17 March 2015
Food Franchising Falls Out of Favour as Service Sector Set to Soar
Although the US franchising sector is on course to out-perform the wider economy, many companies are still committed to taking a far more global approach, according to exhibitors at the International Franchise Association Convention.
There was a certain irony to a South Korean chicken chain sponsoring the general session of the 2015 International Franchise Association Convention in Las Vegas. After all, it's not as if the US doesn't know a thing or two about fried chicken fast food franchises. That, however, was not enough to deter BBQ, a fast-casual chain with more than 3,800 locations worldwide (and a USP of using olive oil for frying), from pushing forward with its plan to launch in every city in a market where Colonel Sanders has long reigned supreme. In truth, this same spirit of entrepreneurship and drive permeated the entire event, with hundreds of franchisees and franchisors looking for ways to grow their businesses and invest in new opportunities.
According to the International Franchise Association's (IFA) Franchise Business Economic Outlook for 2015, franchise businesses are now projected to grow faster than the rest of the US economy. Businesses in this category are expected to add 247,000 new direct jobs, a 2.9% increase over 2014. This will see 8.8 million people employed in this sector in the US alone. Overall, the total number of franchise establishments is projected to grow by 1.6%, reaching 781,794 by the end of 2015. The overall turnover of the sector is also expected to increase by 5.4%, giving a hefty US$889 billion total for the year.
Within the category, personal services – including education, healthcare and entertainment – are expected to outpace other types of business in terms of the launch of new franchise operations, followed by commercial and residential services. The slowest growth is expected in the retail food sector.
While the outlook seems positive, the industry is facing strong headwinds in the US, according to Steve Caldeira, IFA President and Chief Executive. During his keynote address to the convention, he cited concerns over increases to the minimum wage. In Seattle, this is set to rise to US$15, with the expectation this could be extended to other regions. Another key issue, according to Caldeira, is the impact of the Affordable Care Act on franchisees. This has changed the definition of "full time" to 30 hours a week and mandates that business owners provide health insurance to all such newly-designated full-time employees.
Caldeira also addressed franchisees' concerns over a recent move by the US National Labor Relations Board to issue a complaint against McDonald's, deeming it to be a "joint employer" with its franchisees. Coming down strongly against the move, he said: "The entire business model of franchising is endangered by this ill-conceived complaint. Hundreds of thousands of franchisees must now operate not knowing whether they should believe what their contracts state clearly – that they are in charge of their own workplace practices, including setting wages and hours."
Exploring International Markets
In a significant move, more than 80% of respondents to a recent IFA survey said that international growth was now crucial to their company's future success, with some 50% of the companies concerned allocating resources to promoting their overseas operations. The growing interest in international expansion was also evident during a number of the more packed sessions at the convention, with a particular focus evident on research, planning and cultural differences.
Benjamin Simon, Senior Director for International Development at RadioShack, the troubled US electronics retail chain, was among the experts urging companies to undertake due diligence before venturing out. He emphasised that, even though RadioShack had recently filed for bankruptcy in the US, it was gaining ground in India and other parts of the world. He said the former Soviet republics were also proving lucrative markets for the retailer, but warned, just as it was about to introduce its typical franchise model to Azerbaijan, it had encountered a deal-breaker. Explaining the problem, he said: "We discovered that the major existing competitor was owned by the wife of the country's president…"
Describing problems encountered elsewhere, he said: "In South America, we were surprised by the huge ratio of employees to customers at one of our franchise stores. On closer examination, it turned out that the store actually employed only two people – the manager and the cashier. Everyone else was temporary staff and employed by the brands sold at the store, allowing the employers to save on benefits."
Looking at the opportunities in the Asian market, senior care was seen as a potentially lucrative sector. One of the current success stories here is Home Instead Senior Care, a US brand with a strong presence in the Far Eastern markets. In China, the company has recently opened offices in Wuhan and Shenzhen, and is now also looking at opportunities in Singapore and Hong Kong.
Yoshino Nakajima is the Senior Vice-President and Chief Operating Office for Home Instead. Overall, she sees a growing needed for the provision of professional elderly care, but sees some resistance in the Asian markets on account of traditional family arrangements. Outlining the problem, she said: "In China, they're very suspicious about bringing a stranger in to their homes. We have to introduce our caregivers directly to the medical personnel who then recommend them. Only then can they meet the patents face-to-face and get to know them. We don't have to do that anywhere else in the world."
Overall, Nakajima expects it will take several years before the market routinely accepts external care givers. A number of factors, though, she said, are giving her ground for optimism, including an increasing government emphasis on the need for senior care.
Global Franchise Trends
In light of the widespread interest in opening up new markets, presentations by many of the foreign franchise organisations were well-attended throughout the course of the convention. Outlining the opportunities on offer, Guy Gras, Chairman of the European Franchise Federation, said: "The economic crisis is still impacting on many European countries, but a lot of countries are now welcoming American concepts." In terms of his home country, France, he said 51% of the franchise businesses are in the services sector, with a notable focus on hotels, restaurants, hair and beauty. Food retail, meanwhile, is at the bottom of the pile with just 9%.
Over in the New Zealand market, it is home and commercial cleaning services that dominate growth in the franchise sector, according to Graham Billings, Executive Director of the country's Franchise Association. Overall, New Zealand's stable economy and lack of specific franchise laws were cited as the chief reason for this healthy growth, with coffees shop being the country's fastest growing sector.
Over in the Philippines, growth in the franchise sector is being led by US brands (45% of them food-related), according to the country's Franchise Association Chairman, Emeritus Samie Lim. The rapid growth of call centres servicing US companies has seen the Philippines shift into a 24-hour work cycle, driving the growth of franchises in housekeeping services, laundry and the home maintenance sector. It has also fuelled the growth of food establishments and food delivery services that cater to the business process outsourcing industry. Lim also outlined the value of the Philippines for US brands as a launch pad into Southeast Asia, as well as a testing ground for their concepts.
Despite these successes in the Philippines, it is China that is still seen as potentially the most lucrative market for US franchise operators, albeit the most challenging. This may be changing, however. According to Susan Su, Director of the Franchise Department of the China Chain Store and Franchise Association, mainland government support for franchises is increasing year by year, with coffee, drinks and Chinese food attracting particular interest.
In terms of the fastest overall growth, though, Su highlighted the performance of convenience stores and the automotive aftermarket. She said: "We now really hope that Autozone [the US auto parts and service company] will choose to come to China."
The IFA 2015 took place at the MGM Grand Conference Centre in Las Vegas from 20-23 February and attracted more than 2,000 participants.
Anna Huddleston, Special Correspondent, Las Vegas