There are signs of an improved outlook in certain economic areas where franchises are traditionally strong performers, such as the restaurant and business and personal services industries, according to the International Franchise Association (IFA) and GE Capital Franchise Finance.
The IFA released its first quarterly update to its economic outlook prepared by IHS Global Insight in December 2011. IFA is updating its Franchise Business Economic Outlook on a quarterly basis this year instead of just an annual outlook.
The IFA analysis is based on a grouping of franchise businesses in 10 broad business lines. The growth outlook differs among the groups, with output growth in 2012 ranging from 6% in personal services to only 3.7% in retail food.
And in a separate report, GE Capital Franchise Finance also said the restaurant industry is starting to heat up again.
While providing a positive outlook in general, the revised IFA forecast is down slightly from the original forecast of 1.9% three months ago. The IFA now indicates that the number of franchise establishments in the United States will increase by 1.6% in 2012.
“Our forecast of the number of new businesses to be created economy-wide has been reduced slightly and with it expectations for growth of the number of new franchise establishments,” the IFA said.
Since our December 2011 forecast report was prepared, there have been a number of positive economic releases,” said James Gillula, managing director at IHS Global Insight, IFA’s partner in compiling the forecast. “However, negative factors that could restrain an economic rebound remain.”
On the plus side, there have been three successive employment reports showing over 200,000 new jobs per month – which point to the possibility of a more sustained economic recovery.
However, negative factors that could restrain an economic rebound remain. Gasoline prices have risen sharply, creating a drag on consumer demand, and weak global growth limits the possibility of gains from rising exports, the IFA said.
Business services will rank first in franchise employment growth at 3.3% and third and fourth, respectively, in growth of the number of establishments and employment.
In addition to being the growth leader in output, personal services will rank second in growth of the number of establishments and third in employment growth.
Quick-service restaurants – the largest franchise business line – will rank fourth in the growth of new establishments but will see growth rates of output and employment that are near the franchise sector average.
Franchised real estate operations are also expected to show some signs of life this year, as well, the IFA said.
“We expect sales of new homes to increase by 17% in 2012. Sales of existing single-family homes, coops and condos are expected to be up 10%,” the IFA forecast. “On the non-residential side, vacancy rates for retail, commercial, and industrial properties remain high by historic standards, but have been coming down as the economy continues to gain ground. There are some signs of life on the new construction front as well. The percentage gains we anticipate in 2012 will look impressive, but will leave the industry still well below its pre-recession level.”
Within the retail sector, the fastest growth will occur among non-store web-based retailers.
“Long-suffering building materials, furniture and home furnishings, and electronics and appliance retailers will finally have something to cheer about in 2012,” the IFA said. “Among general merchandise retailers, warehouse clubs and superstores and dollar stores will lead the way. Traditional department stores are likely to continue to lose ground as consumers continue to favor lower prices.”
Employment in franchise establishments in 2011 was revised up slightly to show a 2% gain. The IFA continues to expect 2.1% employment growth in 2012. The output of franchise establishments in nominal dollars in 2011 was revised down slightly to show a 4.9% gain. The IFA continues to expect 5% growth in 2012.
Restaurant Industry Starts to Simmer
Meanwhile, consumers are spending more on meals, and foot traffic at establishments is improving, albeit from a diminished base, according to GE Capital’s Chain Restaurant Industry Review, released this week.
As sales trends recover, operators are translating those positive feelings into a greater willingness to invest in their businesses. And with increasingly accessible credit, they’re able to commit to higher capital expenditures.
“The restaurant industry has come through the upheaval of the past several years by listening closely to the consumer and adapting to their changing tastes – and they’ve done it well,” said Agustin Carcoba, president and CEO of GE Capital, Franchise Finance. “Depending on their segment, brand and focus, operators have emphasized food quality, service quality, menu options and other factors that will lead to renewed growth this year and in the years ahead. Even better, operators did it all while managing operational costs.”
Consumers spent $406.6 billion at restaurants in 2011. For 21 consecutive months, they spent more at restaurants than grocery stores, and that trend is expected to continue, GE Capital said.
Last year, quick-service restaurants (QSR) accounted for 48% of that figure, and full-service restaurants (FSR) accounted for 48.1%. The QSR category includes limited service, fast casual, take-out locations and snack and non-alcoholic beverage bars, while FSR includes family, casual, high-end casual and fine dining establishments.
Operators’ improved expectations can be partially attributed to positive results that were sustained throughout last year. QSR same-store sales grew 3.2% last year – ahead of the FSR rate of 2.4%. QSR benefitted from eight consecutive periods of growth due to more consistent traffic, while FSR relied more on menu price increases and higher average checks.
“Restaurateurs are no longer in survival mode; now they’re planning for the future,” said Trey Brown, commercial leader of GE Capital, Franchise Finance. “To capture that growth and maintain a competitive advantage, they’re investing in their businesses by building new stores, remodeling existing ones or investing in new equipment.”
The level of liquidity available in the restaurant space continues to improve. Merger and acquisition activity – an indicator of the popularity of the restaurant industry among investors – increased last year. Total syndicated volume in the restaurant space increased more than 26% to almost $12 billion in 2011.
Strategic buyers returned, such as American Blue Ribbon Holdings LLC, Darden Restaurants and Landry’s Inc. Private equity firms were also active; for example, Golden Gate Capital acquired California Pizza Kitchen.
“We expect restaurants to continue to be appealing acquisition targets because of the ongoing increases in food dollars spent away from home, as well as the scalability of this business model,” Brown added.
By Mark Heschmeyer, Costar Group