Franchising has been affected by a number of internal and external factors over the last year, some of which have the potential to alter the composition of the industry.
The franchise industry has always modified itself in response to the changing times, and 2018 was no different. Between the rising number of businesses turning to the franchise model, a number of policy changes and changing consumer preferences, this year had a palpable impact on franchising, leaving the industry in a precarious position as it looks toward the future.
1851 publisher and CEO of No Limit Agency Nick Powills summed up the uncertainty that has plagued the franchise industry under the umbrella of growth. “Growth is impacted because more businesses than ever are turning to the franchise model,” he said. “More brands competing for the same pool of buyers creates more of a challenge when seeking prospective franchisees,” Powills added.
Powills further explained that when the economy is good, franchise sales typically lag. “There’s usually a trigger moment that compels a prospective franchisee to act. In a good economy, there are less trigger moments because job security has potential franchise buyers sitting on the sidelines longer,” Powills said.
New York-based franchise attorney Harold Kestenbaum, who has over three decades of industry experience, noted two main legal factors that have impacted the franchising industry over the last year. “The biggest influences on the franchise industry that I’ve seen this year have been the push to remove no-poach provisions from franchise contracts and the back-and-forth surrounding the NLRB joint employer rule,” Kestenbaum said.
No-poach clauses in franchise contracts prohibit workers from switching from one franchise location to another. “The critique of the provision began in Washington and now other states are beginning to look at it,” Kestenbaum said. So far, 11 states’ attorneys general deemed the provisions unlawful, saying they reduce competition and may violate antitrust laws. Kestenbaum noted that while anti-poach clauses are present in most franchise agreements, most franchisors don’t enforce them.
“You see these provisions enforced predominantly with big franchise players, who are the ones being targeted in these complaints,” Kestenbaum said. “With bigger brands, there’s more employees and more units to jump to. Compare that to a franchise with just one unit per town and it makes the clause irrelevant,” he added.
Kestenbaum noted that perhaps the most significant discussion in the legal sphere poised to have the biggest ripple effect on franchising is the National Labor Relations Board’s proposed rollback of its joint employer rule. Over the last year, the NLRB has taken steps to change a rule that makes companies liable if their franchisees and contractors commit labor violations.
“With the loosening up of this rule, franchisors can do more in terms of quality control,” Kestenbaum said. “Previously, the rule considered you a joint employer if you made suggestions or established particular criteria for employees. What will change is that now, that won't weigh to the degree of joint employment, making it easier for franchisors to operate without burden,” Kestenbaum added.
A few other policy changes have the potential to affect franchisees and franchisors going forward, both Kestenbaum and Powills pointed out. The effects of the Trump administration’s immigration policy have been felt by the restaurant industry as they struggle to fill positions as a result of a dwindling immigrant workforce. According to the U.S. Bureau of Labor Statistics, foreign-born workers were more likely to be employed in the service industry than native-born workers in 2017, 23.9 percent versus 16.1 percent.
Kestenbaum also noted the escalating trade war with China as something that has begun to raise costs for construction and manufacturing franchise brands and those that use steel, metal and aluminum in their buildouts. “Minimum wage hikes and tax increases at the state level are all things that make current franchisees think twice about opening that second unit,” Powills said. “Plus, labor is tough to find and real estate is costly. It’s a perfect storm causing lots of frustration in the industry,” he added.
“The last year has been a really challenging time for franchising,” Powills said. As for what the future holds, Powills pointed to the certainty of evolving technology as the indicator to where things were headed and how brands must harness it to differentiate and advance offerings.
“Amazon has completely cut out the legs of the convenience store. Grubhub is the biggest restaurant chain in the world, changing the composition of the restaurant industry,” Powills said. These changing consumer preferences and the dwindling amount of human interaction in POS mean franchises must chase these leaders to stave off obsoletism.