6 Franchise Industries with Promising Outlooks
By IBISWorld Industry Analyst Eben Jose
With national brand recognition and an aggressive business strategy, franchises have become particularly popular – and could soon replace many independent retailers – because they are able to offer low prices through economies of scale. The economic downturn made many prospective business owners wary of opening an independent business; instead, they are turning to proven business models that come with a complete business strategy and a recognizable brand.
Before the recession, many franchise models required potential owners to not only invest a large sum up front – sometimes millions of dollars – but also pay a percentage of the franchise’s gross revenue to the company. A typical prerecession percentage was about 6.0; however, as post-recession trends continue to gain traction, such as the “buy local” movement, many companies are decreasing their annual fees as much as 50.0% to encourage more people to take a chance on their business.
Pertaining mainly to restaurants and grocery stores, the buy local trend has spread into the private sector at an increasing rate over the past five years. What started as an opposition to fast-food and preservative-rich diets has quickly become an affordably priced alternative that has gained momentum even despite the recession. In an effort to combat this trend, many food-oriented franchises have been adjusting their menus to contain more healthy alternatives. Although these alternatives are not always produced using local products, the image shift for brands such as McDonald’s and Subway has generated enough buzz to compete for the health-conscious consumer. Companies’ ability to change their brand on a national level allows for quick adaptation and assimilation, which helps these businesses survive, and even thrive, during uncertain economic times.
Considering this and other key business advantages, IBISWorld expects franchises to continue to steal market share away from independent businesses and to increase their total economic output, which currently stands at 4.4% of the total private sector. Based on IBISWorld research, the following are six franchise industries with promising outlooks, based on revenue growth, growth in the number of franchise establishments and the dispersion of those establishments on a national scale.
Coming off a nearly 5.0% annual decrease over the past five years, new car dealers operated under the franchise model have turned the corner and are expected to grow steadily going forward. As the recession bit hard, weak consumer sentiment and disposable income put many independent new car dealers out of business. Such companies are expected to continue to go bankrupt, mainly due to increased competition and the lack of a nationwide marketing initiative.
IBISWorld expects two of the nation’s largest new car dealer franchises, AutoNation Inc. and Penske Automotive Group, to increase revenue and dealership numbers during 2012. Additionally, large automobile manufacturers, such as Audi, BMW and Mercedes, are all expected to add dealerships in the United States in the coming years. Their US counterparts, Ford and General Motors, are expected to expand operations abroad. In fact, BMW’s commitment to building a manufacturing infrastructure in the United States (BMW operates a facility in South Carolina) further demonstrates the expected influx of European automobiles into the US market. With initial capital requirements of more than $1 million, opening a new car dealership is a big risk. That risk can be lessened considerably, however, with the guidance of a seasoned parent company. IBISWorld estimates that the New Car Dealer Franchise industry’s revenue will grow at an average annual rate of 3.4% in the five years to 2017. Profit margins are also expected to increase on the back of lower floor-plan interest expenses and expanded maintenance and repair divisions.
Sandwich and Sub Store franchises, such as Subway, have experienced moderate growth over the past five years and are expected to continue to grow at a steady pace, despite facing considerable competition from independent businesses. When it comes to food, quality is king, which typically keeps franchises off most consumers’ list of favorite places. In the past five years, buying local and food truck trends have taken off, putting even more pressure on franchises to adapt.
In response, franchisors have continually reinvented their menus and presentation to keep up. For example, Subway remains one of the top franchises in the United States because it runs eye-catching television advertisements that strengthen the company’s commitment to fresh food, while also offering different promotions on a monthly basis, such as the “$5 Footlong” deal. These initiatives have been successful, but they come at a price: Subway demands a high royalty fee from its franchisees that totals 12.5% of sales, 4.5% of which goes to marketing costs. Franchises such as Quiznos and Jimmy John’s Gourmet Sandwiches have similar financial requirements, with initial franchise fees of about $40,000. Typically, a franchise owner should expect to pay considerably more in total initial costs to get the store running – sometimes as much as $500,000, depending on location. Over the next five years, IBISWorld expects sandwich and sub store franchises to expand and continue to push independent restaurants out of business.
Despite heavy and changeable government regulation, pharmacy and drug store franchises fared well during the recession and will return to prerecession growth rates in 2012. A key driver for the industry has been the widespread adoption of generic drugs. Cardinal Health and AmerisourceBergen, two of the largest pharmacies that use the franchise model, both reported high growth in 2011 on the back of sales of generic drugs.
