What California’s Economic Outlook Means for Franchisors

If you’re a franchisor looking to develop your business in California, you’ll want to consider the state’s policy variables and growth rates when scaling your plans.

By Victoria CampisiStaff Writer

Updated 11:11AM • 07/21/23

This month, 1851 is taking an in-depth look at ALEC-Laffer’s 16th annual “Rich States, Poor States” Economic Competitiveness Index and how it can be useful to franchisors as they expand their footprints. The report ranks all 50 states based on two criteria: 1) Economic Outlook, a state’s current standing in 15 state policy variables; 2) Economic Performance, a retrospective measure based on a state’s performance over the past 10 years.

For the state of California, these rankings reveal a lot about where the state economy is going and where there is opportunity for their economy to grow.

2023 Economic Outlook Ranking: 45
2023 Economic Performance Ranking: 18

The State

In 2023, California's economy is expected to weaken after experiencing a decline in gross domestic product (GDP) during the first half of 2022, followed by a partial recovery in the second half of the year, according to Comerica. Several factors contribute to this projection, including the spillover effects from a correction in the tech sector, the failure of Silicon Valley Bank, a slowdown in the state's housing market, as well as ongoing challenges caused by high inflation and rising interest rates.

In 2022, California's population lost around 138,400 people to 38.94 million. But these recent population losses are predicted to partially reverse in 2023 due to the resumption of immigration flows after the pandemic, fewer job opportunities in other states and higher mortgage rates, making it more difficult to sell homes in California.

However, payroll growth is projected to slow significantly from 5.6% in 2022 to 1.1% in 2023. The job market in California is under pressure, leading to an increase in the state's unemployment rate. Consequently, total personal income is expected to rise at around 2% in 2023, lagging behind inflation.

Making Sense of the Data

What does this mean for California’s economy? To start with the Economic Performance report, the index shows that within the past 10 years, California has been outperformed by only two other state economies.

The performance index is based broadly on a state’s performance within state GDP, absolute domestic migration and non-farm payroll employment. California has seen an absolute domestic migration of a whopping -1,551,510, ranking it 49th in the country.

The Economic Outlook tells another story about California’s economy. The ranking is based on a state’s current standing in 15 state policy variables. Each of these factors, ranging from sales tax burden to state minimum wage, is influenced directly by state lawmakers through the legislative process. In this ranking, California appears at No. 3, with a top marginal personal income tax rate of 13.3% and a top marginal corporate income tax rate of 8.84%.

The report indicates that, generally speaking, states that spend and tax less experience higher growth rates than states that spend and tax more. While this is an important finding for entrepreneurs looking to start their own businesses, it shouldn’t discourage them from investing in their dream franchises if they're in a market with a slower growth rate.

Franchise Growth Plans

So what should franchisors do with this information? When it comes to deciding where franchisors should develop their brand, it’s always important to look at the complete picture of what the region has to offer. Though most franchisors take a shotgun approach — meaning wherever a prospect franchisee inquires, the franchisor will typically entertain that marketplace — the strategy of looking at these overall policies can help them scale their business at a more efficient rate. With that said, findings within the report should not be the deciding measure for franchisors, but they should play a role in the decision.

Grégoire

Current units in state: 1
Growth capacity in state: 10
Total jobs created at max growth capacity:
Total unit count: 1
Investment range:

Grégoire, a fine fast casual eatery concept that has owned an intimate, open-concept space in Berkley, California, for 20 years, is ready to expand in California. The restaurant, founded by French chef Grégoire Jacquet, is well known and loved in the Bay Area and Jacquet is excited to bring the buzz about the brand to other markets in the surrounding area with the help of franchisees. Jacquet hopes to grow Grégoire to 10 locations in the next two years, accelerating growth and establishing a presence from Santa Cruz to San Francisco to Napa.

“I always felt that this was just a fantastic business model,” said Jacquet. “It's a really profitable business with low food and labor costs because it's so compact. It's perfect for high-density metropolitan locations, perfect for food on the go. I see one day having a Grégoire in every major city.”

United Water Restoration Group

Current units in state: 1
Growth capacity in state: 45 to 50
Total jobs created at max growth capacity: 500 to 1,000
Total unit count: 95
Investment range: $159,342-$441,874

Premier restoration and reconstruction services franchise United Water Restoration Group (UWRG) has identified California as one of its next target markets for growth. It is targeting areas such as Los Angeles, San Diego, San Jose, San Francisco and Sacramento.

“When I worked in restoration previously, California was a very busy market,” said Bob Moore, president and shareholder at UWRG. “Due to earthquakes, wildfires, flooding and other natural disasters, there tends to be a lot of pipe bursts and need for our services. Plumbing quality seemed to be an issue with a lot of the builders, so we were dealing with a lot of busted pipes and leaks inside the homes. We were pretty busy.”

Griswold

Current units in state: 2
Growth capacity in state: N/A
Total jobs created at max growth capacity: N/A
Total unit count: 170+
Investment range: $95,850 to $174,100

Griswold, the leading non-medical home care franchise, is looking to expand in several California markets, including San Diego and Orange County, due to the areas’ booming senior populations, as well as experience in the area.

“When you look at our leadership team, they have a lot of experience operating in California,” said Brian Hill, Griswold’s franchise development manager. “We have a strong understanding of what it takes to be successful there, so we are excited to pass that knowledge to new franchisees as we bring them into the system in the state.”