Franchise Update Magazine Issue IV, 2011 | Page 56
Grow Market Lead
Market
trends
By Darrell Johnson
Growing in a Changing
Economy
A
Companies focus on the bottom line
s an economist, I see some really challenging times ahead.
As a businessman (and professed contrarian), I see some
interesting opportunities. Let’s take a
look at both.
The world economy will be fortunate to realize a 3 percent growth rate
in 2012. Less than 2 percent and we’ll
see a global recession, something too
close to call at the moment. Europe is a
mess, China is slowing down, and Japan
is close to returning to the economy of its
lost decade. With most other economies
substantially smaller, we can’t look to the
ones just mentioned to be the engine of
growth to get the world humming again.
That leaves the U.S. We’re in the aftermath of the “Big Party.” You remember
the Big Party, we all had fun in it. The
2002 to 2008 period was marked with unprecedented consumer and government
spending. Consumers bought everything
they could using home equity and credit
cards. And the government managed to
expand its spending across all continents
and categories. Until both consumer and
government debt get back to a more affordable level, the hangover will continue. It is going to take years—and it’s
not clear whether the government has
the fortitude to deal with its portion of
the tab and, if so, how it will do it. That
uncertainty will further constrain business and consumer spending.
And before we get to a more robust
economy, other fundamental economic
issues must be resolved. The persistent unemployment and underemployment rates
suggest we are in the midst of a structural
change in employment ranks. There are
many job openings in skilled and technical
fields that only education and training can
resolve. That’s a long-term issue.
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Housing is another fundamental economic issue that has a long path to balance. There are roughly 3 million vacant
homes, another 3.5 million underwater
mortgages, and about 2 million homes
in default or delinquency. Until those are
moved through the market (something
the legal system currently is constraining), the market will not clear and we’ll
have flat and declining home prices and
the accompanying uncertainty that produces in consumers’ minds.
All the above would suggest it’s time to
hunker down and try to ride out the storm.
If the storm were relatively short, I might
agree. However, I believe we’re seeing a
gradual transition of the old guard (developed countries) toward the new guard
(developing countries). In the next 10 to
15 years we’ll see quite a few changes in
the ranks of the top 25 economies.
For starters, China will overtake the
U.S. as the world’s largest economy in
about 2022. I think that changeover will
be marked by more dramatic swings in
U.S. and global economies in coming
years. In economic terms, the period
from 1985 to 2007 could be considered
the Great Moderation in business cycles,
when dips were few and far between.
From 1799 to 1929, nearly 90 percent
of U.S. expansions lasted three years or
less. With the Fed out of high-caliber
ammunition and the political climate
anything but conducive for a cooperative
solution, it seems likely we’re returning
to the historical norm of more dramatic
swings in economic activity.
What about a business perspective?
Let’s start with a look at the S&P 500. Do
you know when more than half of those
companies started? Good guess: during
economic downturns. American business
culture is built on entrepreneurism. The
next wave of great companies has already
been started. They’re all around us. Bully
for American business, but for many of
you with growing or mature brands that
just adds to the challenge. Even now we
see new franchise brands being started,
on average, every three days.
That leads me to a key driver for almost
every company in the U.S. and certainly
every franchisor: relentless pressure on
spending your company’s dollars wisely.
In the economic turbulence ahead, companies will focus on the bottom line, not
the top line. Whether marketing, franchise
development, training, operations, or
compliance, franchisors must be confident
they are spending smartly and effectively.
Having more and better information will
guide franchisors through most decisions
to a degree just barely being felt today.
Picking the next area to develop will be
made with forecasts of local, city, and
county growth patterns 5 and 10 years
from now, when your franchisees will
still be running the businesses. Training will have more business-level skill
development and information sharing
to strengthen the franchisee overall.
Support will find ways to overcome traditional legal barriers to do what’s right
and necessary with franchisees. And all
of this will be benchmarked, not only
internally but across brands and sectors.
We’re seeing the power of this today
with Bank Credit Reports (BCRs), which
are a specialized form of benchmarking.
While BCRs compare brands within
franchising, their real power is that they
provide a level of credit risk forecasting
for banks that are shifting capital away
from independent businesses (where banks
struggle to have any predictive credit risk
ability) toward franchising, which has a lot
of credit risk predictability. In uncertain
times, banks, franchise companies, and
companies in general that can operate
with better information will make better
decisions and successfully navigate these
choppier waters. n
Darrell Johnson is president and CEO of
FRANdata, an independent research company supplying information and analysis
for the franchising sector since 1989. He can
be reached at 703-740-4700 or djohnson@
frandata.com.