IFA Study Shows Franchising Strong

WASHINGTON, D.C. (Blue MauMau) – A survey for the International Franchise Association concludes that franchises have outpaced the economy from 2001 to 2005 as a whole in terms of the rate of growth of jobs, payroll and output. PricewaterhouseCoopers LLC undertook the major survey (pdf, 180 pgs) on behalf of the IFA for the second time in a row, following the first for 2001. Their report, released two weeks ago, compares the 2001 survey to the latest data of 2005, breaking down the economic impact by state and congressional district (pdf, 400+ pgs).

John R. Reynolds, president of the IFA Educational Foundation, thinks such economic information by congressional district is essential to the organization. He declares, "It is very important for policy makers, the media and the financial community to understand the positive impacts that franchising has on the economy. More franchise businesses mean more jobs. More jobs mean stronger, healthier communities. We need public policies that encourage and support the growth of more franchise businesses."

In past years the U.S. census did not take account of whether an enterprise was a franchise or not. The IFA paid considerable sums to come up with the information. Such studies have probably helped convince the government of the importance of gathering information on franchises.

Ms. Francine Lafontaine, professor of business cconomics and public policy at the University of Michigan's Ross School of Business, thinks highly of such efforts by the IFA. "Kudos to the IFA to put its money where its mouth is. This study did not come cheap," she declares.

Research Findings '01-'05

• 3.3% of all businesses in the United States were franchise enterprises
• 909,253 U.S. franchise units in 2005, which included franchised units, franchisor corporate units, gas stations and dealerships
• 140,000 new U.S. franchise establishments

The IFA in a press release proclaims how much of the economy is pushed by franchising. "The rate of growth in employment was three times higher for franchise businesses than for the economy as a whole," it proclaims. And the number of franchised establishments and the part they play in the economy is large. According to the study, franchised businesses operated 909,253 establishments in the United States in 2005, counting both establishments owned by franchisees and those owned by franchisors. That amounts to 3.3 percent of all business establishments in the United States.

Such claims have the franchise industry puffing with pride.

Number Problems

Although there is no doubt that franchising is doing well, some academicians and business leaders are taking a second look at the lofty claims. The Department of Commerce's Bureau of Economic Analysis shows jobs and payroll growing at similar growth rates that the IFA study shows for franchising. (see charts, franchise information provided by the PricewaterhouseCoopers study for the International Franchise Association and economic data by the U.S. Bureau of Economic Analysis).

Professor Lafontaine observes, "Franchises are not growing more than the rest of the economy, and especially not as fabulously as the press releases would like us to believe. But it is still a healthy growth. Franchises are an important way to organize businesses in the retail and services sector. The growth in franchises shows that people are finding ways of making the format work well for franchisees and franchisors."

Franchises are an organizational form and that is why it is difficult to say that franchising or for that matter licensing specifically contributes so much to the economy.

The professor continues, "It gets me nervous when it is said that there is this much business because of franchises. In other words, there would still be restaurants out there if there was not franchising. It is not that franchising is creating all of this [economic activity]."

Suspiciously High Output Figures

Matthew Shay, president of the International Franchise Association, declares, "As a result of these spillover effects, the total impact of franchising was to provide 21 million jobs and $660.9 billion of payroll in 2005. Output produced because of franchised businesses grew to more than $2.3 trillion in 2005."

It is those large and quickly growing output numbers that look out of kilter to the direct numbers that are growing at about the same rate as the rest of the economy (see job and payroll charts). Those projections of what happens to the overall economy because of franchised businesses appear out of the norm compared to other measurements (see Growth Mismatch chart).

Professor Lafontaine observes, "The growth in output seems large relative to all the others. It would be surprising if franchised businesses were able to grow output that much above nominal GDP given the growth in all other measures is much more comparable."

But PricewaterhouseCoopers disagrees that this is so unusual. Drew Lyon, a principal at the accountancy firm and a PhD in economics from Princeton University, replies, "The reason why output in franchising is growing at 9 percent while the U.S. output grows at less than 6 percent is really a function of the specific sectors of the economy that franchising is located. During this period franchisors were located in the faster sectors of the economy."

No matter how watchers of the franchise industry quibble whether franchises are dramatically outpacing the economy or just keeping up with it, one should not miss that this huge sector at the very minimum is roughly keeping pace with the economy.

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Related reading:

• Census Bureau Starts Surveying Franchises