Written By: Sarah E. Needelman
The number of U.S. franchises declined for the third consecutive year, falling by a modest 0.6% in 2011, according to a new report commissioned by the International Franchise Association.
“There was a greater contraction in the number of businesses than we anticipated,” said Steve Caldeira, president of the IFA, the franchising industry’s largest trade group.
Mr. Caldeira said in an interview with the Wall Street Journal that a lack of access to credit “probably was a factor,” in the decline this year. “We may have underestimated the potential significant downward impact,” he added.
In January, the IFA, the franchising industry’s largest trade group, had forecast 2.5% growth this year for the sector. Employment at franchises rose just 1.9% in 2011 compared with IFA’s previous forecast of a 2.5% increase.
The IFA has used different research firms for its recent reports, it said. Its 2011 forecast, released in January, was prepared by PricewaterhouseCoopers, while its 2012 forecast, released Monday, was prepared by IHS Global Insight, a unit of IHS Inc.
IHS Global said that it expects U.S. franchise establishments to increase in 2012, by 1.9%. It also expects franchise businesses to boost hiring and sell more goods and services in the year ahead.
Lodging, business services, and personal services are expected to see the most growth in 2012, it said.
Quick-service restaurants are expected to continue to make up the bulk of franchise establishments in operation next year (21%). They are also likely to provide the greatest number of jobs (37%) of all franchise categories, and to generate the most revenue (26%).
IHS says its outlook is based on modest improvements made over the past year in small-business lending, as well as signs that the overall U.S. economy is on the mend, such as the lowering of the national unemployment rate.
The forecast also presumes that the payroll tax cut for employees will be extended.
Stephen Bronars, a senior economist with Welch Consulting in Washington, D.C., said in an interview that he believes the new IHS/IFA study may be “overly optimistic” because the health of franchising’s largest sector, quick-service restaurants, is directly tied to consumer discretionary spending. “It will depend on what happens to housing prices and consumer sentiment,” he said. “Are people going to go out to eat and take vacations? What’s going to happen to the price of gasoline?”
Franchises in some parts of the country are less likely to see a rebound than those located elsewhere, he added. “States like Nevada and California, where real estate values declined and the economic downturn had the biggest negative impact, will have to rebound a lot in the next year for this optimist forecast to come true,” he said. “People have lost money on their houses and aren’t as wealthy as they used to be.”
In a survey earlier this month of 149 IFA members, more than one quarter of franchisees said they expect a "moderate improvement in access to credit" over the next 12 months, compared with just 6.3% who said this in a November 2010 survey.
Among franchisers, 55% said they expect a “moderate improvement in access to credit” in the year ahead, up slightly from 53% who said the same in November 2010.