2020 Outlook for Franchising
What will the new year bring for franchising? Find out in our annual Board Perspectives Q&A, where we asked IFA’s Board of Directors what their predictions are.
1. What is your outlook for your business and the franchising community as we start the new year?
2. What are the top issues facing your franchise system for 2020, and what advice would you give on how to counteract them?
David Barr
IFA Chair, Managing Director, Franworth
1. My view on the economic trends remains bullish, although I am also anxious as to when does the music stop. With that viewpoint as background, the partner companies of Franworth continue to excel and perform very well — both in sales to consumers, as well as in franchise development sales. We have decided to continue to aggressively invest in growing the businesses. We are very excited about the current and future growth of Franworth’s partner companies.
2.The top two issues facing Franworth partner companies result from the current positive economic environment — labor and real estate. Many franchise businesses rely on service industry labor, such as beauticians for lash extensions or trainers for fitness. Recruiting and retaining talent is a challenge in many cities. In addition, small box retail spaces can be difficult to find as the retailers that are growing are all looking for similar size spaces. Fortunately, at Franworth we have specific processes and partners to assist new franchisees with obtaining talent as well as real estate sites.
Catherine Monson, CFE
CEO, FASTSIGNS International
IFA Second Vice Chair
1. Franchising continues to be a strong business model, bringing the power of brands and a proven operating system to the individual investor/franchisee. With franchising, you get the best of local ownership combined with a strong brand, training, proven processes and buying power. A threat facing franchising is the prices of the raw materials that go into manufacturing signage and visual graphics have been increasing. Our franchisees need to continue to increase their prices to protect their margins. We have been providing additional training for our franchisees on how to do this and how to explain these price increases to their customers.
2. Labor shortage. Our business is a low staffing model — the typical franchisee has four to seven employees. When our franchisees are down one employee, it has a significant impact on their ability to sell, produce and install signage and visual graphics. The threats to franchising in 2020 come from government, whether it is California’s AB-5, The PRO Act and other legislation, franchising will be in jeopardy. Legislators need to hear from franchisees on how the franchise business model has helped them build a successful, locally-owned business, creating jobs and economic output and how they make all employment and labor decisions for their business. How do franchisees know to get involved? Well, it takes informed and motivated franchisor leaders to educate and motivate their franchisees to get involved.
Charlie Chase
President and CEO, First Service Brands
1. The ten-year economic recovery will continue (in some form) and we will continue increasing our market share in the markets we serve. The franchise business model continues to be the most democratic wealth distribution strategy that exists today — one that we heavily rely on for brand expansion.
2. After ten years of recovery, franchisees have started to forget how bad the 2009 recession was. Although it is still memorable, the old bad habits have come back creeping in sapping profitability. The post-recession discipline that drove our success from 2010 through 2019 needs to be complimented in 2020 and beyond.
Tom Baber
Multi-Unit Franchise Owner, IHOP and Money Mailer
1. The election process is the wildcard. Consumer sentiment may be impacted by the political rhetoric that goes along with it. Legislation at both the state and local levels are likely the biggest headwinds facing franchising, but they likely will not impact 2020 significantly. Of course, potentially damaging legislation should be our priority as an industry and receive both our attention and resources. Barring unforeseen barriers, I expect 2020 to be strong with low inflation, high employment and access to capital with low interest rates. The employment market will continue to make it challenging to find the necessary talent, but that also means consumers have more to spend. I much prefer this environment to the alternatives.
2. Employees and legislation. We continually learn how to be a better employer and a great place to work. We also try to find ways to provide benefits that might not be available in other places. For example, all our employees and their families have access to telemedicine that we provide at no cost. It does not replace health care, but it is a little extra convenience and peace of mind for our employees that we use as a differentiator. I continue to be as active as possible to both understand the risks, and be part of the solutions whenever I am able. Whether through the IFA Legislative Action Group (LAG), the IFA Board, the Franchisee Forum, meetings with Congress members or simply sending texts and emails, it is imperative to reach out on behalf of the franchise industry. Bad legislation poses a greater risk to our model than any other risk I am able to imagine.
Aaron Chaitovsky, CPA, CFE
Partner, Citrin Cooperman
1. We have been assisting our clients, as well as many others in the franchise community, with the new revenue recognition accounting standards and their impact on the industry and strategies with regard to compliance with the new tax act. It has been intense, as we continue to help prepare companies for their new financial reporting presentation and the potential impact for the financial statement users. Planning is key. For 2020, we anticipate some of the same nuances, with many franchise concepts still getting their arms around the impact of the accounting and tax changes and are looking for franchise consultants that get it and can explain it. The industry is experiencing transformation from the old “mom and pop” franchisors. Many concepts will need to get back to basics, and in many cases, revitalize operations and work on the customer experience aspect of their franchise with the focus once again on ensuring that their franchisees are profitable.
