IFA Says 2% Franchise Growth for 2010

IFA sees light for franchises at the end of a not-so-bad tunnel

WASHINGTON - The International Franchise Association last month announced that franchisors and their networks of franchise owner-operators will see marginal growth in jobs, economic output and number of establishments in 2010. 

The IFA commissioned PricewaterhouseCoopers to project what 2010 looks like for the franchise industry. The firm forecasts that the number of business-format franchise establishments will rise slightly from the drop in 2009 levels by 2 percent in 2010, from 883,292 to 901,093—a net gain of 18,000 establishments. The number of franchise establishments in 2009 was estimated to have stayed relatively flat compared to 2008 levels, declining an imperceptible 0.1 percent. 

The IFA says that lodging franchises were the only major sector to have a significant decrease in 2009, with a slippage of 0.8%.

But there are a number of franchise sector experts not commissioned by the lobbying group who have a different take.

Robert Mandelbaum, director at PKF Hospitality Research in Atlanta, says that his research firm does not track the number of franchised hotel establishments. But he states, "PKF Hospitality Research is forecasting a 3.1 percent increase in the net number of hotel rooms in 2009. Given the disparity of these two numbers [i.e. the IFA's forecast of a 0.8% decrease in hotel franchises versus a 3.1% increase of hotel rooms estimated by PKF], one must assume that a number of hotels are either losing their franchise affiliations, or opting to go independent."

Dr. Francine Lafontaine, professor of business economics and public policy at the University of Michigan's Ross School of Business, observes, "We cannot tell from these whether it is true that 'the number of franchise establishments has no significant dip in 2009.'" LaFontaine stresses that the 2010 projections are based on five-year-old figures. She declares, "All the figures quoted in the [IFA's] press release, i.e. anything that is beyond 2005, is a forecast, or best guess." 

A report estimates that in 2009 franchise establishments reduced their employees by 4.1 percent, resulting in a loss of 409,000 jobs as declining consumer spending caused owners to reduce costs. Output of franchise businesses was estimated to decline by 0.7 percent in 2009, for a loss of $5.7 billion.

Auto franchises have been particularly hard hit in 2009, having reduced product, cut jobs, and offered historic discounts in order to cope.

According to Autodata Corp. on Tuesday, U.S. auto sales are expected to finish 2009 at 10.4 million vehicles, the lowest level of car sales since 1992 when sales were 10.3 million. Consulting firm Urban Science told trade journal TireBusiness.com that 1,467 auto dealerships were closed through October, with another 200 estimated to shut down by year's end. That is a 7.3 percent decline in auto dealers, the worst decline since a dealership count by Automotive News in 1957. 

But the IFA has removed automotive dealers, gasoline service stations and beverage bottler franchises from their franchise statistics saying that these were "supplier-dealer" relationships in which "the franchisor licenses its trademark to franchisees but typically does not provide them with a 'system' for operating their business." 

Robert Purvin, founder of the American Association of Franchisees and Dealers, thinks the IFA's list of what is a franchise may be more to suit its own agenda rather than accurately reflect reality. 

Purvin says that over the past forty years, both product-distribution and business-format franchises have come to be blurred together. "Auto dealerships both new and used (e.g. CarMax) have clearly evolved to present a business format associated with a brand, as have gas stations over the years," he states. "Going the other way, examples like Baskin-Robbins, Jenny Craig and Ben & Jerry's have been distribution points for manufacturers of products, but have evolved to a place where they are now more closely regarded as business format franchises." 

The IFA does not have auto dealers as members. Rather, they are typically members of the National Automobile Dealership Association. Founded in 1917, NADA states on its website that it "represents more than 19,700 new car and truck dealers, both domestic and international, with more than 43,000 separate franchises." A powerful lobbyist, the independent franchisee association helped sponsor the Dealers Rights Amendment of a $1.1 trillion Spending Bill that initiates an arbitration process between franchisor and franchisee to resolve ongoing concerns about recent dealership closures. The bill passed both the U.S. House and the Senate last month.

2010 GDP to Increase 3.8 Percent

"The U.S. economy is expected to experience slow growth in 2010 as the nation begins to recover from the recession. The Franchise Business Economic Outlook for 2010's macro view of the economy anticipates nominal gross domestic product (GDP) to grow 3.8 percent, while economy wide employment is projected to increase 0.4 percent in 2010," said Drew Lyon, principal in PricewaterhouseCooper's National Economics & Statistics practice. "Our forecast is for output of all franchise business sectors to expand modestly in 2010 as the recovery takes hold."

The growth of 0.4 percent in jobs cited is a gain of 36,000 jobs after losing over 400,000 jobs in 2009.

Overall economic output, the gross value of goods and services produced by franchise businesses, is forecast to increase 2.8 percent in 2010 to $868.3 billion—an increase of $23.6 billion. 

"We are pleased that the 2010 outlook for franchise businesses is projected to be more positive than 2009, but access to credit remains a major hurdle to increase jobs and economic output at the levels we have seen during past recoveries," said IFA President & CEO Matthew Shay. "An expected $3.4 billion shortfall in lending to franchise businesses in 2010 will result in 134,000 jobs not created and $13.9 billion in economic output lost. We urge Congress to quickly pass bills currently on the table that would close this lending shortfall and allow franchise businesses to operate at their full economic potential."

General Motors has announced that it plans to cut 1,300 dealerships by October of 2010.

The IFA says that the top three fastest growing sectors in regard to economic output will be personal services (4.4 percent), quick service restaurants (3.2 percent) and business services (2.6 percent) in 2010.

But when it comes to 3.2% growth in 2010 for quick service restaurants, Darren Tristano, executive Vice President of Technomic Information Services, a consulting and research firm famous for tracking restaurant trends, disagrees. His firm's forecasts show lower growth numbers. "I wouldn't expect it to grow that much since it hasn't in many years," he declares.

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