The New Normal in the Economy and Franchising

For the past several months, franchisors have been eagerly awaiting a thaw in the credit markets so that franchise financing can get restarted again. While franchise financing is likely to get better, it will be never like the glory days of 2005-2007. Similarly, while new franchise sales are likely to pick up, they are not going to have the same volumes as earlier years.

In some sense, the current economic environment is the New Normal and franchisors that adapt to it are likely to succeed the most. With unemployment likely to reach 10% and the continued wage stagnation – a college grad with a generic degree is likely to start with the same salary as his peers from 15 years ago or the disappearance of high paying white collar jobs permanently, overall purchasing power in the US is likely to remain depressed. This is turn is going to put continued pressure on earnings growth for public companies and survival for smaller organizations.

However, all is not lost. Once people become accustomed to this new environment of reduced credit, increased savings and decreased spending, the paranoia around splurging on eating out or home improvements or retail purchasing is likely to disappear giving a boost to sales. This is also an opportunity for franchisors to evolve their business models to support a lifestyle for millions of baby boomers who are likely to work longer because their retirements savings have taken a massive hit. In addition, a lot of franchisors are focusing their energies on improving existing franchisee profitability – a task that had historically been ignored because of rapid new system growth.

For the past several months, franchisors have been eagerly awaiting a thaw in the credit markets so that franchise financing can get restarted again. While franchise financing is likely to get better, it will be never like the glory days of 2005-2007. Similarly, while new franchise sales are likely to pick up, they are not going to have the same volumes as earlier years.

In some sense, the current economic environment is the New Normal and franchisors that adapt to it are likely to succeed the most. With unemployment likely to reach 10% and the continued wage stagnation – a college grad with a generic degree is likely to start with the same salary as his peers from 15 years ago or the disappearance of high paying white collar jobs permanently, overall purchasing power in the US is likely to remain depressed. This is turn is going to put continued pressure on earnings growth for public companies and survival for smaller organizations.

However, all is not lost. Once people become accustomed to this new environment of reduced credit, increased savings and decreased spending, the paranoia around splurging on eating out or home improvements or retail purchasing is likely to disappear giving a boost to sales. This is also an opportunity for franchisors to evolve their business models to support a lifestyle for millions of baby boomers who are likely to work longer because their retirements savings have taken a massive hit. In addition, a lot of franchisors are focusing their energies on improving existing franchisee profitability – a task that had historically been ignored because of rapid new system growth.

Nuggets from IFA convention 2009 in San Diego

Another successful franchise convention has come to an end, providing franchisors with valuable nuggets about how to make the best of the current economic environment. While the attendance at 2350 was short of the previous mark of 3000+, the enthusiasm was probably higher because everyone was looking for ideas and suggestions that they could take back home.

My company FranConnect, itself had a great convention allowing us to meet hundreds of our customers while meeting several new faces. We also sponsored the General Luncheon session on Tuesday with Carly Fiorina and it was interesting to get her analysis on the way out of the current economic morass.

Anyways, here are some of the things and ideas that I heard from folks at the convention and thought that some of you may find this useful:

- While everybody is concerned about leads being down and the difficulty in getting financing for qualified leads, new franchise sales are still happening at a reasonable pace. The trick is to adapt your processes to the new realities. e.g. Local lead generation through localized marketing, chamber of commerce based events, franchisee referalls is growing and providing high quality leads. Smart franchisors are also trying to market to existing franchisees of other non-competing concepts – e.g. A Subway franchisee may be a good prospect for opening up a Baskin Robbins store!

- Franchise relations was another big topic area with people looking for ideas to strengthen their ties with franchisees. One key idea here was to provide franchisees with tools that help them improve their profitability. Performance dashboards that display key metrics, sales numbers, expense ratios, etc and compare these numbers to other franchisees can certainly help franchisees identify areas where they can improve. Similarly, communicating continuosly with franchisees through all possible channels can further strengthen relationships. As they say, there is no such thing as overcommunicating in franchise relations!

- How to best manage social media and Web 2.0 technologies such as Facebook, LinkedIn, Twitter, Blogging, MySpace, Youtube were probably one of the biggest focus points for a huge number of franchisors. Any roundtable or session that focused on these sessions was completely full. The key takeaway was that franchisors need to be active participants on all these platforms. The new generation of franchisees are anti-advertising and anti-brands and communicating through social networks is going to be one of the most important channels for finding new franchisees!

There are dozens of more ideas from the convention that I would like to share, but more of it later!