Franchise Trends into 2021
As of February of 2020, the franchise industry was forecasted to add 232,000 jobs in 2020, growing the total number of employees employed by franchises to 8.67 million. The industry was expected to add 1.5% more franchised businesses in the U.S. to a total of 785,316 establishments.
Obviously, that was prematurely optimistic. However, some things have not changed. The states that were predicted to see the most franchise establishments and employment growth in 2020 were Texas, Colorado, Arkansas, Florida, Idaho, Tennessee, Georgia, North Carolina, South Carolina, and Nevada. This development was expected to increase in the South and West due to growing populations, state-level economic policies and favorable business tax climates. This was based on a decade long trend of growth seen below. This likely won’t abate due to the nature of this growth predicating on lower cost of living, which has not yet changed.
With population growth comes demand for various goods and services, and franchises can fill that need.
1. Cohesive partnerships
Franchising only works when franchisors get wealthy by helping their franchisees get wealthy. While this might sound obvious, the trick is creating a cohesive business that continues to succeed based on past success. When done right, franchises create a cycle, with franchisors actively promoting their franchisee’s success and franchisees wanting their franchisors to succeed. This keeps everyone focused on the same goal and avoids a dangerous “us versus them” mentality.
If expenses are crowdfunded, this removes pain points and sources of consternation between franchisor and franchisee.
2. The ideal franchisor
Today, the ideal franchisor has 500-plus franchise units with fewer than 50 franchisees. Happy, successful franchisees will grow their businesses into larger territories. They focus on scaling their business exponentially, using free cash flow to reinvest into building more units. Large territory, multi-unit franchisees are the best way for a franchisor to operate a franchise business with less effort put into monitoring franchisees and a much higher return when they sell the company.
This is great because it allows for markets with multiple players and without monopolies.
3. Long-term value
Historically, franchisors have regarded the franchise fee as the only source of revenue from a franchisee. Today, franchisors consider the long-term value of their franchisees. A franchisee pays royalties into the system that could equal millions of dollars over the lifetime of the business. Franchisors are focusing on nurturing their franchisees and providing the tools they need to succeed.
FundingFuel would open up these value propositions to more people.
4. Private equity and professional investors
More private equity and professional investors see franchising as a way to earn steady, predictable revenue and profits. Investors can witness the snowball effect of compounded returns resulting from an investment that generates enough profit to reinvest successfully. More investors will see franchises as a self-perpetuating investment that generates profit to meet their long- term wealth-building goals.
Private equities frequently operate with debt and leverage, and crowdfunding would mitigate the debt burden of franchisees and protect franchisees from exploitative firms, while increasing the value proposition for long term focused funds.
5. Social scrutiny
Social media sets a franchise up to scrutiny. As billions of customers with iPhones consider themselves food critics, franchisors have no choice but to hold franchisees to the highest standards. If someone reads about food poisoning at a location across the country, the effect rippling to the other coast is hard to ignore. Franchisors often use oversight systems, like a district manager program, to monitor their franchisees to minimize chances of failure to follow proper procedures that could result in negative press.
Smartphones also offer opportunity to identify contamination. If becoming a franchisee becomes available to anyone, there will be a tremendous need for technologies to aid in running them. We haven’t begun to see the potential here.
6. COVID-driven needs and opportunities
2020 introduced a down cycle of scary proportions and brought opportunity. Ghost kitchens create opportunities for companies with the foresight to change their model. Off-premise sales are about the brand bringing their product to customers. The shift from dine-in and take out to new options such as curbside pick-up and Chipotle’s “chipotlanes”, has shown that scrappy business owners have innovated new ways to operate their businesses and change with the demands of society.
Celebrities are opening branded ghost kitchens which will perpetuate this trend.
Franchises have the potential to weather recessions better, but there often isn’t enough corporate flexibility.
“As sad as COVID-19 is, it has created new opportunities”
Businesses can now start up for 50 to 80 per cent less than they would have in better days, opening in low-cost conversions of shuttered businesses or with smaller footprints. Smart franchisees take advantage of the great real estate deals and available labor force to grow their businesses.
Crowdfunding will be the perfect solution to the loss of cash that came with the recession.
7. Quick growth, new concepts and health
Health and wellness are very much in vogue, but it goes beyond the bland and uninteresting foods we saw a decade ago. Instead, developing flavorful options that are not only tasty and healthy, but that also put our social conscience at ease are important. A good example of this is the speed at which the new healthy, socially conscious Sweetgreen chain emerged. It raised an unheard of $1.5bn valuation in less than 10 years.
However, at the polar opposite of their offering, Five Guys burger joints grew from four locations to over 1,000 in the same amount of time. So, what really sells is new concepts that allow supply lines to be created in days, not years.
8. Black Lives Matter and diversity
Franchisors and franchisees must embrace upward opportunities for everyone and diversity on their teams. This requires even more commitment to improving the lives of employees. Opening doors and developing clearly multicultural franchise businesses. Diversity is at the heart of society and a commitment to equality in hand with embracing diversity helps pave the road for success, not to mention a more unified world. Ethnic food is a void waiting to be filled. Despite a population of 1.5 billion Muslims and 1.5 billion Indians, until recently there were very few restaurants serving food to this growing audience. Supply has finally met demand, with Middle Eastern and Indian concepts growing during 2020. They’ll continue growing at light speed throughout 2021.