2. We are auditors, advisors, consultants and accountants to the franchise industry and, as such, are observers of the issues that our clients and prospects are currently dealing with. Whether it is continuing labor and health costs, especially in the hospitality arena, or the prospect of franchisees without the available working capital competing against larger non-franchised corporate-owned locations, a franchisor today must complete a self-assessment. These are still real ongoing issues and the IFA is working diligently to clarify the understanding of the franchise model to those outside of the franchise community.
Ronald Feldman, CFE
Chief Development Officer, ApplePie Capital
1. The overall outlook for the debt markets is uncertain right now — everyone seems to be anticipating a downturn and lenders are tightening credit policy for both franchise and non-franchise businesses. Thus far, lenders have not reacted one way or the other to the political and regulatory pressures that franchising is facing, adding to the uncertainty. The fact is that franchising has been very resilient in prior recessions (even in 2008's Great Recession) and generally comes back faster than the rest of the market. My company is 100 percent franchise focused, and we remain bullish on brands with solid economic models until something proves us wrong.
Lane Fisher, CFE
Partner, Fisher Zucker
1. The changes to the income recognition rules for 2019 audits that require franchisors to amortize the initial franchise fee over the term of the franchise agreement, as well as the development fee over the term of the development agreement, will have a profound impact on franchise development and growth in 2020. The rules require a restatement of the last three years of business activity. If you are an emerging franchisor who uses brokers to accelerate development, who grew quickly over the past three years, then you will be the most capital challenged. We predict problems in the registration states, as examiners coordinate how to handle financial statements which have eroded because of the restatement. We believe that many brands cannot maintain a registration without financial assurances and that many brands will simply avoid the more active registration states.
2. Franchise growth will continue to be constrained by regulatory hurdles on franchisees, such as AB-5 and growing exposure on joint-employment claims, as well as continued minimum-wage hikes. We predict that franchisors employing a “janitorial” style model will avoid California and other states entirely. Franchisors will continue to develop and embrace technology which reduces and economizes on the labor component of the business model. These challenges will force brands to demonstrate that the franchise “box” isn’t broken by demonstrating strong Unit Level economics and brand equity with customers. Understanding what drives consumer sales and profitability, and translating such performance into Item 19 will be essential.
Dustin Hansen, CFE
CEO, InXpress Americas
1. Outlook for 2020 is very strong and encouraging. At some point soon, we will see the market soften to the level of a recession. That will simply require a continuation of disciplined business execution. The opportunity for the franchise community to expand and add more units is increasing. The desire of the millennials and the capital held by boomers will continue to create opportunities for brands to grow and expand. We do not feel there are lead generation issues facing franchising, but there are franchise development process issues that can create challenges for brands looking to add more units.
2. Global trade challenges and increased market competitiveness continue to be a challenge for our business. To overcome these challenges and continue driving the same aggressive growth we have experienced over the past decade, we have invested heavily in value creation IT tools and capabilities, talented people and disciplined business processes.
Barbara Moran-Goodrich, CFE
CEO and Co-Founder, Moran Family Brands, Inc.
1. My overall outlook is good. I feel the economy is strong and can maintain throughout the 2020 year. However, it is an election year with polarized views and history that has shown when there is a potential for political party change, consumer spending slows down. Hopefully, this will not happen and the economy will continue to have growth throughout the year ahead.
2. One issue is vehicle data. In the digital age of the modern car, vehicle data is now transmitted wirelessly and sent directly only to vehicle manufacturers. This data is not just about car repair needs, it is about your driving behavior, such as steering, acceleration and braking, your GPS location, vehicle health, fuel use, emissions, engine hours and more. This information should not be at the hands of manufacturers to sell or use for themselves. Because of the invasion of our privacy and potential loss of control of who repairs our vehicles, we are promoting awareness and advocacy to fight this with our franchisees, our customers and vehicle owners. Another issue is recruitment. This has been a concern prior to the unemployment numbers dropping from lack of interest in the trades. We are continuing to roll out the internship and apprentice (type) program to help increase interest in the automotive aftermarket. Lastly, AB-5 and joint employer. This will continue to be a serious issue and will be even more difficult to help our franchisees if it is not resolved. If AB-5 goes on without revisions to exclude franchising, then we will be tested in California and other states will be watching. We need to continue the fight and let our Congresspeople, state senators and state representatives know our position on both AB-5 and joint employer.