U.S.A in focus: the current state of franchising in the states | Global Franchise
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Friday 7th October, 2022

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U.S.A in focus: the current state of franchising in the states

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U.S.A in focus: the current state of franchising in the states

As both the inarguable home of franchising and the largest market in the world, the U.S. often dictates which trends and brands will thrive over the globe. However, a turbulent year may have changed the future of the industry forever

As both the inarguable home of franchising and the largest market in the world, the U.S. often dictates which trends and brands will thrive over the globe. However, a turbulent year may have changed the future of the industry forever.

Words by Kieran McLoone, deputy editor for Global Franchise

While the origins of modern-day franchising could be traced back to a variety of sources, many agree that what we now recognize as the franchise model stems from U.S. history, with Ben Franklin and Thomas Whitmarsh’s printing press business way back in 1733.

The two entered into an agreement that saw Whitmarsh responsible for the running of the business and tracking of expenses, while Benjamin Franklin had the responsibilities that we’d now recognize in a franchisor: he provided the printing tools, rented the print shop for Whitmarsh to work in, and helped with the repairs and general upkeep of this pioneering location.

Following the success of their original South Carolina location, Franklin subsequently established similar relationships in New York, Antigua, Newport, Lancaster, and Boston; he eventually went international, too, with businesses in Jamaica, Canada, and Great Britain.

“The U.S. consumer’s understanding and acceptance of franchising as a business model means that the pool of prospective franchisees may be larger than anywhere else in the world”

Jump forward over a century-and-a-half, and in 1896, Henry Ford began selling automobiles en masse. Wanting to expand his reach, he enlisted William Metzger to build and open the first independent Ford dealership in Detroit, and suddenly automobile retail franchising became a mainstay.

Half a century later, and the International Franchise Association – America’s primary franchising authority – opened its doors in 1960. The 60s’ were also an explosive period for food franchising in the U.S., with McDonald’s opening countless locations and cementing the golden arches as an icon of franchising’s potential for success.

Today, the franchising model has grown into one of the primary pillars supporting the U.S. economy; even during the turbulent times that the world is currently experiencing.

In a 2018 study, it was estimated that pre-pandemic, there were 759,000 unique franchise locations in the U.S., outputting more than $760bn and employing over eight million people. The largest segment contributing to this output was, perhaps not surprisingly, quick-service restaurants including the likes of McDonald’s, KFC, Burger King, Wendy’s, and Sonic. QSRs generated $250bn in economic output, followed distantly by business services, which generated $100bn.

McDonald’s wasn’t just a pioneer in U.S. food franchising; it’s also still a frontrunner, and at $96bn in revenue, it remains the leading franchise in the States. By the number of locations, the sandwich artistry brand Subway is the largest operation, and in 2018 had 42,000 locations worldwide, with 24,000 of those situated in the U.S.

Equally vast and dense

America’s population of around 330 million is largely concentrated in urban areas, with only 19 per cent of the population living in rural locations. Overall, according to SME advisory publication The Balance Small Business, the U.S. has an average franchise penetration of 379 franchises per capita, with the highest numbers being found in California; a state with a population of 38 million and 82,739 franchise locations. The opposite end of the scale can be found across the country in the Midwest, with Iowa only having 262 franchises per capita at a total population of just over three million.

At its core, the U.S. is an especially attractive market for both domestic and incoming international franchise brands for a plethora of reasons. Primarily, the U.S. consumer’s understanding and acceptance of franchising as a business model means that the pool of prospective franchisees may be larger than anywhere else in the world, and consumers will be confident in a franchise brand’s ability to deliver the consistent service they’ve come to expect.

This is thanked in part to the enduring legacy that franchise brands have in the States, and also by the sheer presence of household names – one in every seven American businesses is a franchise, for example.

“The U.S. is the most competitive market on Earth, and there are typically 20 to 30 franchise brands in each sector. To survive and grow, a U.S. franchise has to be efficient and competitive”

This goes hand-in-hand with the fact that America has clear, well- defined franchise and business regulations that govern and guide franchisors to ensure that litigation is kept to a minimum, and any challenges can be overcome by utilizing past experiences. More often than not, a franchisor will be able to tackle any problem that their franchisees may run into because they’ve already experienced it many times in the past.

Due to the U.S.’s significant supply chain infrastructure, such as the fact the country has more than 5,000 public-use airports for transporting resources and materials between franchise locations, it’s rare to run into logistical problems that franchisors could face in less developed markets.

Additionally, English is the predominant language spoken throughout the States, which means that communication is often immediate and seamless. Again, this is something that can considerably prohibit the growth of a brand in a country with a differing mother tongue.

