Franchise Businesses Poised for Stronger Growth in 2011

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Jan 12, 2011, 12:38 ET

Franchise Business Leaders Cite Credit Access as Continuing Challenge

WASHINGTON, Jan. 12, 2011 /PRNewswire-USNewswire/ -- Franchise businesses are poised for stronger growth in 2011, according to a report prepared for the International Franchise Association Educational Foundation by PwC*. As the economy recovers from the "Great Recession," the 2011 Franchise Business Economic Outlook forecasts a rebound in the number of establishments, jobs and economic output in the franchise industry.

The 2011 Outlook estimates that the number of franchise establishments will grow 2.5 percent in 2011 from an estimated 765,723 to 784,802—an increase of 19,079 new establishments. The number of direct jobs is projected to grow 2.5 percent from an estimated 7,614,000 to 7,808,000, creating 194,000 new jobs. Economic output—the gross value of goods and services a business produces—is projected to grow 4.7 percent or $33.3 billion from an estimated $706.6 billion to $739.9 billion.

"The forecast of stronger growth in 2011 for franchise businesses is good news for our country. When franchise businesses are stronger, so is our economy as a whole," said IFA President and CEO Stephen J. Caldeira. "However, while the forecast reflects a stronger outlook for the franchise industry and the overall economy, franchise businesses will continue to struggle with accessing sufficient credit that would enable business expansion and job growth."

The 2011 Outlook reflects a new base year (2007), the latest year for which comprehensive estimates of franchise business activity are available. The baseline data was drawn from the first ever U.S. Census Bureau's 2007 Economic Census Franchise Report, which contains information on franchise and non-franchise establishments, sales, employment and payroll in selected industries for businesses with paid employees. For the 2011 Outlook, PwC supplemented these data with estimates of franchise activities in additional industries and in businesses without paid employees (primarily self-employed individuals operating small, unincorporated businesses). Estimates of franchising activity in the 2011 report supersede previous editions.

"The U.S. economy is expected to experience stronger growth in 2011. The Franchise Business Economic Outlook for 2011 anticipates economy-wide real gross domestic product (GDP) growth of 3.0 percent, while economy-wide employment is projected to expand by 2.4 million jobs in 2011," said Drew Lyon, principal in PwC's National Economics & Statistics practice. "With improving economic factors predicted for 2011, including increasing consumer spending, we expect that franchise businesses will expand at their fastest rate since 2007."

Different Effects on Franchise Business Sectors: The accelerating economic recovery expected in 2011 is projected to have different effects on growth in the number of establishments, employment and output within the 10 business format franchise business lines reviewed in the Outlook.

Establishments: With the exception of Business Services, the number of establishments in each business format franchise line is estimated to increase in 2011. The largest gains are expected in Lodging (4.4 percent), Automotive (3.9 percent) and Retail Products and Services (3.9 percent).

Employment: All franchise business lines except for Business Services are projected to experience employment growth in 2011, ranging from 1.1 percent to 4.4 percent, with the largest increases occurring in Lodging (4.4 percent), Automotive (3.9 percent) and Retail Products and Services (3.9 percent). The Business Services line is projected to experience a modest decline in employment of 0.2 percent in 2011.

Output: Output is forecast to increase in all 10 franchise lines of business in 2011. The three franchise business lines projected to see the largest percentage increases are Automotive (7.2 percent), Commercial and Residential Services (6.9 percent), and Personal Services (6.5 percent).

Franchise Business Leaders Optimistic for 2011, Access to Credit Remains Top Concern

The report's overall forecast aligns with the results of a new IFA Franchise Business Leader Survey, conducted in November 2010. Franchise business leaders are optimistic about how the U.S. economy will perform in the next 12 months. According to the survey, one-half of franchisors say the outlook for the U.S. economy will be "better" in 2011, but 47 percent say it will be "about the same," and only 3 percent say it will be "worse." More than 40 percent of franchisees surveyed say the U.S. economy will be "better" in 2011, one-half say the economy will be "about the same," and 7 percent say the economy will be "worse."

Both franchisors and franchisees say the tight credit market has severely limited their ability to expand their business. Nearly one-third of franchisors report that more than one-half of their franchise prospects and current franchisees were unable to get financing in the past 12 months. Only 8 percent say that their prospects and franchisees have had "no problems with financing." Two-thirds of franchisors report that they have seen "no improvement in credit access in recent months." Forty-two percent of franchisors report that lack of credit has "significantly impacted their ability to expand," 45 percent say it has "moderately impacted their ability to expand" and only 12 percent say it has had "no impact." Fifty-five percent of franchisees report that the lack of credit has had a "significant" or "moderate" impact on their ability to expand their business.

"We believe that lending to franchise businesses in 2010 was down 40 to 50 percent," said Caldeira. "For 2011, the credit gap between supply and demand should show some improvement, but we are a long way off from the pre-recession, more robust appetite for business investment and lending."

Caldeira said that an updated small business lending analysis of the lending environment for franchise businesses will be released in spring 2011 in conjunction with an IFA sponsored Franchise Business Lending Summit. The Summit will bring together franchise business leaders, lenders and government officials to identify solutions to improve capital flow to small businesses and to stimulate business growth and job creation. A copy of the 2011 Outlook and the Franchise Business Leader Survey can be viewed here.

In addition, Caldeira said that while the recently enacted tax and unemployment benefit package including extension of the current tax rates for two years contributed to the stronger outlook for 2011, IFA urges the new Congress to implement a pro-growth agenda to help small businesses grow.

"It is widely acknowledged that small businesses, including locally owned franchise businesses, contribute greatly to job creation in the U.S.," said Caldeira. "To keep the recovery going, we urge the new Congress and the Obama Administration to adopt policies that help, not hamper businesses' ability to grow and expand, including making the current tax rates permanent and addressing provisions in the new health care law that are onerous, costly and potentially devastating to the franchising community."

About the International Franchise Association

The International Franchise Association is the world's oldest and largest organization representing franchising worldwide. Celebrating 50 years of excellence, education and advocacy, IFA protects, enhances and promotes franchising through government relations, public relations and educational programs. Through its awareness campaign highlighting the theme, Franchising: Building Local Businesses, One Opportunity at a Time, IFA promotes the 21 million jobs and $2.3 trillion of economic activity generated by franchising. IFA members include franchise companies in over 90 different business format categories, individual franchisees and companies that support the industry in marketing, law and business development.

*PwC refers to PricewaterhouseCoopers LLP

SOURCE International Franchise Association