Three converging trends are taking shape
FranchiseMarketUpdate
BY DARRELL JOHNSON
The Future of Franchising
Three converging trends are taking shape
Since the turn of the century , I have observed three fundamental trends within the franchise business model . The first is adaptability , which has a wonderful positive attribute but a dark side as well . The second is unit concentration , which is another way of describing the rise of the multi-unit operator . The third is the pendulum swing of franchise agreements toward franchisor interests . These three trends are having a converging impact on the 2016 version of the business model and suggest some things about further changes to come .
There are about 3,200 active franchise brands across more than 200 industry sectors . More than 300 brands dip their toes in the franchising water for the first time each year ( some have good success , some stay a few years and decide it ’ s not for them , and some never get off the ground ). What they all have in common is a business model they are able to adapt to the idiosyncrasies of specific industries and circumstances . The franchise business model operates equally well in industries with little regulation ( e . g ., home-based consulting ) and industries with a lot of regulation ( e . g ., medicine ). While the business model itself is regulated , one of its strongest attributes is its ability to adjust to industry-specific requirements .
At the highest level , there are two versions of the franchise business model : business format and non-business format , the latter usually considered a combination of dealer , license , and distributorship forms . While those of us on the business format side usually don ’ t consider these other forms , they often are included and often misapplied in regulation , legislation , and the press . Under this top level , the model takes many forms and uses terms that have different meanings , depending on who is doing the talking .
Adaptability is a good thing but we have unintentionally created a dark side . We use terms such as area development , area representative , sub-franchisor , and master franchise , sometimes with a degree of interchangeability . No wonder we confuse the media , regulators , legislators , and the public . We also confuse ourselves . Ask franchisee ( and even franchisor ) employees who they work for and , more likely than not , they will say the brand , not the franchisee who employs them .
Multi-unit concentration wasn ’ t much of an issue before the beginning of this century . Most franchisors didn ’ t want multi-unit operators having too many units , presumably because they were concerned about losing control . That changed dramatically
Ask franchisee employees who they work for and , more likely than not , they will say the brand , not the franchisee who employs them .
starting in the early 2000s . A combination of factors drove this trend . Baby Boomers were in their prime income years and as a group had accumulated considerable wealth . They also were leaving the ranks of large companies with a desire to control their own businesses , but with growth in mind . At the same time , franchisors woke up to the training economies and ( at least perceived ) lower failure risks associated with experienced operators . The race to attract them was on , and the result has been a steady rise in multi-unit control of total franchised units , which stands today at about 55 percent .
In the past 15 years , franchise agreements have slowly , consistently been strengthened in favor of franchisors . During this period FRANdata has reviewed more than 1,000 franchise agreements a year for SBA affiliation eligibility purposes , so we have a pretty good vantage point to observe how contractual agreements have evolved . It could be argued that one of the unintended consequences of this control shift has been the dramatic rise in state legislative initiatives that involve franchising .
Where are we today ? The franchise business model is expanding , both in the number of brands and number of units . On an economic level , most franchisors and franchisees are making money in this sluggish , slow growth economy . The publicly traded franchise brands are outperforming the broader indexes . Yet the franchise model is facing serious legal , legislative , and regulatory threats . We face special interest groups with specific agendas who have been able to bend legislators and the media by twisting and distorting franchise terms . We have franchise stakeholders who don ’ t make the correct distinctions between brand and employer .
Where are we headed ? Let ’ s consider how the three basic trends I ’ ve identified are likely to interact . If the legal / legislative / regulatory barriers are not too great , the adaptability hallmark of the franchise business model will adjust to get around or over the obstacles . The model may not construct ideal solutions for both franchisors and franchisees ( for instance , it is quite likely franchisors will pull back the levels and types of support in reaction to NLRB / DOL threats if they continue ), but the model will adjust and survive , hopefully not in a seriously weakened state . Further , with the growing influence of multi-unit operators in the way franchise agreements are designed , I think the control pendulum is starting to swing back toward the middle . We are already seeing this with many franchisors willing to “ negotiate ” franchise agreements with larger franchisees while still insisting on a take-it-or leave-it approach to single-unit operators .
Like the economy itself , franchising trends move in a cyclical pattern . I think the cycle we are entering will lead to a business model that is better described and understood than previously , with a more balanced franchisor / franchisee relationship .
Darrell Johnson is CEO of FRANdata , an independent research company supplying information and analysis for the franchising sector since 1989 . He can be reached at 703-740-4700 or djohnson @ frandata . com .
80 MULTI-UNIT FRANCHISEE ISSUE III , 2016