Problems of a pandemic

To say that COVID-19 has shaken the global franchising industry to its core would be something of an understatement, and few international markets have felt those shockwaves quite like the U.S. This year, for instance, there was a total of $185.3bn in losses due to the pandemic, which is only set to continue while ‘business as normal’ remains a distant memory.

Nationwide lockdowns toward the start of 2020 forced many businesses to either pivot their offerings or close entirely, and as the New Year looms in the distance, we’re only now seeing the knock-on impact of these changes.

As part of the International Franchise Association’s six-month COVID impact analysis, it was shown that within the first six months of the virus’ outbreak, an estimated 32,700 franchise businesses were closed as of August 2020. Unfortunately, just over 10,000 of those will remain closed permanently, and over the next six months, one in 20 businesses will permanently close due to ongoing pressures associated with a lack of regular operation. If this trend continues, then a further 36,000 franchise units will be at serious risk without dedicated government support.

Earlier this year, government support came in the form of Paycheck Protection Program (PPP) loans, which were designed to support U.S. SMEs during the worst months of economic instability. Approximately 70 per cent of franchises managed to receive support from PPP loans, but even these haven’t been able to secure the jobs of millions of Americans, and as of August 31, the franchise market had experienced a total loss of around 1.4 million jobs – 40.2 per cent of which were deemed permanent.

Help needed in hospitality

As was likely expected, the hospitality industry suffered the most this year, with the sector facing the highest rate of business closures at 6.9 per cent. This equates to roughly 2,069 franchised businesses, with employment in hospitality declining by approximately 215,000 jobs.

For some restaurants, distancing measures have meant that only take-out orders and curbside delivery are viable methods of serving customers. Early on in the pandemic, this spelled serious trouble for establishments which haven’t offered these avenues previously, with 60 per cent of restaurants closed by April 12 according to Restaurant 365, a provider of restaurant management software.

Thankfully, with stimulus checks distributed just three days later on April 15, restaurants saw an uptick in sales and as of September 20, closures stabilized at around 13.6 per cent. Naturally, there’s still the question of how many of those will be permanent closures, but looking ahead, the hospitality industry could see increased demand – if from entirely new sources.

Before the pandemic’s ascent, takeout orders in U.S. restaurant franchises accounted for only 18 per cent of sales as of March 1. Just three weeks later, on March 23, that figure had jumped to 70 per cent due to brick-and-mortar closures and a push for consumers to avoid in-person contact. This figure has since dipped and now sits at around 30 per cent, but it still remains almost double what it was before COVID-19 turned the industry on its head.

“COVID-19 has greatly affected the American franchise industry but in some surprising ways,” says Lane Fisher, a franchise attorney at FisherZucker LLC. “Obviously, the pandemic and stay-at-home orders significantly impacted brick-and-mortar businesses and sit-down restaurants, especially in the spring. We’ve seen signs of those industries coming back as the economy reopens. On the other hand, smaller restaurants that were primarily designed for take-out performed phenomenally well and have seen their gross sales increase.

“Outdoor dining has increased capacity at some restaurants, but because it’s highly seasonal, it’s a short-term fix. COVID has demonstrated that a drive-thru is a more useful amenity than more indoor seating. Fast-casual lobbies are being restricted or closed to maximize a drive-thru, home delivery opportunity.”

Even once restaurants and franchised businesses, in general, are permitted to fully reopen en masse, there are still considerable roadblocks that could stop the industry from reaching the monumental highs that it’s often associated with. One of these roadblocks comes in the form of frivolous coronavirus-related lawsuits, that could impede businesses from returning to normal and even shutter some locations that are already fighting to remain afloat.

Back in July, the IFA delivered a petition to Congress with more than 7,000 signatures from franchise business owners, calling for coronavirus liability protections for businesses that follow applicable guidelines. This came shortly after it was reported in June that almost 1,300 coronavirus-related lawsuits had been filed since May 1. Also in June, the US Chamber of Commerce released a study that showed two-thirds of small business, comprising of 20 to 500 employees, were concerned about the possibility of lawsuits threatening their ability to reopen effectively.

For Lane Fisher, the threat that franchises face from litigation is a considerable one, but there are ways to mitigate risks: “Franchises take their responsibilities seriously to provide both a safe work environment for their employees and a safe and comfortable place for their customers. Fear of litigation is driving many businesses, such as fitness facilities, to obtain waivers or releases from members or customers before permitting them to work out. It would ease everyone’s minds if the government limited liability to gross negligence.”

