UPDATE ON THE US FRANCHISE MARKET

UPDATE ON THE US FRANCHISE MARKET

As the birthplace of franchising and a market in which this business model is developing more widely than anywhere else in the world, the United States is lagging behind. Since the start of the health crisis, the franchise sector has undergone upheavals that could shape the future of the industry. Invest US takes a look at the franchise market in the US.

A brief history of franchising in the USA

The origins of franchising, as we know it today, can be traced back to a variety of sources. Many agree that the franchise model has its origins in American history, notably with the printing press venture of Benjamin Franklin and Thomas Whitmarsh in 1733.

In the mid-18th century , the two men entered into an agreement under which Whitmarsh would be responsible for managing the business and monitoring expenses. Franklin, for his part, would assume the responsibilities of a franchisee today. Franklin thus took charge of supplying the printing tools, renting the printing press, repairs, and general maintenance so that Whitmarsh could operate his business there.

A successful first experiment in South Carolina convinced Franklin to repeat the operation—based on the same model—in New York, Antigua, Newport, Lancaster, and Boston. Very quickly, its expansion took on international proportions, with the birth of companies in Jamaica, Canada, and Great Britain.

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For Franklin, "the American customer's understanding and acceptance of franchising as a business model means that the pool of potential franchisees is perhaps larger than anywhere else in the world."

At the end of the 19th century , in 1896 to be precise, Henry Ford began selling automobiles en masse. Wanting to expand his reach, he commissioned William Wetger to build and open the first independent Ford dealership in Detroit. Thus was born the automotive franchise, a true pillar of the industry.

Some 50 years later, in 1160, the International Franchise Association, the leading American authority on franchising, opened its doors. Around this time, food franchising experienced unprecedented growth in the United States, including the proliferation of McDonald's restaurants and the establishment of the yellow arch, considered the pinnacle of success for the franchise model.

The franchise market in the USA: an American economic pillar

Today, franchising has become one of the pillars of the American economy. This remains true even in times of turbulence, such as the health crisis that began in early 2020.

In 2018, a franchise study reported nearly 760,000 unique franchise locations in the United States. Translated into revenue, these entities generated more than $760 billion and employed more than 8 million people. Unsurprisingly, the most successful franchisees were in the food and fast-food sector: McDonald's, KFC, Burger King, Wendy's, and Sonic, to name just the largest. These fast-food restaurants generated $250 billion, easily leading the franchise pack, ahead of business services, which generated $100 billion over the same period.

A pioneer of food franchising in the United States, McDonald's generates approximately $96 billion in annual revenue. It remains the largest American franchise today. Subway ranks first in terms of franchise numbers, with 42,100 locations worldwide in 2018, more than half of which are located in the United States.

Franchising in the United States: a real culture

The United States is home to 330 million people, most of whom are concentrated in urban areas. Across the country, only 2 in 10 residents live in rural areas. Comparing the number of franchises to the population in the United States, the figure is 379 franchises per capita. The highest figures are recorded in California, a state with 38 million residents and 82,739 franchises. Conversely, in the Midwest, Iowa has only 262 franchises per capita.

It goes without saying that the United States is a particularly attractive market for brands expanding through the national and international franchise model. The primary reason for this is American consumers' understanding and acceptance of franchising as a business model. This means that the pool of potential franchisees is significantly larger in the United States than anywhere else in the world. The credibility of the model and the trust placed by consumers in a franchise brand's ability to provide consistent service are strong. This is likely due to the enduring legacy that franchise brands have managed to establish in the United States, as well as the simple presence of reputable names. It's worth noting that one in seven businesses in the United States is a franchise.

If we look at the number of franchise brands by sector, there are between 20 and 30. In the United States, there are clear and well-defined regulations regarding franchising and business. These govern and guide franchisors to ensure that disputes are kept to a minimum and that any obstacles can be overcome based on past experience. Most of the time, a franchisor will be able to tackle any problem their franchisees may encounter simply because they have already experienced this many times in the past.

Given the extensive supply chain infrastructure in the United States, with over 5,000 public airports for transporting resources and materials, logistical challenges are rare. Furthermore, from a linguistic perspective, with English being the language spoken throughout the United States and the world, communication is immediate and seamless.

These latter elements, as innocuous as they may seem, contribute to the success of the franchise in the USA.

What has happened to the franchise industry in the US since the coronavirus pandemic?

To say that the coronavirus has shaken the global franchise market would be an understatement. Many international markets have felt the shockwaves of the health crisis, with the United States leading the way. Losses attributed to the pandemic have reached a total of $185.3 billion.

Nationwide, store closures have been on a rolling basis since the beginning of 2020, forcing many businesses to modify their offerings or close their doors.

