Is now the time to consider becoming a franchisor?
Congress is meeting this week to discuss a bailout of the big three automakers. After all, the theory goes that if Ford, Chrysler and General Motors go down, then up to 3,000,000 jobs throughout the United States might be put at risk. And, as I write this article, Congress has agreed to provide billions of dollars of loans to the American auto industry, with a plan of use that would fail most high school business courses. It seems again that the chance to fix the problems in Detroit will be missed as the panic and the politics over the economy continue seemingly unabated.
The good news is that it is unlikely that we will soon see Matt Shay, President of the International Franchise Association, sitting in front of Congress hat in hand defending the bad management of franchisors. While same-store sales are down in some sectors of franchising, and the lack of a robust lending market is putting a damper on new franchise sales for some franchisors, most franchisors will weather the storm well and will take the necessary steps to strengthen their brands. That is the beauty of the entrepreneurial marketplace and the inherent strength of franchising.
As opposed to the 3,000,000 jobs that Congress is all in a twitter about today, franchising represents more than 11,000,000 jobs, which is more than 8% of all of the private sector jobs in the United States. And, when we think of the thousands of companies that the politicians keep mentioning for their focus on the auto industry, put that into perspective of franchising which represents over 900,000 businesses directly involved in franchising, accounting for over 4% of the total economic output for the US economy. If we include the suppliers to franchising, as the media has done in establishing the 3,000,000 employee benchmark for the auto industry, employment because of franchising is over 20,000,000 jobs (15.3% of the private sector) and $2.3 Trillion of economic output (11.4% of private sector output in the United States). Thankfully for the economy as a whole, franchising is generally strong and, as in the past economic downturns of the past fifty years, it will be small businesses that will be the real engine to lead us out of the problems we currently face.
On second thought, maybe Congress should call Matt and some of the leaders in franchising to attend some hearings on how to turn the economy around and how businesses should be managed for growth. As franchising dwarfs the automotive industry and we have shown that we understand how to manage our affairs, the lessons from franchising just might be beneficial to them.
So, is now the time to become a franchisor? Every indication we have is that the growth of franchising, when compared to its record growth of the past decade, has slowed. The answer as to whether or not to expand your business through franchising is likely mixed, as each company’s potential will need to be evaluated based on many factors, including the strength of the concept, its management team, the underlying economics of the business, its marketability against the competition, and of course, what the condition of the overall economy will be when the company is ready to begin offering franchises.
I asked a friend and competitor of mine, Mark Siebert, the CEO of The IFranchise Group, for what he sees for 2009 and 2010. MSA and IFranchise are the two leading franchise advisory firms in the United States and regularly compete with each other for the opportunity to work with emerging and established franchisors.
According to Mark, “The fear-mongering in the media combined with the credit crunch have taken their toll, but the media will move on and credit will loosen. And when that happens - probably around mid 2009 - we are anticipating that pent up demand combined with rising unemployment will fuel an explosion in franchise sales. Ultimately, the biggest driver of franchise sales is unemployment. And as callous as it sounds, every time we see unemployment up a tenth of a percent, 150,000 prospective franchisees hit the street.” Mark goes on to say that “Unemployment also contributes in unseen ways. Every time a layoff occurs, the reverberations are felt throughout the workplace, as those who remain employed wonder when the ax will fall again and how they can control their own destiny. And ultimately, franchising will loom large in the thinking of many.”
Mark is right. In each of the recessionary periods we faced since the 1980s, the Great American Dream of independent business growth fueled the entrepreneurial engine, creating new companies, new jobs, new suppliers, more new jobs servicing those new companies and ultimately, led us back to economic strength. So long as lenders return by the second or third quarter of 2009, which appears to be the case, the grease needed for the entrepreneurial economy will be there.
My one concern continues to be the actions that Congress will take in socializing the economy that might lengthen the recession. Congress is tooling around with something that it has shown no historic talent to deal with - the micromanaging of business. Reed, Pelosi, Franks or Dodd have never run a business. They have never created a single product or service nor have they ever created a single “non-dole” related job. So long as Congress understands that franchising does not need their “assistance,” the future of the entrepreneurial economy appears to be not only robust, but also outstanding. Let us hope they spend the next few months with Ford, General Motors, Chrysler, the States and each of the other entities which the media tells them need their help.
So why look at franchising now? When properly developed, becoming a franchisor takes at a minimum four to six months. During this time, consultants are developing the strategy behind the structure of the franchise program, lawyers are drafting legal documents, marketers are putting together the recruitment material, manuals and training programs are being developed, and the other elements required to offer and manage a franchisor are in the works. So, if on January 1, 2009 you began to put into place the elements needed by your franchise system, somewhere between May 1st and July 1st you will begin to market your opportunity to prospective franchisees.
Given the number of individuals impacted by layoffs, and those leaving companies voluntarily because of their perception of what the economy might do to their companies, there will be a huge population of individuals seeking to invest in franchised opportunities. At the same time, the war in Iraq will begin to wind down and even if it does not, many of our military will be returning to civilian life and will be looking for jobs and new careers. 2009 and 2010 will see the largest pool of potential franchisees than we have seen in many years. For those franchisors emerging during the second half of 2009, as well as for the established franchisors, these new candidates will be there to invest in the right concepts or to staff the new locations. This may also be one of the best real estate and construction markets we have seen in a number of decades.
Which are the companies with the best likelihood for success? The spending psychology of consumers in 2009 and 2010 will still be limp. Those concepts whose retail products and services require a buyer willing to spend on luxury items will not do as well as those targeted to a marketplace looking for lower-cost quality offerings. For example, business travelers will likely be staying at Courtyard by Marriot or Hilton Garden Inns, both quality offerings targeted a mid to lower market traveler, rather than lodging at those brands' higher-end offerings as they might have in the past. Dining at moderately priced restaurants will be more attractive than full service higher end offerings, and those companies that can provide outsourced solutions that enable businesses to reduce their labor costs will excel. At the same time, any business focused on the needs of two-person working households should do well. Taking care of the needs of those families' obligations to their children or aging parents will be attractive, as will those that can provide services for homeowners that they do not have the time or talents to perform themselves. The beauty industry, as it always does during times when people are looking for work, should see a robust increase in business. People will move from their higher priced hairdressers to some of the quality lower cost offerings during this time. When you can’t afford a vacation, spending a half hour having someone taking care of you is a good substitute.
The opportunities for new and innovative franchise offerings that play into the needs of the marketplace will be very strong in 2009 and 2010. Established franchisors that have not targeted those consumers in the past are already creating products and services for that marketplace, and are re-tooling their franchise organizations and offerings to support them. That is the way of the entrepreneurial economy. After all, entrepreneurs have always understood the opportunity presented by the Incumbent Inertia of the established players. Bringing to market products and services that consumers want to buy allows them to take advantage of the vulnerability of the established companies who are reluctant or unable to change their existing products, services, and they way they do business to meet the needs of the marketplace. This will be a good time for new franchisors, as many of the established brands will make for easy targets.
Toyota and Honda understood this when they developed smaller fuel-efficient vehicles, and it is the lesson that Detroit has failed to understand for the past forty years. It's no wonder that their leadership needed to fly into Washington on their private jets begging for Congress to bail them out - and why franchising will do just fine.