Franchise Deals Grow Nicely Despite Slump
Franchise businesses account for one-third of all US retail sales
TWO years ago, Ed Weber made a leap from being "wrapped in the womb of corporate life" to running his own business.Skip to next paragraph
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After taking an early retirement package from his post as director of engineering with ConTel IPC Telecommunications, he opened a Great Frame Up franchise, which offers picture-framing services in Norwalk, Conn.
Today, despite a recession that has been particularly tough on the Northeast, "we're doing better than we thought we would," Mr. Weber says. He is now looking to open another store in a nearby town.
The wave of corporate downsizing that has led to thousands of layoffs and early retirements for middle managers is helping to feed a steady rise in the number of franchise businessses.
At a time when other types of service and retail businesses are on the ropes, the pace of franchise growth has slowed only modestly. Franchising, which includes everything from McDonald's restaurants to quick-print shops to gas stations, now accounts for one-third of all retail sales in the United States. "We expect that by the end of the decade it will be half of all retail sales," says John Reynolds, spokesman for the International Franchise Association (IFA) in Washington, D.C.
The IFA just held its largest-ever exposition in Washington this past weekend, drawing an estimated 30,000 attendees.
In 1990 and '91, despite several quarters of negative growth for the economy at large, franchise businesses increased their sales by $36 billion and $44 billion respectively, reaching a total of $758 billion last year. The total number of US franchise establishments also rose, by 21,000 in 1991 and 29,000 in 1990, according to the IFA.
"It seems like the growth has picked up," if anything, during the recession, says David Klitzky, referring to The Great Frame Up, which he founded in 1971. The Chicago-based franchise opened 15 establishments in the last year to reach a total of approximately 140, he says.
While the recession has actually meant slower-than-normal growth for many franchises, several factors have helped franchises keep on an upward course, Mr. Reynolds says:
* Coordinated advertising and marketing programs. With national organizations, franchises can respond quickly to changes in the economy. He cites the example of fast-food outlets pushing low-priced "value menus" during the recession.
* Demographic changes in the US. With more households having two wage-earners, franchises can provide certain services quickly and reliably or take over tasks that were once done by a homemaker. Housecleaning, automotive upkeep and repair, day care, and other programs for children (Computertots and Kinderdance) are among the examples he gives where franchises are growing.
* The surge in corporate layoffs. This has left many experienced and enterprising business people "waiting in line to start new businesses," Reynolds says.
* Brand loyalty. As Americans relocate more often, the name-recognition of a franchise is a competitive advantage over mom-and-pop stores.
Mr. Klitzky gives the example of a franchisee in Memphis. "Eighty percent of her customers in the first month" were people who had been to another Great Frame Up elsewhere.
"Franchising is the business phenomenon of the last quarter century," says Bill Byrne, author of a new book on entrepreneurship, "Habits of Wealth."
Citing data from the IFA and the US Small Business Administration, he notes that if 100 franchises and 100 nonfranchised businesses open in a given year, the success rates will vary dramatically. Six years later 85 of the franchises will still be open, compared with only 37 of the nonfranchised operations.
Franchising blends a specific business plan developed by the franchisor with the incentive of individual ownership; each franchisee bears the financial burden of his own store or stores. This formula can lead to business success or conflict, or both. Klitzky, like other franchisors, has sometimes found himself in court trying to recover royalties that franchisees have failed to pay. (Franchisees typically pay an initial license fee and then royalties as a percentage of sales. The average total investment
is $148,000, according to a survey done for the IFA. The royalties often cover overhead costs such as training programs and coordinated advertising campaigns.)
The franchisee has his own challenges. Weber had always prided himself on being independent as a manager at ConTel, but being totally on his own in business entails an insecurity he had not imagined.
"You don't realize till you get out here just how different things are," he says. Although pleased with the business so far, he says that making a good living require three or four stores.