Halftime Analysis: FRANdata CEO Darrell Johnson Explains Where Franchising Stands in 2016

We are halfway through 2016, and the franchise industry continues to hum along – as we near the November election and begin to look ahead to 2017. So how has the first half of the year fared for those in franchising?

1851 Franchise spent time with FRANdata CEO Darrell Johnson to get an overview of the industry as we close Q2 and enter Q3.

This is part two of that discussion. You can read the first part here.

What are the segments and industries within franchising that are performing the best, and are seen most favorable by lenders right now?

The industries that are in higher demand in food are fast casual or QSR type of restaurants, quicker food and quicker service – and in the non-food sectors it’s being driven by demographics like senior care and health care services, as well as fitness and lifestyle brands aimed at millennials.

The US population distribution is shaped like a barbell where you have a big baby boomer generation on one side and then a big millennial generation on the other, and a considerably smaller age demographic in between. Therefore millennials are driving a lot in the QSR, fitness, and specialty type of businesses and the baby boomers are driving health care and fast casual dining (which is a little more relaxed than the QSR concepts).

We are seeing an increase in the number of new brands on a year-to-year basis – there are about 300 new brands that will join the franchising fray this year. Some are spin-offs from established brands, and some are brand new out of the ground trying to build their business model. You get a good indication of which industries are growing from how many new brands are entering them as well as from the number of new units being added within those sectors.

That also leads to a lot of questions for new brands about how to go about their growth. For new brands, they want to understand the operational side – what should they expect across their system to determine how to invest in certain areas. What should they invest in now that is going to provide the most benefit in the long run.

What should new franchisors focus on, and how is FRANdata helping guide them?

There are 11 functions that a franchisor is responsible for – they have to do development, find new franchisees, train them, have involvement in site selection and the preopening side, compliance, legal, marketing – and more. When they are a beginning franchisor they are resource constrained, oftentimes more from the human resources than capital resources – and oftentimes both. If I have four units and four franchisees – how much do I need to devote to training and field support versus if you have 14 units. When do you need to hire more training folks? When do you need to scale from an operational standpoint? Those are daily operational tactical questions that impact their brand over time. If they have one unit underperforming, they will spend a disproportionate amount of time focused on fixing that one location rather than focusing on growth. Better information and advice on how others have worked through those types of situations will help them out – and that’s one of the things we can provide them.

In the other sense, what should existing franchisors focus on now – and how is FRANdata helping them?

There has been a lot more emphasis on comparative performance, and I think that’s a byproduct of the sluggish economy. If it was a better economy, they would be more focused on growth than operational efficiencies. In order to get a better outcome overall, there is much more emphasis on performance. In this type of economy getting more revenue comes, to a greater degree, on taking away market share from competitors. They also need to squeeze expense dollars without hurting their system. We do much more work in recent years on metrics that deal with performance. If you’re on the board of directors of a franchisor – what part of the organization are you overspending or underspending on? Where could they operate better and improve ROI? Which decisions are going to impact things more favorably or adversely over time? That is where data and research from FRANdata can help guide all of those decisions.

What are you most excited about for FRANdata in the near future?

It comes down to two words: performance matters.

The reason I’d use those two words is that franchising is under attack. There are parts that are working well and other parts that aren’t working well. To understand all of that, there has to be performance measures and metrics to help us understand it. There is only one company in the U.S. that is absolutely centered on that and strengthening the business model of franchising – and that’s FRANdata. We are disentangling the data and providing advice and insight that’s leading to enhanced performance. If you want a business model more impervious to attack, execute the business model better. It’s a great business model, but it’s not always well executed and identifying good from bad is important, as is studying the ways it has worked best in your industry so that a franchisor can build on top of that.

We’re going to improve the business model of franchising by staying on the course we’re on.

What issues will be most important this election season?

There are issues that will directly impact all franchise businesses and weaken the business model for franchising as a whole. The model has proven time and time again its ability to adjust and adapt. The NLRB is a significant but not a catastrophic issue for franchising. It may weaken the business model and hurt small businesses, people and families in the process – but the model will adapt. It’s a pliable business model, so the NLRB won’t be catastrophic but it likely will weaken the model as franchisors are forced to pull back from support that otherwise would help franchisees succeed.

However, there are issues that impact the ability for the franchise model to operate on a fundamental level. The overtime issue is a good example. If you basically double the exemption level, you create a domino effect across a whole business. This isn’t just franchising, it’s business in general. We’re going to create a much higher cost for all businesses. Either returns on capital over time become less appealing so you have fewer businesses starting, growing and expanding, and/or you accelerate the tradeoff of capital for labor. It’s similar to the kiosks found in fast food restaurants. When you have something that is dramatically changing operations like that – franchising can’t adjust without a fundamental substitution of capital for labor. You put a kiosk in, you let a person go. You end up with less labor as a result of something like the overtime rule. That’s an example of one where the franchise business model has no other way to address it. Part-time labor is often a step toward full-time employment and in the franchise business model, is accompanied with training that can lead to career development. Arbitrarily changing the exempt level will most hurt the people it is intended to help: unskilled and inexperienced.

In small business, when you create anomalies and disparities around minimum wage and overtime rules, you get unintended consequences. We’re heading down a path where one of the biggest job training programs in America – franchising – is about to get undermined by good intentions that are misdirected. This isn’t political rhetoric. It’s common business sense.