Nationwide, store closures have been on a rolling basis since the beginning of 2020, forcing many businesses to modify their offerings or close their doors.

In 2021, US government support came in the form of a program called the Paycheck Protection Program (PPP). This is a plan to support American SMEs, helping them through the most difficult months of economic instability. Approximately 70% of franchises received a PPP loan. However, this did not guarantee the jobs of millions of Americans. As of August 31, the franchise market had lost 1.4 million jobs, including more than 40% of permanent positions.

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The special case of franchising in the hotel industry

Like everywhere else in the world, the hospitality sector has suffered particularly hard from the Covid-19 crisis. The business closure rate has risen to 6.9%, or 2,069 franchised businesses. This also equates to 215,000 job losses.

For some restaurants, lockdowns and social distancing measures have resulted in orders reaching an all-time low, in the form of takeout and home delivery. At the start of the pandemic, restaurants that weren't ready for this mode of operation had to adapt as best they could.

By mid-April 2020, 60% of restaurants in the United States were closed. A few days later, a stimulus check program helped boost sales. By mid-September, restaurant closures were stable at around 13.6%. While the number of permanent closures is currently unknown, the hotel and restaurant industry is expected to see increased demand, and the sources from which it comes will vary.

Before the coronavirus pandemic reached its peak, takeout orders at US franchised restaurants accounted for about 20% of sales. In just three weeks, this figure jumped to 70%. It then dropped to around 30%, but remains significantly higher than the initial figure.

It's clear that the coronavirus crisis has had a significant impact on American industry, particularly the franchise sector. Economists are seeing signs of a comeback for franchises as the economy recovers. Also worth noting is the explosion in orders from small restaurants, due to the exponential increase in takeout orders.

Outdoor dining has also increased, but for obvious reasons, it remains highly seasonal. It's expected that once restaurants and franchised businesses in general are allowed to reopen en masse, they will still have to overcome obstacles that could prevent the franchise industry from achieving the impressive numbers it has often been associated with. Among these obstacles is abusive coronavirus-related lawsuits, which could prevent businesses from returning to normal and force some establishments to close, even though they are currently struggling to survive.

In July 2020, the IFA presented a petition to Congress signed by over 7,000 franchise owners calling for coronavirus liability protection for businesses that follow applicable guidelines. This petition came shortly after 1,300 COVID-19-related lawsuits were reported since May 1. In June 2020, the U.S. Chamber of Commerce released a study showing that two-thirds of small businesses with 20 to 500 employees are concerned about the possibility of legal action, feeling threatened by the potential for optimal reopening.

This threat of litigation is a significant burden for franchises. However, there are ways to mitigate the risks: franchises take their responsibilities seriously to provide a safe work environment for their employees and a secure and comfortable place for their customers. The fear of litigation and other legal proceedings pushes many businesses, such as gyms, to ask their customers (or members) to sign a waiver before they begin training.

In addition to litigation, the franchise industry is concerned about revenue generation and their ability to adequately adhere to the stringent health and hygiene guidelines imposed on all businesses across the country. For example, a Verizon small business recovery survey found that just over half are worried about financial sustainability if social distancing regulations remain unchanged. Seven in ten businesses surveyed believe they can stay open for at least six months, or even longer, if conditions in the United States remain as they are now. Only 3% of executives surveyed believe that, if nothing changes, they will be forced to close permanently within the next two months. The same survey also indicates that the franchise industry is on the road to recovery, although it still has a long way to go.

What does the future hold?

The rich and tumultuous history of franchising in the United States makes it difficult to predict the future and what it holds for businesses in this sector. Hundreds of thousands of entrepreneurs continue to flock to American franchises, embarking on what they call "the American dream." After all, while some sectors like hospitality and restaurants have taken a beating this year, businesses remain confident in their ability to withstand the downturn.

The question is: what distinguishes the United States as a market that international franchisors should seek to enter as soon as possible? The United States remains the world's largest economy, with a population of 330 million and a per capita GDP of $65,000. The regulatory environment is well defined and remains the same for all franchises, regardless of their location. The United States, it should be remembered, is open to new concepts, particularly international brands.

American franchises looking to expand their concept abroad, on the other hand, rely on their brand awareness and inherent trust in their home country, which goes hand in hand with a successful growth strategy.

Admittedly, establishing an international franchise in the United States is no easy feat. While American consumers welcome concepts from around the world, the U.S. regulatory framework can be daunting. Regulatory disclosure and filing requirements at the federal and state levels, as well as those of the U.S. Department of Commerce, inevitably raise the question: Where do you start? Alongside this issue, there's a second: how do you adapt your brand offering to the American market?