Crowdfunding will definitely open franchising to more people of all backgrounds. It will also allow existing businesses founded by minorities to weather economic turbulence.
9. Fair pay
Across the board, everyone must commit to fair pay. The days of paying a staff as little as possible to earn more profits is over. It’s time for a new mindset that declines to concentrate on returns at the cost of employees. Franchises are only as strong as their people. A happy team meets goals and takes care of customers. You can leverage the tragically high unemployment rates to find the top candidates, but be sure to reward your top employees motivating them to stay.
By removing the role of debt in franchise transactions and investment there is less trickle down debt burden on the employees and franchise owners can put profits toward wages instead of interest.
10. Improved wages, improved career paths
Attracting top talent will get better for franchisees as they move toward a people-first mindset. The first hire a new franchisee makes should be their director of operations acting as the GM for the first location. This employee is not a cost, it’s an investment.
“More investors will see franchises as a self-perpetuating investment that generates profit to meet their long- term wealth-building goals”
Make aligned compensation part of their compensation plan and suddenly that DO has skin in the game. Get a strong management team in place long before they are needed. Then when the second store opens, promote from within as your management team spreads out across the new locations, allowing your DO to oversee them all.
While the world continues to respond to the unpredictable economy of an ongoing pandemic, the resulting trends are opening doors of opportunity for the franchising industry in 2021. And don’t forget: franchising only works when you get wealthy by helping others get wealthy.
Franchising for the Young and Old
Crowdfunding will allow a younger demographic to open up franchises. Gen Z is especially entrepreneurial and franchising is a fantastic way to get an equivalent of an MBA education.
John Henry started a cleaning business at 18 and sold it off, becoming a millionaire at 21.
Other Franchise opportunities for young people not on the list:
- clubs and social spots, a lack especially felt in rural areas and small towns where young people turn to drugs for socializing.
- Maker spaces
- Microschools
- Dispensaries
- Coworking
- Esports
Baby boomers often can’t afford costs of living, suggesting a need for alternative living franchises, like shipping containers or tiny homes. There is also the need for franchise indoor farming.
Franchising and the Gig Economy
There are strong parallels between the two ways of working for oneself. Both mean following corporate rules in exchange for making money on your own terms. Service and hospitality franchises will benefit from services like Thumbtack, Wonolo, or Takl.
Last year, the Trump Administration rolled back a rule, which expanded the definitions of “joint employment,” and meant that franchise employees with wage and labor complaints could argue in court that both the franchisee — their direct employer — and the franchise company were responsible for ensuring fair pay and labor practices.
Franchising, Minimum Wage, and Automation
Franchisors believe that minimum wage hikes eat into their bottom line.
A higher minimum wage makes labor more expensive, incentivizing replacement with automation.
Various franchises have different views on automation. Wow Bao embraces the fact that automation can allow for running a restaurant with fewer people, due to the fact that labor prices are unpredictable. Chick-fil-A uses automation and a host of other technologies to enhance its laborforce. Capriotti’s expected back in 2018 to be a ghost kitchen. Instead of bringing this technology to Mom-and-Pop shops, franchises will allow mass adoption of technologies regardless of what the future holds.
Franchises, ESOPs, and Coops
As opposed to franchises, cooperatives offer laissez-faire corporate management and resistance to economic instability. Retailer owned cooperatives have seen success in grocery stores, pharmacies, and hardware. Consumer cooperatives have seen success in REI and MEC, bookstores, grocery stores, and credit unions. Ace Hardware is both a cooperative and a franchise. Brightly Cleaning is the first cleaning coop franchise. Franchising offers cooperatives a stronger brand.
Just as cooperatives make franchisees owners in the larger company, ESOPs make employees owners of the larger company. The current administration may be sympathetic to such arrangements, which is very good, because ESOPs need legislative change to make them practical: namely, to make employees secured creditors in the case of bankruptcy. ESOPs weather recessions quite well though. An ESOP Company Pays no Federal or State Income Taxes. ESOPs don’t necessarily increase company earnings, but don’t detract from them either.
Franchises and Supply Chains
On the topic of collectivism, franchising offers strength in numbers that mom-and-pop shops simply did not have. This is especially useful in purchasing cooperatives, where franchisors can put pressure on suppliers to drive down prices.
Supply chains are typically arranged by the franchisor, which is one of the many benefits of working through a franchise. However, there are many instances where a franchisee may want to perform business with local suppliers instead of a large corporation. Franchises in 2021 will have to be flexible to such arrangements as a hedge against possible disruptions and also to be in accordance with environmental initiatives or regulations. Communication between franchisor and franchisee is vital. Alternative payment arrangements is yet another trend going forward, and one that may circumvent rises in minimum wage.
Franchising and International Expansion
Most franchises would be lucky to expand beyond a state or region, but the success of franchises in the past has been in expanding overseas. This comes with an especially urgent need for flexibility, and a greater need for technological solutions to aid in running franchises that transcend language and cultural barriers.
Franchising and IPOs
The largest problem that faced small businesses for the last several decades was that the Beltway prioritized Wall Street over Main Street. Fortunately that is no longer necessary, for the SPAC or “blank check” company offers the opportunity for franchises to go public for much less and gain the recognition and treatment they deserve.
