Something Has Definitely Changed: The "New Economy" and its Impact on Franchising
Has the United States economy changed? Are we in a "new economy"?
Yes, undoubtedly yes. In fact there are so many new facets to our economy - some good, some questionable and some bad - that you don't need me to tell you that the economy has changed. Ultimately, where our economy "ends up" is still undecided and, in large measure, will be decided by political and economic factors yet to be determined. But, no matter where we end up, one thing is clear: our economy has been and will remain fundamentally altered.
So, what are some of the characteristics of this evolving "new economy" and what do franchisors need to know?
- Opportunity Still Exists - Although there are elements of economic turmoil - opportunities still exist. For the start-up franchisor the current level of economic instability may indeed constitute a competitive advantage and opportunity to level the playing field and compete with the "big players". More than ever, technology is abundant and relatively cheap. Competitive tools such as the internet, automated database systems, point of sale systems and social networking have created the opportunity for small competitors to compete at the highest levels and take on much larger competitors who may be distracted by franchisee defaults, litigation and over leveraged balance sheets.
- A Renewed Focus on Franchisee Profitability is Critical. Prior to the current economic cycle (and the 10 years prior to that) capital was abundant with consumers and prospective franchisees being afforded access to easy credit. In many instances, franchise system sales and franchisee investments were, in large measure, fueled (or at least inflated) by consumers and franchisees who simply spent more than they could afford. System growth was focused on the incremental "gross sales and royalties" generated by franchisee expansion. Insufficient resources were placed on franchisee profitability (compared to gross sales) and, in the current economic cycle, franchisee default rates are increasing at a substantial rate. A renewed focus on franchisee profitability (even if it comes at the expense of gross sales) is more critical than ever as consumers and capital markets remain in retreat.
- Other Factors. As you are well aware, there are many other facets to this "new economy", including the impact of the declining credit markets on franchisee financing. In our future and continuing posts about franchising and the new economy we will discuss franchisee financing and other issues that franchisors are confronting.
This story is evolving rapidly...
