It`s the Economy Stupid

It’s All About The Economy Stupid!
A Preview of Economic Storm Clouds….
FRANdata Supplier Services
Access and Understand the Franchise Industry
•
Understand the Market and Measure Total Opportunity—
We help franchise suppliers understand the size, trends, and nuances of the franchise industry. We identify some of the macro‐issues that will control the measure of opportunity.
•
Determine Best Prospects—We help discover the characteristics of a supplier’s best prospects. This involves a combination of our expertise, in‐house information and research to gauge direct interest in a particular product or service.
•
Target Specific Niches—Having identified the characteristics of an ideal prospect, we find all of the franchises that meet these characteristics.
•
Create Effective Lead Lists—We provide contact lists of either franchisors or existing franchisees when appropriate to help you make development calls.
•
Assess the Competitive Landscape—FRANdata can identify and analyze a franchise supplier’s primary competitors and gauge their relative success and failures in the marketplace.
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“FRANdata puts into perspective
the universe of franchising.
Franchising touches almost every
industry and having specific
insight and guidance into the
inner workings of this dynamic
vertical segment helped us
validate and develop new
franchise strategies that we would
not be able to do on our own.”
- Cecelia Choi
Strategic PartnerManager, Google
Outline
• On recoveries after financial recessions
• The state of the economy
• Some predictions
• What that means for you
• Success in a slow recovery environment
• Measuring success
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Beating GDP in Slow Growth Market
“A blindfolded chimpanzee
throwing darts at the Wall Street
Journal can select a portfolio that
performs as well as those
managed by the experts”
– Burton G. Malkiel,
in “the Preface to A Random Walk
Down Wall Street”
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Beating the Market?
“Common sense attests
that some people can and
do beat the market. It’s not
all chance “
– Burton G. Malkiel,
“181 pages later in A Random Walk
Down Wall Street”
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The Economy
Phases of Economic Recovery
Phase 1 (2008-2011)
• Rapid business/gov’t/consumer deleveraging and capital
constriction
• Decreased consumer spending
Phase 2 (2012-2013)
• Rise in low-risk lending
• Lingering uncertainty
Phase 3 (2014 –[2017])
• Increased overall lending and rising interest rates
• Slowly rising confidence and spending
• THE NEW NORMAL
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End of Ultra Cheap Credit
• The Fed will end QE this year and interest rates are likely to rise soon after
Interest Rates
9%
8%
7%
6%
30-year fixed
mortgage rate
5%
4%
15-year fixed
mortgage rate
3%
2%
1%
0%
2007
2008
2009
2010
2011
2012
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2013
2014
2015
Small Business Lending
40%
Thomson Reuters Small Business Lending Index % Change from Previous
Year
30%
20%
10%
0%
-10%
-20%
-30%
2006
2007
2008
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2009
2010
2011
2013
Jan.
Oct.
Jul.
Apr.
Jan.
Jul.
2012
Oct.
Apr.
Jan.
Oct.
Jul.
Apr.
Jan.
Oct.
Jul.
Apr.
Jan.
Oct.
Jul.
Apr.
Jan.
Oct.
Jul.
Jan.
Apr.
Oct.
Jul.
Apr.
Jan.
Oct.
Jul.
Apr.
-40%
Jan.
• Lending to small businesses as an overall percentage of business lending decreased from 35% in 2008 to 24% in 2014
2014
Evolution of the Credit Box
Senior Loan Officer Opinion Survey on Bank Lending Practices for Small Firms
• Lending process is moving towards being “lender driven”
• Banks are loosening credit criteria and lending is up 26%
• Lenders are slowly going up the risk curve, closing the lending gap
100%
80%
60%
40%
20%
0%
Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4
2008
2009
Tightened Conisderably
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2010
2011
2012
Tightened Somewhat
2013
2014
Unchanged
Ability and Willingness to Lend is up…

Experienced franchisees will benefit from cheaper loans and better
terms from conventional lenders

