In England, franchising is strong but worrisome signs can’t be ignored
Philip F. Zeidman
Illustration by Jonathan Hankin
Dateline: London, June 2019.
Samuel Johnson wrote, “… when a man is tired of London, he is tired of life; for there is in London all that life can afford.”
It’s been a busy month here: Harry and Meghan produced their royal Archie. President Trump has come and gone, leaving behind him the indelible image of the orange “Trump Baby” balloon floating over London. Theresa May stepped down as prime minister. The controversial and bombastic Boris Johnson was successful in his bid to succeed her.
Prince Philip turned 98. And, yes, Brexit
Against that background, what’s been happening in franchising here? A series of meetings and associated inquiries provides some perspective on the franchise model, which first took hold in the 18th century in the “Tied Pub” system in which breweries offered financial support to pubs in exchange for exclusivity over the beer served.
First, the numbers.
- The growth has been steady, but consistent. There’s been an increase in the number of people employed in franchising, up 70 percent in the last 10 years (700,000 this year).
- The growth in franchisees comes disproportionately from young people (more than a quarter of new franchisees in the last two years were age 30 or under) and women (37 percent). And that’s a potent combination: 52 percent are females under 30.
- The biggest growth areas for franchising remain personal services, hotels and, of course, catering.
- Predictions are for care franchises to boom, since 18 percent of the population—80 percent of them homeowners—are over 65; and 2.4 percent are over 85.
- Profitability remained at about 90 percent even during the last recession, with 80 percent profitable within two years. Less than 1 percent of franchises per year close because of commercial failure.
- Thousands of U.S. firms have a presence in the United Kingdom, and it is the top location for U.S. regional headquarters covering EMEA, or Europe, the Middle East and Africa.
- For those U.S. companies seeking “balanced growth,” the U.K. is the top location (large market potential, GDP growth, purchasing power). And with low regulatory risk, second only to South Korea.
- Franchising contributes more than 17 billion pounds to the British economy in a year.
An interesting subset of the population to watch is retirees. About 25 percent of them return to work, and the over-50 cohort represents 43 percent of new enterprises, the largest group in age terms. By age 70, almost 60 percent of those still working are self-employed. (I wonder how Prince Philip is categorized.)
But only those with the blurriest of visions would see unlimited horizons. Perhaps understandably in light of different sizes of the markets, U.K. franchisors don’t approach the scale of those in the U.S. And while the number of franchisees and units has increased, the number of franchise systems has barely budged (some would argue that sort of consolidation is positive).
Observers have noted an increase in the marketing of get-rich-quick schemes, usually franchises at low costs; and they note the risk that direct sellers and multi-level marketers can promote their offerings as “franchises” to add an air of credibility. The proliferation of franchise exhibitions has led to some fatigue, and has also increased the use of social media as a vehicle of recruitment.
The U.K. has tenaciously resisted periodic proposals for franchise legislation, one of the diminishing number of major markets where that is the case. And the country is no longer a haven from the sort of franchise disputes that sometimes seem endemic in the U.S., the difference cannot be explained away simply by the number of lawyers. There remains a cultural factor in the contrast between these two environments. Some of that may be attributable to the British Franchise Association—which has been steadfast in its opposition to regulation—and its trumpeting of the benefits of self-regulation through its code.
In the final analysis, of course, the economic position of franchising cannot be viewed in isolation from that of the economy at large. And there are some worrisome signs on that front in the summer of 2019.
While the economy remains reasonably strong, there have been a number of poor figures in manufacturing, services and construction, and especially in retail, where High Street stores have been affected in the same way as brick-and-mortar retailers have been hit in the United States. Trade and other tensions with the U.S. (and the resignation of the U.K. ambassador to the U.S. following Trump’s exchanges of tweeted insults) have left a pall as thick as London’s fog. The pound (partly a cause and partly an effect) fell to its lowest level against the dollar in five years.
Much of this, of course, is due to the continuing uncertainty about Brexit. Some commentators have maintained that franchising, having shown that it is capable of surviving uncertain economic times, should be virtually invulnerable to the twists and turns of the Brexit saga. That seems, to this observer, to be a bit unrealistic.
While there may be no area in which franchising is uniquely at risk, many of the consequences of Brexit (uncertainty about supplies; problems with trademarks registered only in the European Union; the outflow of Eastern Europeans to the Continent, exacerbating labor shortages for restaurants) can pose especially severe issues for franchisors.
James Russell Lowell asked, “What is so rare as a day in June? Then, if ever, come perfect days.”
Maybe not perfect, but surely interesting.
And no, Dr. Johnson, I’m not tired of London, or of life.
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or firstname.lastname@example.org.