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Franchisors Weather Recession Better

rbfranchise50_Q3_2008
Ronsenberg Center Franchise 50 Index vs S&P 500. Chart/UNH

DURHAM, NH (Blue MauMau) - An index of some 50 firms that sell and operate franchises is weathering the financial storm better than the average publicly traded firm in the S&P 500. Amid the very beginning of the credit crisis that hit the world at the end of the third quarter of 2008, franchising firms seem to represent an investment flight to safety, having dropped only 0.4% in share price compared to the 9% dip of the S&P.

Longer-term, the market gains of these franchising firms look even more impressive. The Rosenberg Center Franchise 50 Index (see blue line in the chart), a portfolio of public firms that engage in business format franchising, has dropped only 12% compared to the S&P 500 (red line), which has gone south by some 21% year to date. Since the index was launched in 2000, it has grown some 59 percent in share value compared to an actual drop of 16.5 percent for the S&P 500.

Why? What is being put into the franchising juice of the index's select companies that makes the value of such franchising firms on the whole tone up while other non-franchising firms sag?

Paul Steinberg, a New York franchise attorney and an ex-Wall Street stock broker, monitors the index. He observes, "Of course public franchisors weathered tough economic times better. A franchisor has a buffer that it can use to squeeze profit margins. Franchise owners and suppliers can help absorb increases in costs for a franchisor. Franchisees, on the other hand, have a different scenario."

The best performing franchisor in the last quarter was Buffalo Wild Wings (BWLD), a franchisor of quick casual dining restaurants. While same-store sales grew 8.3% at its company-owned restaurants and 4.5 percent at franchised ones, net earnings for the franchising firm grew 46 percent. Buffalo Wild Wings continued to expand, adding 24 company-owned restaurants and 45 franchised from the beginning of the year until the end of September.

The franchising company that saw the biggest drop in its third quarter value was Dollar Thrifty Automotive Group (DTG), which dropped 79.6 percent.

Hachemi Aliouche, who oversees the index for the Rosenberg International Center of Franchising at the University of New Hampshire, observes, "Skyrocketing fuel costs and industry-wide decline in demand have hurt all car rental companies. However, Dollar Thrifty Automotive Group was hurt more because most of its vehicles are made by Chrysler, which have resale values lower than cars made by other car manufacturers."

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.