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WASHINGTON, D.C. -- Franchise businesses are starting to show signs of recovery after being battered by the recession -- and its lingering effects -- for the past three years.
According to "The Franchise Business Economic Outlook: 2012," the industry is expected to experience modest growth in the number of establishments, employment, output and contributions to U.S. gross domestic product (GDP). The report was issued by IHS Global Insight for the International Franchise Association (IFA) Educational Foundation.
Underlying factors, such as the weak rebound in consumer spending, have restrained franchise business growth over the past three years. In addition, tighter credit standards have limited the formation of new franchise small businesses and the expansion of existing businesses, the report stated.
However, as these conditions improve, the IHS Global Insight report forecasts an acceleration in the number of franchise businesses in 2012 and continued modest growth in employment and economic output.
"The forecast for modest growth is good news for the franchise industry and the overall economy, given franchising supports 12 percent of the U.S. private sector workforce," said IFA President and CEO Stephen J. Caldeira. "However, the rate of growth is far below the growth trends we experienced before the recession. Pro-growth policies out of Washington, D.C., to provide certainty to the franchise industry, such as comprehensive tax reform that lowers the corporate and individual tax rates, as well as increasing the flow of credit to small businesses by the lending community, will help to get us on a more aggressive path of growth and job creation."
The forecast for modest growth is consistent with the overall macroeconomic outlook. The report estimates real GDP to increase 1.8 percent in 2012; consumer spending to grow 2.2 percent, a continued sluggish recovery in the housing market; and slower economic growth abroad.
The report also indicates some acceleration in the number of franchise businesses in 2012, accompanied by continued modest growth of employment and output in the franchise industry.
The outlook for growth differs among franchise business segments. For example, personal services franchises are expected to be a growth leader in 2012, with 6.2 percent in output growth, followed by retail products and services at 6.1 percent growth. The number of establishments in each business segment is estimated to increase in 2012, from a low of 0.1 percent in retail products and services, to a high of 3.1 percent in lodging.
All segments will experience job growth in 2012, with business services franchises' growth the highest at 3.6 percent. The two groups that account for 50 percent of all jobs in the franchising industry – quick-service restaurants and table/full-service restaurants -- will also experience job growth of 2 percent and 1.8 percent, respectively, the report stated.
The IFA Annual Business Leader Survey, conducted in early December, suggests franchisors and franchisees, frustrated with the slow pace of the recovery, are not as positive about the outlook for the year ahead. One major hurdle continues to be access to credit.
While franchisors are optimistic about plans for expansion in the number of establishments in 2012, they are less optimistic about an increase in same-store sales or adding jobs compared to the survey a year ago, according to IFA.
Comments from survey participants indicate that the less optimistic outlook stems from franchise business owners who are frustrated with the pace of the economic recovery and the "lack of leadership in Washington, D.C." that is "making things worse, not better."
Franchisors and franchisees revealed concerns about how a range of issues are impacting their bottom line. These issues include weak consumer sales, limited credit access, energy price increases (especially commodities), and the impending health care law. Survey comments also revealed frustration with the "lack of support for pro-growth small business policies," and the "uncertainty created among consumers and investors" by the "negative rhetoric coming out of Washington."