaurants: 183,543
- Full-service restaurants: 31,004
2021
- Quick-service restaurants: 188,402
- Full-service restaurants: 32,027
2022
- Quick-service restaurants: 191,673
- Full-service restaurants: 32,813
2023 (estimate)
- Quick-service restaurants: 195,507
- Full-service restaurants: 33,174
2024 (projected)
- Quick-service restaurants: 199,808
- Full-service restaurants: 33,605
The IFA said overall franchise output growth last year was supported by “stable consumer spending, which was fueled by the tight labor market, where wage growth surpassed inflation and increased spending power and household wealth.” That should decelerate somewhat this coming year, however, as reduced pandemic-era savings, slower wage growth, rising household debt, and lower savings rates flood the picture. Rising credit card debt levels could hurt sentiment and spending, as well as the end of the COVID-19 pause on student loan payments, the IFA added. With inflation and interest rates likely to ease in the second half of 2024, consumer spending is anticipated to expand in the second half, but at a comparatively lower rate.
Yet, the IFA said, consumer confidence remains high as the CCI reached a five-month peak in December at 110.7, indicating people entered the year with some optimism. As the economy transitions in 2024, FRANdata forecasted total output generated by franchised businesses to grow by about 4.1 percent, climbing to $894 billion.
U.S. consumer spending accounted for two-thirds of the nation’s economy in 2023.
“The data shows franchising continues to exceed economic expectations,” added Darrell Johnson, CEO of FRANdata. “Even amid rising interest rates, franchising grew ahead of our projections. With continuing inflation and labor challenges, a U.S. presidential election, geopolitical tensions, and technological advances in artificial intelligence, 2024 should be a transition year for the U.S. economy, but franchising continues to stand out.”
In the IFA’s view, economic turmoil and price hikes have the potential to send consumers toward experiences they can enjoy and find fulfillment in rather than retail merchandise. “The focus will be on pampering and self-indulgence, which will primarily benefit the personal services sector and lead franchise output growth at 7.3 percent compared to other industries,” the IFA said. “It is expected that people will not stop spending on travel but will travel more affordably within the country than internationally, boosting output growth for the lodging sector by 4.5 percent.”
And for restaurants, the IFA expects the output of franchised businesses in the quick-service realm to lift by 4.7 percent thanks to increased spending on dining out thanks to a return to the office and surge in off-premises preference.
The wider output picture:
2018
- Quick-service restaurants: $256.6 (billion)
- Full-service restaurants: $73
2019
- Quick-service restaurants: $267.9
- Full-service restaurants: $76.5
2020
- Quick-service restaurants: $241
- Full-service restaurants: $55.1
2021
- Quick-service restaurants: $261.2
- Full-service restaurants: $72.8
2022
- Quick-service restaurants: $275.1
- Full-service restaurants: $76.4
2023 (estimate):
- Quick-service restaurants: $287.6
- Full-service restaurants: $78.1
2023 (projected):
- Quick-service restaurants: $301.1
- Full-service restaurants: $80.2
FRANdata forecasts also call for employment in the quick-service franchise sector to increase by 2.2 percent to nearly 4 million. For full-service, about 18,000 new jobs will arrive through 400-plus units.
Franchises in both segments continue to face challenges from increases in the cost of inventory, supplies, and materials.
In addition to the outlook report, the IFA conducted a franchisee survey for the first time. This found 65 percent of quick-service and 53 percent of sit-down restaurants were feeling “substantial” impacts from inflation.
Most foodservice operators said they were forced to absorb cost increases by raising prices to counter. Thanks in large part to higher prices, the U.S. Census Bureau recently reported total year-end sales in restaurants increasing to $96.4 billion from $85.1 billion in December 2022. “In 2024, successful food franchises will differentiate themselves through a focus on hospitality and personalized customer service as the consumer mindset shifts to focus on the value derived from the money spent in an anticipated slower economy in 2024,” the IFA said.
Consumer spending, closely linked to the health of the labor market, will be crucial in supporting the top line, the company noted. With a projected uptick in the unemployment rate as 2024 marches on, full-service restaurants will need to be prepared for a potential decline in demand, while affordable quick-service brands targeting the lower-income segment could witness increase business.
But returning to the idea of cautious consumers leaning on experiences, “eatertainment” concepts might fit a sweet spot as evidenced by a Placer.ai report that showed a 25–30 percent increase in foot traffic to these venues in 2023.
Additionally, the IFA expects healthier, plant-based menus to continue to proliferate in 2024 as more protein alternatives join the equation. “The menu will likely feature more international flavors catering to a growing immigrant-prompted global and diverse consumer base,” it said.
A full 91 percent of quick-service operators and 87 percent of full-service ones said they expected labor challenges to persist as a growth setback in 2024, per the survey. And you can circle California. “Potential new labor laws in some states, such as AB 1228 in California, which will increase the minimum wage in [quick-service restaurants] to $20 per hour starting April 2024, will increase operational costs, shrink profit margins, and potentially decrease unit growth,” the IFA said.
California is also slated enact a law banning “junk fees” in 2024, which include service charges added to food delivery. “[Quick-service] and full-service/table restaurants will feel the impacts of this regulation, as menus will need to reflect the total price, which may make consumers hesitate due to perceived higher prices,” the IFA said. The National Restaurant Association said earlier the regulation could cost the industry $3.5 billion—nearly $5,000 on average for a menu redesign at each location.
The IFA believes more tech will emerge this coming year through a variety of avenues, from advanced solutions like license plate recognition in drive-thrus and data mining investments to better understand consumers’ preferences. This year, the IFA said, will see the integration of voice AI and vision AI to further improve omnichannel management systems and ordering options like self-service kiosks, POS systems, detachable mobile tablets, tableside payment options, and consumer-facing apps. “These innovations are expected to garner higher customer engagement, satisfaction, and loyalty,” it said. “Intuitive and smarter technology will aid in managing the higher volume of orders, improving the speed of service, streamlining operations, and reducing labor costs.”
As interest-rate driven increases in real estate costs mount, FRANdata predicted more units will be established as drive-thrus and smaller footprint quick-serves, as noted earlier. Direct-to-consumer delivery through third-party vendors like DoorDash and UberEats, ghost kitchens, and mobile food truck concepts, which spiked during COVID, are expected to thrive, the IFA said, as they leverage tech to optimize preparation times and delivery routes.
“In the coming year, the foodservice industry is expected to experience better conditions for growth as food prices decline with inflation,” the IFA said. “Additionally, investor confidence will be restored, and with pent-up demand for investment opportunities, 2024 is poised to witness increased activity in the equity and M&A field.”