Lending environment will be tougher for emerging brands and new
franchisees, which has opened the door for alternative lenders
Financing to Experienced Franchisees
Financing to New Franchisees
Other
11%
SBA
35%
Other
22%
Conventi
onal
54%
SBA
43%
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Convent
ional
35%
U.S. M&A Activity
• In December, 2014, $8.9 billion was spent on deals – a 10% increase from 2013
• Rising competition among buyers is driving sustained momentum into 2015
U.S. M&A Market Index
1,200
1,000
$250
$200
800
$150
600
$100
400
$50
200
0
$0
FactSet Research
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Deal Volume
Aggregate Deal Value (bn)
May 2004
Sept 2004
Jan 2005
May 2005
Sept 2005
Jan 2006
May 2006
Sept 2006
Jan 2007
May 2007
Sept 2007
Jan 2008
May 2008
Sept 2008
Jan 2009
May 2009
Sept 2009
Jan 2010
May 2010
Sept 2010
Jan 2011
May 2011
Sept 2011
Jan 2012
May 2012
Sept 2012
Jan 2013
May 2013
Sept 2013
Jan 2014
May 2014
Sept 2014
Jan 2015
May 2015
Consumer Confidence
120
100
80
60
40
20
0
Source: The Conference Board
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Why doesn’t this recovery feel good?
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Slowest Recovery Since WWII: Output
Source: Federal Reserve
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Slowest Recovery Since WWII: Employment
Source: Federal Reserve
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Economic Lift After Recessions
• Recession of 1948
Manufacturing
• Recession of 1957
Infrastructure
• Recession of 1969
Defense, Telecommunications
• Recession of 1981
Defense, Real Estate
• Recession of 1990
Technology
No clear driver
• Recession of 2007
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Elusive Growth
• Historically low and artificially held down interest rates are no
longer boosting the overall economy
• Declining gas and commodity prices have not produced a
predicted rise in consumer spending
• Existing growth is uneven, concentrated especially in key urban
centers
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Congress Will Not Drive
“I think you'd have to go back to the 1850s to find
a period of congressional dysfunction like the one
we're in today.“
-- Daniel Feller, Professor of
History, University of Tennessee
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Congress Will Not Drive
The 113th Congress was the second-least
productive in U.S. history. It had the lowest
Source: Libraryapproval
of Congress, Gallup
rating of any Congress in 40 years
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The Election Typically Isn’t a Driver
Traditional post-election
economic slump looming
Source: Library of Congress, Gallup
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Economic Outlook: Global Growth
Regional GDP % Growth
10
0
2013
2014
2015
2016
Developing Europe and Central Asia
East Asia and Pacific
Latin America and the Caribbean
Middle East and N. Africa
South Asia
Source: World Bank
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2017
Systemic Low‐Skilled Labor Issues
Source: Acemoglu and Autor analysis of the current population survey for 1963-2008
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
The demand for high-skilled
workers (and their wages)
continue to rise

The demand for low-skilled
workers (and their wages)
continues to fall

Automation will become
increasingly standard

Minimum wage debates will
continue to affect the industry
Beating the Market
Beating the Market
• Annual organic growth less than 3%
• Nearly zero sum market share
• Defining and connecting with customers
• Challenge and opportunity of sub-sector
specialization
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Proliferation of Brands
Fastest Growing Industries
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
Health and Fitness

Frozen Desserts

Clothing & Accessories

Business Services

Education and Child
Services
Measuring Success
Measuring System Success
Business Metric
What is healthy?
Unit Continuity Rate ™
95%+
Real Business Failure
<1%
System Growth
10%-40% (depending on system type and maturity)
Recurring Revenue Self-Sufficiency ™
Yes
Revenue to Initial Investment Ratio
x1-x5
Historical and Projected Unit Success Rate ™
70-95% (depending on industry)
Franchisee – Franchisor Relationship
Varies (litigation, satisfaction surveys)
Franchise Agreement Assessment
Level of lender friendliness
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The Evolving Franchise Business Model
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Sales : Investment
Performance Transparency to Lenders
Return on Training
Comparative Measures
Transfer Activity
Unit Operating Costs
Transparency
Same Store Sales Growth
Return on Marketing
Time to Breakeven
Unit Success Outcomes
Return on Development
Navigating the Choppy Waters
• Awakening a fundamental strength of the franchise business model • The battle for market share will be won by best brands • Comparative measures and benchmarks will define “best”
• To prospective franchisees, better FPRs • To lenders, better brand performance risk analysis
• To media and legislators, real success/failure outcomes • To franchisors, support/outcomes relationships
• The franchise business model is in the era of comparative measures
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“It’s Not All Chance”
• Economic recovery will continue to be slow
• Growth will come primarily from increasing your share of the pie,
not from a larger pie
• Market share will be challenged on two fronts:
• Specialty brands targeting niche consumers
• Direct competitors working to increase market share
• Performance metrics will be key to assessing the valuation of your
brand
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FRANdata Franchisor Services
Best Practices Research and Advisory
For more than 25 years FRANdata has studied the performance and activities of every franchise in the US and beyond—3,000 active franchises across 230 different industries. Now you can use this information to help you meet your development goals this year. You choose your competitors/peers. For each brand we can help you:
• Learn about their marketing programs, where they advertise, events they attend, awards and performance claims they make
• Discover industry‐wide trends that might form the direction of your business
• See their past sales success and project their goals for the future
• Compare the basic offering details: fees, start‐up costs, agreement terms
“This has been a productive
engagement with FRANdata. Tide
Dry Cleaners, and Procter and
Gamble as a whole, are very datadriven businesses. FRANdata brought
forward quality analysis and
perspective in the Franchising and
Dry Cleaning arenas. They were able
to gather and analyze financial and
operational information as well as
provide us with helpful insights and
metrics that enabled us to focus our
strategy."
- Jeff Wampler
CEO, Tide Dry Cleaners
33
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FRANdata is the only source of comprehensive information about franchising:
FRANdata ‘s capabilities are uniquely focused on the franchise ecosystem Fact‐based research and analysis
Custom Research: Provides strategic direction through timely analysis
World's largest database of franchise information
Reports: Data, analysis, trend forecasts
Tracks and analyzes more than 3,000 brands in 30 sectors and 230 industries Complete objectivity: FRANdata
receives no advertising or referral fees
Ron Feldman, CFE
CDO
FRANdata
[email protected]
Manages Franchise Registry with more than 6000 lender members and 3500 franchisor members
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