The business model of franchising has impacted our economy ever since the 1850s, when the first franchise business was created by the Singer Sewing Machine Company, and I’m very proud to be a part of this exciting industry.
As of this writing, there’s been a serious reversal to the statement above about how franchising affects our economy. Now, the economy is affecting the franchise industry, and that in itself is a major trend worth discussing.
First off, there’s the continuing lack of traditional small business startup funding. This makes it a lot harder for would-be franchise owners to become franchise owners. Some of the more resourceful prospective franchise owners are looking at alternative lending, and are succeeding at launching their franchises in this way.
Secondly, unemployment still remains high, and in 2011, no major gains in job creation are being forecast.
Traditionally, downsized middle managers and executive-level employees have been a popular target of most franchisors. This target group usually has a decent severance package that they’re able to survive on for a bit, and they’ve also typically been able to accumulate a decent amount of savings, adding to their net worth. (Franchisors always look at net worth statements, as they’re a major qualifier.)
Real estate is usually a major part of a franchise candidate’s net worth statement, and that’s now a problem. Home values are low, and in some cases, homes are “underwater.” (For instance, the housing market in Las Vegas is currently 80 percent underwater.)
So, what does this all mean?
This means that there are still going to be a good amount of downsized workers looking into franchise ownership, but there will be fewer who have the financial qualifications to get approved by the franchisor and the banks.
It’s too soon to tell if the franchisors will be adjusting their qualification criteria.
As for the banks, I have no reason to think that they will become more flexible in the short term, either.
The credit crunch has had a major impact on franchising, and even with several pushes by lobbying groups like the International Franchise Association to loosen credit up, the credit market is still not very loose.
Intrepid souls who are serious about becoming their own bosses will still find ways to buy franchises in 2011. But patience will be a needed virtue, as the process itself will continue to be a slow one.
The trend that I’m about to share with you is one that’s happening as a direct result of the credit crunch: the conversion franchise.
In a conversion franchise, an independent business, like a local convenience store, pays a franchise fee to become part of a franchise system, like 7-Eleven. Both parties benefit in this transaction:
- The independent store owner gets instant brand recognition and buying power.
- The franchisor gets an instant royalty stream.
Here are five popular conversion franchises courtesy of MSNBC’s Your Business and OPEN Forum by American Express.
In general, conversion franchises are easier to get financed because of the existing revenue stream of the independent store and the brand recognition/proven model of the franchisor. I expect this franchise trend to continue to increase in popularity.
There’s an upward trend in franchising that continues to surprise people both in and out of the industry.
In most cases, in a down economy (like we’ve been experiencing for the past two years), consumers tighten their belts and mostly avoid products and services that are considered luxuries. People tend to focus on their needs…not their wants.
Massage Envy is one franchise business in a fast-growing segment that’s really bucking the odds in a serious way. These membership-based facilities, located in high-traffic areas, offer everything from deep-tissue massage to massages that focus on pressure points. (There’s even something called “migraine therapy massage.”)
Not only are consumers opening their wallets to experience these spa-like services, but people who are looking to become their own bosses are buying franchises like Massage Envy, Massage Heights and others at a pretty rapid pace. (Even with an investment of $290k-$470k.)
Food-related franchises are very popular, and every year, new concepts and ideas are tried. 2011 will see the continued growth of a newer type of food franchises: mobile restaurant franchises.
Mobile restaurants are quite the trend in certain areas of the country, and from an investment perspective, it’s a way for passionate foodies to get into business for themselves inexpensively (compared to opening up a 5,000-square-foot restaurant.)
One mobile restaurant concept, Sauca Foods, out of Washington DC, recently won the 1st place prize in The Great Emerging Franchise Challenge. Vermont’s ZooHoos Eatery is another young mobile restaurant franchise, but with a “green” twist. I expect to see several new mobile food concepts entering the fray in 2011.
Speaking of “green,” 2011 will be a year in which more and more existing franchise concepts will start transforming some of their products and services into more environmentally friendly ones.
Subway, the world’s largest submarine sandwich franchisor, has started some green initiatives. They’ve begun serving salads in bowls made partly from recycled soda bottles and water bottles. They’ve even set up redistribution centers, which bundle all the things that franchisees use more efficiently, so that full truckloads (instead of partially full ones) can deliver those products. One truck, making one trip out of the redistribution center, equals less fuel being used.
Solar panel franchises have been around for a few years now, and they’ll continue to grow, albeit slowly. As more and more people start learning about the potential of solar power and how it can save them money (in the long run), franchises like Solar Universe and Lighthouse Solar will continue to be worth watching in 2011.
The biggest challenge for franchisors continues to be quality lead gathering. There’s certainly no shortage of franchise websites around, and they all have “request more information” forms pasted underneath the listings of franchises that are advertisers on their websites. It’s just that the sheer number of “leads” that franchise sales executives have to contact, vs. how many end up buying their franchises, is too wide of a gap.
More and more franchisors are using social media marketing than ever before, and this lead gathering technique should help the gap that I mentioned close a little more. Franchisors are quickly finding out that it takes time to build a successful social media campaign.
Franchisors are also learning that to be successful in the social media space, the use of specific social media tools that help manage campaigns are a must. Read what Jason Falls says about the importance of social media management tools for franchisors. We’ll continue to see the adoption of social media marketing in franchising for 2011.
If lenders actually start lending, and prospective franchise owners start to see their net worth increase, 2011 could be a better year than 2010 was. Here’s hoping!