IFA’s annual report on the state of the industry, done by forecasting firm IHS Economics, foresees that the franchise sector will once again outperform the overall economy in 2016. U.S. gross domestic product should increase 3.1%, while the franchise sector will see a 5.1% gain.
Except if the whole sector comes crashing down due to an unprecedented federal ruling, that is. This year, there’s a big asterisk attached to that sunny outlook — a wild card in play that could cause franchise-industry growth to stagnate in 2016.
A nervous industry
Nearly all franchisors — 97% — believe the joint-employer rule, should it be allowed to take effect, would negatively impact their business, and 82% said that impact would be “significant” in the IFA’s most recent Franchise Business Leader Survey.
The study’s caveat reveals the terrible secret the franchise industry doesn’t want to think too hard on: Nobody really knows what would happen if this ruling stands.At the least, franchisors would need more insurance against mistakes their franchise owners might make. At worst, franchisors might need to much more closely monitor franchisee decisions, an idea loathed by franchisors and franchisees alike.
The whole concept of franchising as it’s been practiced since the 1950s is under fire here. Traditionally, a parent company gives local owners a guidebook and a system to follow and then lets them operate independently. Franchise owners are an independent-minded breed, and more corporate interference might discourage many from becoming franchisees.
Sectors set to grow
Assuming that industry lobbyists are able to avert doomsday for the whole concept of franchising, life should be rosy.
If so, then which types of franchises are forecast to do best? Here are the six industry sectors — out of the ten major franchise types tracked by IHS — that the survey predicts will see the most growth in new franchise units opened:
- Personal services (+1.9%) — The aging population means more disposable income to spend, spurring growth of this category. Popular personal-service franchise concepts includes spas, childcare, tutoring, senior care, hair salons, and one of the hottest emerging concepts, paint-and-sip studios such as Pinot’s Palette and Painting With a Twist.
- Lodging (+1.8%) — Some travelers may not know it, but many of the best-known hotel brands are franchises, including Holiday Inn, Hilton, and Red Lion. And with the economy recovering, travel is picking up again and room rates are rising. More travel means more opportunity in the sector, so many major chains are in expansion mode.
- Business services (+1.7%) — One of the hottest niches here is tax franchises such as H&R Block HRB +0.89% and Liberty Tax, which have seen explosive growth in recent years. This varied sector includes a wide range of service types, including staffing firms, business-coaching franchises, and companies such as FranNet, which help potential owners choose a franchise to buy. Familiar names include The UPS Store, Cartridge World, and FastSigns.
- Quick-service restaurants (+1.6%) — This sector is the big Kahuna of franchising — it has one-fifth of all franchise units and is responsible for nearly 40% of the entire sector’s employment. Panera Bread is the largest franchise chain in the vanguard of the trend of upscaling of fast food. Quick-serve has been in the sweet spot with diners for several years now, as consumers seek better-quality food served fast, and it’s unsurprising that more owners will be looking to get into this game. The IHS forecast expects quick-serve restaurants to be the fastest-growing in adding workers in 2015.
- Retail products & services (+1.6%) — Retail-store chains should benefit from the general economic improvement in 2015. Many of the best-known national brands are franchises, including 7-Eleven, supplements chain GNC, and Pearle Vision eye-care and eyewear centers.
- Commercial & residential services (+1.6%) — As business picks up, there’s more call for services such as industrial cleaning. Many of the national brands in this niche are franchise chains, such as Jan-Pro and ServiceMaster Clean.