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Sniegowski: Franchising Predictions for 2011

Over 80 different industries license franchises. So when CNBC asked me to make predictions for 2011, it took me a while to figure out how to eat this elephant. A normally complicated world for making predictions becomes even more complicated when franchise is thrown into the mix.

But here goes...

Better Information

A few rays of sunlight will pierce the franchise fog in 2011. The franchise field is anything but transparent. As someone who reports on it, I know that sometimes it takes months of efforts to get a small glimpse of what is happening behind the counter of a particular brand. Even franchisors have a difficult time determining what is myth and what is reality. No one is immune.

As an example, Black Enterprise magazine this year stated that Coverall was one of its top 40 franchise picks for 2010. No mention was made that Coverall’s sales per franchise was $39,000 per year. That's the top-line number, before any business expenses and royalties are taken out. How's that for a business-in-a-box?

According to Entrepreneur magazine’s Franchise 500's top 10 list for 2011, a top quality franchisor, McDonald's , is ranked as No. 3, upstaged by No. 2 BP's ampm convenience stores. Yeah, right. Come to think of it, number two is a good description.

How is a good franchisor supposed to be noticed when trade publications are clueless themselves?

"Franchisees who have the money, an increasingly uncommon situation in today's economy, should remind themselves that they are in the driver's seat." -Editor, Blue MauMau, Don Sniegowski

In this industry, the wheat, say a franchisor like Meineke Car Care Centers, may struggle to be separated from the chaff, such as Cottman Transmissions, which has one of the highest percentages of owners who are unable to pay back their loans. In a tough sector, franchisor Meineke has listened to the Meineke Dealers Association, which helped the franchise system improve. It’s far from perfect, but it’s better.

Part of what gladdens the hearts of franchise salespeople when they see Wall Street traders or other sophisticated investors, besides their money, is they think all that is needed to get up to speed will be provided by the franchisor. If the prospects don't have industry, business or franchise experience, they become even better sales targets. Someone who has never been in the dairy or franchise business is a great mark for the sale of an ice cream or frozen yogurt franchise.

“Franchise businesses have a much higher business continuation rate than non-franchise businesses,” reassures the industry propaganda, as if there were something magical about just being a franchise. “Before we accept your hundreds of thousands of dollars, we need to be sure that you are right for us,” continues the pitch, trying to turn the tables on investors by treating them as if they were applying for a job or seeking admission into Stanford.

So how does a sojourner in a strange land get the scoop? Market researchers and trade associations provide resources and a network to better know an industry, like retailing. Likewise, independent franchisee associations are one of the best sources of inside information for franchises.

The good news is that franchisee associations will see an uptick in 2011. Franchisee attorney Andy Selden, who is a leader in forming independent franchisee associations and national cooperatives, told me that he is seeing an increase in the creation of these organizations.

Feel that sunbeam?

In 2011 the media will probe deeper when covering franchise systems and interviewing CEOs of franchising firms, introducing yet more light.

2011, a buyer's market. Transactional franchisee attorneys tell me that they've never seen an environment like this, where so many fees and agreements are up for negotiation. That is because franchising firms as a whole are cutting back on their budgets to sell franchises. Franchisees tell me that conventional loans are mighty hard to come by. They expect it to remain difficult in 2011.

Franchisees who have the money, an increasingly uncommon situation in today's economy, should remind themselves that they are in the driver's seat. If the franchise contract and its fees aren't exactly right, walk away. There are 3,500 other franchising firms to choose from. The franchise contract is laid with hidden mines. The trick is to find an attorney who knows what a franchisee-friendly contract looks like. Family lawyers will be clueless.

There are organizations that can help. For example, the AAFD has access to an arsenal of trained and ready-to-go franchisee attorneys to help identify clauses that are particularly egregious and to bend the agreement in your direction.

AAFD chair Bob Purvinsays, “We have a cache of ‘franchisee-friendly agreements’ and we have services to 1) review offerings, 2) assist with negotiations, and 3) make referrals to qualified counsel.” Purvin has a simple rule of thumb for investors: don’t get involved with chains that have no independent franchisee association.

Other experts agree, adding that advisory councils, which are franchisee boards that simply provide advice to the franchisor, are not enough.

Rising Revenue

Automobile sales will see an uptick, according to franchise owners via their independent franchisee association. Paul Taylor, chief economist of the National Automobile Dealers Association, says, “Several economic factors, such as an aging U.S. fleet, strong trade-in values and an improving stock market, are helping to sustain new vehicle sales.” Franchisees say that the average American car and truck is now over 10 years old. “Many consumers simply will feel the need to buy a new car or truck as the mileage on their current vehicles moves beyond the 120,000-mile mark,” Taylor says. The run-up in used vehicle prices is also pushing shoppers into the new vehicle market.

Gourmet burgers will continue to see growth. 2010 saw a host of better burgers introduced into the market. Five Guys Burgersand Fries saw explosive growth. Giant chains like McDonald's and Burger King joined the fray. That favorable wind to gourmet burgers will continue to blow in 2011. In June of this year, a report from food researcher Technomic stated, “I think we will see a shakeout in the years to come as some of the fast casual brands go head to head regionally, but for the next few years, there seems to be ample opportunity to grow.”

Man-in-the-van food franchises are moving into the suburbs. Franchisees can expect corporate to cautiously extend the brands. That is to say, expect more franchisors like Pizza Hut to offer WingStreet-like extensions to give their franchisees opportunity to grow. Also, expect more franchised restaurants to reveal their food supply sources. For example, Five Guys now shows customers who their peanut and fries farmers and suppliers are. Non-franchised chain Chipotle actually highlights farmers as quasi-celebrities. That trend will grow in 2011.

2011 will actually see a bounceback in hotel revenues, even though many hotel franchise owners have hunkered down and budgeted for rougher times. “The U.S. lodging industry has clearly passed through the trough of the lodging cycle and begun its ascent up the recovery curve,” writes Robert Mandelbaum, director of research information services for Colliers PKF Consulting. He argues that hotel owners are now a bit too conservative in their budgets for 2011, thinking that 2011 will be another 2009 or 2010.

Behind the Counter: The Untold Story of Franchising premieres Wednesday, Dec. 15 at 9pm ET.

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Don Sniegowski is the founder of Blue MauMau, the web's premier franchise community, providing access to independent franchise news and honest dialog with top experts. Besides having a jumble of letters in his last name, Mr. Sniegowski has a few more associated with his schooling. He has a B.S. in Finance and a B.A. in Chinese at BYU; studied at UCLA, and obtained an MBA on the other side of town at USC's elite IBEAR program at the Marshall School of Business.

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