Depending upon your source of information, we are headed into a recession or a depression or even a catastrophic cessation of all business activities. By any definition, things do not look promising and we are looking at a new economic landscape. The question arises as to how that will affect franchising. People will tell you that franchising is counter-cyclical, that it continues to thrive during a downturn in the general economy. We have touched on this before, but let’s try to approach the question with numbers.
The equity markets are searching for a bottom after a historically precipitous decline. However, let’s take a look at a small part of the equity market, a selection of U.S. publicly traded franchisors referred to as the Rosenberg Center Franchise 50 Index, developed by the University of New Hampshire’s Rosenberg International Center of Franchising.
The index tracks the performance of the top 50 U.S. franchisors. These 50 franchisors represent 98% of the market capitalization of public companies engaged in business format franchising. Using a similar model as the S&P 500, the performance of those franchisors has been tracked and charted. In the 2nd quarter 2008, the RCF50 was down 4.4%, compared to the S&P 500 being down 3.2%. For the first half 2008, the RCF50 was down 12% and the S&P 500 was down 12.8%. Not much of a difference there. However, for the years 2000-2008, the RCF50 is up 59.6%, while the S&P 500 is down 8.2%. These numbers suggest that franchising has historically outpaced the general economy, but is suffering similarly in this recent downturn.
A quick review of various franchise related websites finds a similar set of statistics being advanced by those who support the franchising concept. These statistics consistently support the notion that franchised businesses are more growth oriented and survive at a higher rate than non-franchised businesses. For instance, a US Department of Commerce study is quoted on more than one site as showing that from 1971 to 1997, less than 5% of franchised businesses close each year, while those same websites cite a US SBA Study looking at the period 1978 to 1998, which found that 62% of non-franchised businesses close within the first 6 years of their opening.
It is difficult to independently verify those statistics and they are dated in any event. But if those trends are true, than someone looking to get into business in an unfriendly economic environment would be wise to look at franchised concepts rather than inventing his own. The question remains whether the current economic environment is so toxic that any business venture, be it franchised or self-invented, will find it impossible to thrive.