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Economic Forecast

Modest growth to mark year in franchising, new report predicts


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Yes, Congress avoided the fiscal cliff as the year turned. But uncertainty will keep franchising growing by 1.4 percent, slightly down from last year’s rate. Commercial and residential services will grow the fastest.

Despite the last-minute avoidance of the fiscal cliff and recoveries in the housing and automobile sectors, franchising will grow more slowly in 2013 than it did last year.  

The Franchise Business Economic Outlook for 2013, prepared for the International Franchise Association by economists with IHS Global Insight, in Englewood, Colorado, predicted  franchising will grow by 1.4 percent this year, or 10,277 new franchised units, compared to its 1.5 percent growth in 2012, with 10,714 new establishments. While some franchise sectors will grow at a faster clip than last year, other sectors will hardly grow at all. 

More work on kitchens, lawns

Franchising’s future mirrors the general economy.  An uptick in housing starts and sales of existing homes in 2013 means more work for franchises that provide everything from kitchen updates to lawn care. The Outlook reports the commercial and residential services sector will grow the fastest this year, adding almost 2,000 new units and 10,000 new workers. 

The much-battered real estate sector will also benefit from the housing rebound, adding 1,380 new offices and almost 6,000 more employees in 2013. Americans are buying more new cars, but that spells trouble for franchises that sell automobile parts and accessories, which will grow by less than 1 percent, or about 200 units. 

 Unemployment is falling, but “income growth in 2013 will not be strong enough to allow consumers to buy everything they want,” the Outlook states. And what consumers want most, it says, is to replace their old cars and household appliances with newer models, leaving less money to spend on other retail products.  Franchised stores that sell clothing, flowers, health and personal-care products and books will grow by only 0.4 percent this year, adding 388 new units. Retail food franchises will grow by 0.8 percent, or 486 units, and personal services franchises, including health care, tutoring, and recreation should have only “modest gains in employment and income” in 2013, the report said. 

Economic trends also affect franchising’s largest sectors, quick- and full-service restaurants. James Gillula, managing director of consulting for IHS, said during a phone interview in mid-January that Congress’s failure to extend the 2 percent cut in payroll taxes “will have a pretty broad impact on consumer spending.” Having even less disposable income means that low-income consumers will be able to eat out less, but it also means fewer customers will be able to move up from QSRs to full-service restaurants. 

The Outlook predicts that QSRs will grow by 1.7 percent, adding almost 2,600 units and over 66,000 more workers; franchised full service restaurants will increase by 361 units. But the drought that dried up crops across the South and Midwest in 2012 will mean higher food costs, putting pressure on restaurant franchisees who had hoped to expand even more this year.  

While many restaurants held their own during the recession, lodging “took it on the chin,” said Steve Joyce, president and CEO of Choice Hotels International, during a press conference on the 2013 Outlook. The franchised hotel industry curtailed growth and actually lost units between 2009 and 2011, before bouncing back into positive territory last year, Joyce said. “We expect business and consumer travel to be favorable in 2013,” he added. According to the Outlook, franchisees will open 383 new hotels or motels this year, and increase their labor pool by more than 6,000 workers. 

Business-services franchises will continue to expand, the report said, although uncertainty about corporate taxes and implementation of the Affordable Care Act will cause corporate America to “keep a lid on expenses,” at least during the first part of 2013. That means demand for services from tax preparation, employment, heavy equipment leasing and commercial cleaning franchises may not be as great in 2013. The Outlook expects that sector to grow by 1.9 percent, or 1,745 units, down from a 2 percent increase last year.

During the press conference, IFA President and CEO Steve Caldeira noted that franchising will provide a total of 162,500 new jobs this year, an increase of 2 percent over 2012. “Our industry outpaces the growth of other business sectors,  which are expected to increase employment by 1.8 percent,” Caldeira said, “but we could be growing even faster and creating more jobs if Washington could remove some of the economic uncertainty.”

“Uncertainty over tax policy and the new health care rules is hitting small business from every angle,” said Aziz Hashim, a member of the IFA board and the franchisee of 62 quick-service restaurants. “We will expand much more slowly in 2013 than we would in a less risky environment.”

Although borrowing expansion capital is getting easier, lending institutions also are risk averse and reluctant to loan money to new franchisees.

 “If Washington can reach reasonable long-term resolutions on taxation and federal spending issues, we could see a real recovery in business confidence,” said Gillula. Then, he said, franchise growth could really accelerate in 2014. 

 

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