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Friday 9th December, 2022

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Breaking America
Breaking America

Insight

Breaking America

Ray Hays believes there’s an opportunity to challenge the status quo, as he offers his perspective on the state of U.S. franchising for international brands seeking market entry

With uncertain global economic times ahead, what do you envision for near-term performance of franchising in the U.S.A.?

Due to global supply chain issues, my crystal ball from Amazon is still on backorder. However, my sense is that franchising in the U.S. is at an inflection point.

The traditional Chinese word for crisis is formed by two characters, which roughly translate as danger and opportunity. In U.S. franchising, there’s a general sense that the franchisors (and franchise locations) that weren’t meant to survive the pandemic have already failed. In effect, the danger stage has passed, and the survivors are now looking at a new landscape of opportunity.

Admittedly, this view of the franchise world is a bit Darwinian, yet it’s my opinion that most franchisors weathered the storm and survived through adaptation. In many cases, the pandemic forced changes that resulted in lasting improvements to their business models for the long term. Recently, we’ve also witnessed new, innovative concepts emerging to fill the market void left by the players that did not survive the crisis.

In short, looking at the U.S. franchising landscape today, I see excellent potential for the hearty survivors, as well as a less cluttered competitive field, enabling innovative new players to enter the market.

Which franchise sectors in the U.S. have emerged strong, and which have struggled?

Of course, the Covid crisis and recent geopolitical events have impacted franchises in unique and specific ways. Analysis of the market data, in terms of winners and losers, is a complex matter that I will defer to professional number crunchers.

U.S.-based franchise market intelligence firm FRANdata has completed extensive analysis of COVID’s impact on franchising. In particular, I highly recommend FRANdata’s article from May 2022, Lessons from the Pandemic: How Covid is Changing Franchising, which provides a brief yet insightful summary of American franchisors’ pandemic performance.

One point of interest from the FRANdata article is that some of the hardest-hit concepts are now in growth mode. Darrell Johnson, author of the article, observes, “Surprisingly, a lot of phoenixes rose from the ashes in 2020. Is it blind optimism or a signal of post-Covid opportunity? Our database shows that approximately 409 brands began offering franchising after the pandemic started.”

As we know, one sector that suffered extensively during the Covid crisis was fitness. However, a recent article in CNN Business (15 Aug 2020), notes that while some fitness concepts are still struggling, others are in growth mode: “Fitness chains and independent gyms at large have been hit hard, with roughly one-third of fitness locations closing during the pandemic… But affordable gym chains, like Planet Fitness (PLNT), appear to be thriving. The chain, which charges as low as $10 for a monthly membership, reported in its earnings last week that it grew its membership base to 16.5 million.”

One area of significant market change in the U.S. includes increased labor demand and working at home as a new norm. This dynamic labor market will likely create both new opportunities and new challenges for personnel services and other HR-related concepts.

Moreover, labor-dependent concepts, such as food and beverage, are looking very carefully at both the cost and quality of labor. Conversely, franchises that have less exposure to the labor market, such as home-based businesses, may appeal more to franchisee prospects, since they are easier to manage with fewer employees and lower overheads.

For the benefit of international franchisors, it’s important to note one U.S. F&B trend that was accentuated during the pandemic: the decades-old American model of drive-thru service. In some countries, drive-thru service is fairly new and not universally accepted. However, international F&B concepts – especially QSR franchises that want to enter the U.S. – need to carefully evaluate drive-thru as a potential part of their strategy.

During the pandemic, American QSR concepts – both established brands and emerging brands – sparked a resurgence of growth through drive-thru service. Some big brands, like Dairy Queen and Dunkin, as well as most major U.S. burger and chicken concepts, have decades of history with drive-thru services. During the pandemic, we also witnessed the success of smaller players with an emphasis on drive-thru, including Scooter’s Coffee, The Human Bean, and Salad and Go, all of which have experienced strong growth in new locations since 2020.

Relevant to personal service franchises, one cultural shift that Covid brought to the forefront in the U.S. was a heightened awareness of care for the elderly. While some senior care franchises were negatively impacted in the early months of the pandemic, several concepts saw strong revenue growth after the first half of 2020. In part, this was in response to demand from families, who wore struggling to find safe care solutions for their elderly loved ones. With the unstoppable demographic growth of aging Boomers in the U.S., the demand for care solutions will continue to grow in the coming decades.

What would be your top tips to help franchisors to capitalize in the American market?

In terms of timing, it’s my opinion that 2022 and 2023 would be a good time to look seriously at entering the U.S. market. As mentioned above, new entrants to the market may have a better opportunity to compete in today’s reimagined U.S. franchising landscape.

American franchises are not as entrenched as they were pre-Covid, and I believe that international concepts may now have an opportunity to challenge the status quo. American consumers have been forced to accept new ways of doing things, and I believe that international concepts may be able to capitalize on this brave new world in U.S. franchising.

Finally, if you were a foreign franchisor looking to break into America, which States are ripe for investment?

Of course, the best markets for franchising in the U.S. will depend on the individual franchise concept. My advice to international franchisors is that they do some basic research prior to entering the U.S. market. Look at your potential competitors in the U.S., including their franchise disclosure documents (FDDs). If possible, gather competitor KPIs and other market data for several competing concepts. This will help you to identify trends in your sector, and possible hot spots for growth.

In terms of market selection, it’s also critical for international franchisors to clearly understand U.S. franchise regulations, which can vary on a state-by-state basis. To come up to speed on the U.S. regulatory environment, it’s important to seek guidance from U.S. franchise experts. Working with U.S. franchise professionals (consultants, attorneys, etc.) may add some upfront cost to your market entry, but it will be less costly than making big mistakes in market selection and regulatory compliance.

It’s important for franchisors to do their homework – and to get guidance from American franchise experts – to make an informed decision on the priority U.S. markets for their specific concept.

Finally, I would recommend that international franchisors note the following organizations, which have free resources for further evaluation of the U.S. market:

International Franchise Association: franchise resources, research and supplier directory of franchise experts

U.S. Commercial Service with trade representatives in most US embassies, as well as a team of franchise specialists

Select USA (trade.gov/selectusahome): assists international companies investing in the U.S. with access to State-specific resources)

The author

Ray Hays is managing partner at FranLaunch USA, a franchise management firm that facilitates U.S. market entry for international franchisors and advises emerging US franchisors on growth strategy. He also serves as a member of the District Export Council, a volunteer executive advisory group that supports the export promotion efforts of the U.S. Commercial Service

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