Beyond litigation, concerns within the franchise industry vary from generating income, to being able to adequately adhere to rigid health and sanitation guidelines now dictating how a business can operate.

A recent Verizon small business recovery survey showed that just over half of small businesses have concerns about staying afloat financially if social distancing regulations remain the same. 72 per cent of respondents, however, believe that they can still remain open for at least six months or more if conditions in the U.S. remain how they currently are – only three per cent estimate that if nothing changes, they will be closed for good within two months.

The Verizon survey also indicated that the franchise industry is on the road to recovery, even if it still has a ways to go. Between August 26 and September 4, 67 per cent of businesses reported declining sales, but this statistic is actually an improvement on the 78 per cent recorded in April.

The concern for the wellbeing of small businesses has also decreased slightly since the study’s April results, though this still remains at 92 per cent; interestingly, 64 per cent of respondents were ‘very concerned’ about SMEs coping with the effects of the pandemic, compared to the meagre 18 per cent concerned about the wellbeing of large businesses. It seems the working world as a whole has rallied around the smaller organizations that breathe life into their communities.

A brighter tomorrow

After examining the rich history of franchising in the States and taking a look at its rollercoaster of a present, it only makes sense to look ahead at what the future holds for the industry, and why hundreds of thousands of entrepreneurs still flock to U.S. franchises to fulfill their version of the American dream. After all, while industries like hospitality have undoubtedly taken a beating this year, businesses are still confident that their resiliency will shine through; almost half of Restaurant 365’s survey respondents were ‘fairly confident’ that the sector would see a full recovery within three years, for example.

So what distinguishes the U.S. as a market that international franchisors should look to penetrate as soon as possible? As Bill Edwards, founder and CEO of international development consultancy Edwards Global Services (EGS) says: “There are several major opportunities for an international franchise brand coming to the U.S.A. It is the largest economy in the world with 330 million people, with a GDP per capita of $65,000. It’s a well-defined regulatory environment which is the same for all franchises no matter where they’re from, and the Americas are just very open to new concepts – especially international brands.”

Equally, for U.S. franchises looking to take their concept overseas, brand awareness and an inherent trust in American quality assurance go hand-in-hand with a successful growth strategy. As Bill Edwards explains: “U.S. franchise brands are generally well accepted in other countries due to four factors; firstly, U.S. brands are well known around the world, and the U.S. is known for quality products and services. For example, U.S. food and beverage brands do not lower their quality assurance standards when they go to other countries. This makes for local middle-class families trusting the food their children will eat in a U.S. franchise restaurant.

“U.S. brands are also known for convenience, which means they almost scientifically locate restaurants and retail locations where customers can easily reach them, and the unit layout and business systems are very efficient. And U.S. brands are known for their customer service training focus, which is not as common elsewhere.

“Why are these attributes true? Because the U.S. is the most competitive market on Earth, and there are typically 20 to 30 franchise brands in each sector. To survive and grow, a U.S. franchise has to be efficient and competitive.”

All this being said, there are undoubtedly challenges that come with bringing an international franchise into the States, and while the country’s consumers may be welcoming of concepts from all over the world, the U.S.’s regulatory framework can be a little daunting to say the least.

“Regulatory disclosure and filing requirements exist at the federal and state level, and according to the U.S. Department of Commerce, there are 16 distinct economic zones in the U.S.A.,” says Edwards. “The question for an international brand entering the country is: where do they start?

“There’s also the need to adapt the brand’s offering to the U.S. market which is something that an international franchise will face no matter what country they enter, and there’s the fact that it is essentially impossible to find a country licensee who can manage the entirety of the U.S.”

If a franchisor, national or international, can get around the quirks of the American business landscape, then there’s immeasurable success to be found; regardless of the pandemic. In fact, while certain industries really suffered this year, others managed to persevere and remain as lucrative as ever.

“Home healthcare franchisees were in great demand as more people wanted to care for their elderly family members at home rather than have them placed, or continue to stay, at nursing homes,” says Lane Fisher. “What was surprising to me was that home improvement franchises have seen their sales grow during the pandemic. People at home were finally moving on those home improvement projects that were either put off or they didn’t know they needed until they were locked up at home. “Home health care will come out of the pandemic even stronger. Also, there has been strong growth in essential businesses such as cleaning and sterilization services, including numerous start-ups in the field, and it’s still not enough to meet demand. I expect that demand will continue even after the pandemic passes.”

KEY BENEFITS OF FRANCHISING IN THE U.S.

• Strong consumer awareness of franchising

• Extensive pool of experienced franchisees)

• Defined regulatory frameworks, honed by decades of operation

• Integrated supply chain networks

• English is the primary language spoken

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