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Franchising decline in the offing

This won't be a good year for franchising.

That conclusion comes from none other than the International Franchise Association, which in its 2009 economic outlook predicted a decline in the number of establishments, jobs and economic output for the year.

"The report's macro view of the economy anticipates a continuation of the sharp downturn well into 2009, with a slow recovery," said Drew Lyon, partner at PricewaterhouseCoopers' National Economics & Statistics practice, which prepared the report for the IFA.

The Franchise Business Economic Outlook for 2009 forecasts that the number of franchise establishments will decline this year by 1.2 percent, to less than 855,000 - a loss of some 10,000 units. At the same time, franchises will shed 207,000 jobs, or 2.1 percent of the total franchising workforce. Overall economic output by franchise businesses will likely decline by 0.5 percent, a loss of $4.2 billion.

The report largely blames the credit crisis. Franchising depends on financing. The tightened credit markets have kept prospects from borrowing money needed to open restaurants and hotels, reducing franchisors' growth and cutting royalty dollars. The franchise information firm FRANdata predicts borrowing by franchises will fall roughly 27 percent in 2009.

Another factor in the decline: consumer spending, which has been curtailed significantly in recent months. "The U.S. economy is in the midst of the most severe recession since at least the early 1980s, with adverse impacts on a broad range of sectors of the economy, including franchise businesses," Lyon said in a press release.

The impact of the recession on franchising is unusual. Frequently, recessions can have a positive impact on the franchising sector because rising unemployment often yields higher franchise sales. Franchising generated 1.2 million jobs and 140,000 new businesses in the five years after the last recession started with the September 11 terrorist attacks.

But this recession started because of a credit crunch, and franchising requires the free flow of credit to succeed - someone who is newly unemployed can't buy a franchise if they can't get a loan to get started.

IFA officials note that the situation is temporary, and they expect growth to restart when the economy begins its recovery. Matthew Shay, IFA's chief executive officer, said franchise business leaders in the report expressed cautious optimism in their own businesses and prospects.

Only a quarter of the survey's respondents believe the economy will do better in 2009 than in 2008, but nearly half believe their own businesses will do better this year, according to the report. The business leaders said they are tightening budgets, cutting overhead and implementing other strategies. More than 85 percent said they expect unit growth this year, and 40 percent of respondents said growth would be more than 6 percent.

And despite the negative outlook, some sectors are expected to perform better than others. Restaurants are nevertheless expected to increase the number of units - by 1.5 percent for quick-service restaurants and 1.3 percent for full-service brands.

In contrast, lodging is expected to see a 3.2-percent reduction in economic output. Business services are expected to decline 2.8 percent, and real estate 2.1 percent.

Ruby Tuesday to restructure in 2009

Tennessee-based Ruby Tuesday will close approximately 70 locations beginning in the second quarter of 2009. In a press release, the company cited "a challenging environment for the restaurant industry," and declines in fair value and sales at company-owned restaurants and among the reasons behind the decision.

Despite adding 41 units to its franchise system in 2007, same-store sales at company-owned Ruby Tuesdays generated $1.9 million in revenue - down 9.8 percent from $2.1 million the previous year. Franchised stores also took a financial hit in 2008 - the company's franchise revenue dropped 9.5 percent, to $13.6 million. The company cited temporarily reduced royalty rates (for certain franchises) and the addition of a 53rd week in fiscal 2006 as partial cause for this decline.

Re-imaged as a higher-end, fast-casual restaurant last year, Ruby Tuesday blamed rising fuel costs for its decline. Fuel costs - along with stiffer competition from fast casual chains and the unstable state of the current economy - have hit casual dining chains hard, and driven customers to trade-down to lower-cost options.

Aside from lowering its operating costs, Ruby Tuesday hopes to solve its financial woes by increasing same-store growth by 2 to 3 percent, and sales by $2.4 million. It will also work to reintroduce its brand as it did the year before.

Brinker finally sells Macaroni Grill

Here's how much the credit crisis has cost Brinker International: $43 million.

When the Dallas-based owner of Chili's and On the Border agreed to sell its Macaroni Grill chain to MacAcquisition LLC in August, the price agreed was $131.5 million.

When Brinker announced that the deal was complete in December, that price had fallen to $88 million.

The reduced price, however, didn't keep investors from cheering the news because many worried the deal wouldn't get done at all because of the deteriorating credit markets. Brinker had placed Macaroni Grill on the block for months prior to the announcement of the sale.

MacAcquisition, an affiliate of Golden Gate Capital, bought an 80-percent stake in the 220-unit casual dining chain. Brinker plans to use cash from the sale to pay down its debt.

Kidville buys JW Tumbles

New York-based children's play franchise, Kidville, has bought the assets of JW Tumbles, creating an entity with 43 locations in the U.S. and internationally.

The deal will lead to a change in Kidville's franchising strategy, which for years has focused on a "hub-and-spoke" model. Franchisees would buy a single 12,500-square-foot location, then surround it with three smaller "annex" locations one-tenth that size. JW Tumbles locations are similar to the Kidville Annex locations.

The company has had numerous requests to open the smaller versions. With the addition of JW Tumbles, franchisees will be able to buy those smaller units.

Ash Robinson, CEO of JW, will become the head of Kidville's franchise division. Kidville Chairman and CEO Andy Stenzler will remain in his position. Kidville, which last year merged with a publicly traded company, reported a $1.8 million operating loss in the third quarter of 2008, according to its most recent financial filing.

Both companies start with extremely young kids - Kidville caters to children from the time they're newborn to age 5. JW Tumbles' customers range in age from 4 months to 9 years.

Monson named as Fastsigns CEO

Texas-based franchisor Fastsigns International Inc. named Catherine Monson its new chief executive officer. Munson replaces Gary Salomon, who now serves as the company's chairman.

Salomon said it was important for his successor to understand Fastsigns' mission of service, and expressed his confidence in Monson's abilities to move the organization forward.

Monson comes to Fastsigns after 28 years with Franchise Services Inc., the franchisor of such brands as Sir Speedy and PIP Printing, the latter of which she most recently served as president. Monson also serves on the board of the International Franchise Association, and is a member of Pi Sigma Epsilon, a national collegiate sales and marketing fraternity.

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