IFA: Franchise Growth Expected In 2012

Franchise businesses show signs of recovery in 2012 after three years of stagnant growth during the recession, the International Franchise Association Educational Foundation forecasted Monday.

The IFA report, compiled by the IHS Global Insight consultancy, forecasts franchised quick-service restaurant sales to increase 4.4 percent and franchised full-service restaurant sales to increase 4.2 percent in 2012. Both categories fall slightly under the average 5-percent growth rate for all 10 industry segments in the IFA's overall economic outlook for franchised businesses.

Stephen J. Caldeira, IFA president and chief executive, said the franchise industry faces headwinds from not only a recovering economy but uncertainty over corporate tax rates, requirements of health-care reform and a continued tight credit market. However, franchisors are seeing increased interest from entrepreneurs who have lost their jobs in other industries.

"Given a lot of the shakeout in terms of reorganization, and people who have lost their jobs over the last three years, what we have found is an increased interest in the franchise industry because it's a proven structure and very scalable model where you're in business for yourself but not by yourself." Caldiera said in a conference call with reporters Monday.

The IFA report forecasted that the number of franchise establishments will increase by 1.9 percent in 2012, from an estimated 735,571 units to 749,499. Franchised quick-service restaurants are expected to increase 2.6 percent, to 151,347 units, and franchised full-service restaurants are forecast to rise 2.1 percent, to 36,095 units.

Employment in franchised business is expected to rise 2.1 percent in 2012, after rising 1.9 percent in 2011, the report said. Jobs in franchised quick-service restaurants are expected to increase 2 percent and in franchised full-service restaurants to rise 1.8 percent.

James Gillula, managing director of consulting services for IHS Global Insight, said some of the growth "is just rebound from several years of net declines in overall business formation. It's fundamentally a cyclical thing."

During the past three years, Gillula said, "the quick-service restaurant sector survived somewhat better over the course of the recession, at least the growth rates decelerated a lot slower. They both hit negative territory by the end of 2009. They've come back about the same, currently running about 5 percent year-over-year sales growth in quick-service and the full-service restaurants."

He added that full-service restaurants have "started to do a little bit better in the last quarter or two in terms of year-over-year growth."

The report further said, "With employment and income improving slowly through 2012, we would expect quick-service restaurants to more than hold their own when compared to the rest of the market. In general, consumers are continuing to migrate toward lower prices, a trend that will not reverse until the economy returns to firmer footing."

Quick-service restaurants make up the largest of the 10 industry franchise categories in the IFA's forecast, with 20 percent of the franchise establishment and about 37 percent of the employment.

"The forecast for modest growth is good news for the franchise industry and the overall economy, given franchising supports 12 percent of the U.S. private sector workforce," Caldeira said in a statement accompanying the report.

The report estimated real U.S. Gross Domestic Product to increase 1.8 percent in 2012, consumer spending to grow at 2.2 percent and the housing market's recovering to continue to be sluggish.

"Clearly franchising remains a bright light in what we believe to still be a challenging economic and public policy climate by outpacing the projected growth of the overall U.S. economy [at] 4.8 percent to nearly 5 percent," Caldeira said.

Contact Ron Ruggless at ronald.ruggless@penton.com.
Follow him on Twitter: @RonRuggless