Franchise Update Magazine Issue III, 2011 | Page 37

By Darrell Johnson

Mid-Year Report
Weak demand, confidence slow growth

A

report produced for the IFA
at the beginning of this year,
the Franchise Lending Matrix, forecasted approximately
15,200 new units would be added in 2011.
We’re at the halfway point of 2011. It’s a
good time to check the progress.
The first half of the year showed a
continuation of weak consumer demand.
From the low point in late 2008, consumer demand had fairly consistently
increased until mid-2010. However, it
has been drifting downward since, which
is at the core of the reasons for the weak
recovery and persistently high unemployment numbers. In June unemployment
ticked up to 9.2 percent.
Consumer expenditures compose about
70 percent of GDP, so where they go the
economy goes. Fueling consumer expenditures is consumer credit. In June, for the
first time since August 2008, revolving
consumer debt rose. Perhaps that is the
first signal of more consumer confidence,
notwithstanding the recent declines in the
Consumer Confidence Index (CCI). As
long as interest rates remain low, there’s
a chance that consumers are beginning
to come out of their contraction mindset. Revolving consumer debt is now at
about the level of 2005.
Historically, all this was good for
franchising. Higher unemployment and
greater economic uncertainty motivated
a lot of people to consider franchising.
That hasn’t happened nearly as strongly
so far in this recession/recovery as it
did in past economic downturns. Franchising continues to expand, albeit at
a historically slower pace than history
would suggest.
Two important culprits have created
headwinds for franchise development this
time around: capital access and consumer
confidence. Where those two challenges
go will substantially determine how fast

franchise sales will grow in the next 18
months. The capital access issue has
evolved into a competition for credit.
Most banks have the money. The challenge is to get them to give it to your
prospective franchisees.
Franchisors are at an immediate disadvantage with one of the two types of
prospective franchisees: those with no
previous franchisee experience. While
existing franchisees have challenges with
funding, they at least have a track record
of revenue, income, and cash flow from
which a banker can base a lending decision. A prospective franchisee coming
from another profession and/or without
unit operating experience is simply a
harder risk for a lender to evaluate. Until
lenders shift from risk minimization to a
focus on risk/returns in loan committees,
this drag on development will persist.
Feedback we get from franchise development people suggests that brands
proactively addressing the competitio