The process for becoming a franchisee in this industry is tough, due to high capital requirements and thorough background checks. Franchisees are not required to be pharmacists, but they must employ licensed pharmacists in order to operate in the industry. IBISWorld expects pharmacy and drug store franchises to grow at a rate of more than 3.0% per year in the next five years, and franchisees are projected to benefit from several favorable trends. With the economy back on track, disposable income is expected to increase, which should spur growth in the number of people with health insurance. Additionally, the baby-boomer generation is aging, which should increase demand for prescription drugs. These factors present a strong case for optimism in this industry.
Gas stations with convenience stores
Although many gasoline companies are starting to buy establishments back from franchisees, breaking into this industry is still possible. Shell and Exxon Mobil are two of the largest gasoline distributors in the world, and both still use the franchise model for distribution. Over the past five years, the price of gasoline has fluctuated, and going forward, this volatility is not expected to change. Variable prices aren’t likely to threaten industry profit margins, though, because the majority of profit is made on higher-margin sales from the attached convenience stores.
Franchisees must jump several hurdles before being considered for a franchise. First and foremost, the prospective franchisee must have considerable financial assets, including a minimum of $125,000 just to get the thumbs up to open a station. The hefty start-up costs ensure not only that the parent company gets a competent franchisee, but also that the number of franchises remains at a healthy level in terms of competition and market share. Additionally, a franchisee must demonstrate sound retail management abilities and undergo a comprehensive training program. Access to a new, high-potential location also helps a person’s chances of getting a franchise, and this factor is mainly determined by the franchisor during the initial process. Despite lower-than-average growth during the recession, gas stations with convenience stores are expected to do well over the next five years, with projected growth of just more than 2.0% per year. Growth prospects will depend on the total vehicle miles driven and consumer spending, which are both expected to increase as the economy improves. Franchisors, such as Shell and Exxon Mobil, will also play a large role in their franchisees’ success since they are responsible for maintaining a strong marketing campaign that reaches consumers nationwide.
Supermarkets and grocery stores
Despite high external competition from convenience stores, big-box retailers and warehouses, supermarket and grocery store franchises are expected to experience steady growth as the economy improves. Driven mainly by consumer sentiment and disposable income, the recession caused a noticeable slowdown in sales. During the recession, many people bought less expensive and generic items instead of brand-name items, which subsequently hurt revenue and profit margins.
Over the next five years, revenue is expected to increase as people once again begin to indulge themselves. Although many supermarket and grocery store franchises are regional in nature, Safeway, which operates roughly 1,750 franchises in the United States, has been able to expand nationally due to strong marketing and advertising. Costs associated with the brands promotion is not free for franchisees, however; they can expect to pay a 3.5% annual royalty fee for advertising, in addition to an annual fee equal to 5.0% of total revenue. High external competition and market saturation force companies to collect a marketing fee, which hurts franchisees’ profit margins but positively affects top-line revenue. Additionally, franchisees must pay a one-time franchise fee of between $30,000 and $45,000 that depends on the location of their franchise as well as all additional start-up costs. The burden of start-up costs is mainly a way for companies to weed out financially questionable candidates who are unable to manage the additional costs. In comparison with the other franchise opportunities, supermarkets and grocery stores are expected to have the lowest amount of growth over the next five years. Because food is such a necessity, the market for these stores is saturated and highly competitive, which leaves very few profitable locations available to potential owners.
The baby-boomer generation is getting older and, as a result, in-home senior care franchises have been flourishing over the past five years. With advancements in technology and medicine increasing life expectancy rates, the number of senior citizens is expected to increase even more over the next five years. Many of these senior citizens prefer to stay in their own homes, and these franchises allow them to do just that. The high costs of nursing homes and assisted living accommodations, combined with escalating healthcare costs, have been the key drivers of industry demand. Additional drivers include the amount of federal funding for Medicare and Medicaid and the level of per capita disposable income. While costs for in-home care are lower than other assisted living options, they are still relatively high, and the amount of federal assistance available and the disposable income wielded by consumers are often huge factors in the decision to use this industry’s services.
Benefiting from reputation and proven practices, which are especially important when it comes to healthcare, potential franchise owners can currently choose from more than 60 different franchise brands. Home Instead Inc., Interim Healthcare Inc. and Comfort Keepers Inc. currently make up more than one-third of total market share. Franchisees must pay a $39,000 initial franchise fee, additional fees (which includes marketing and tax costs) and a recurring 5.0% annual royalty fee. Interim Healthcare and Comfort Keepers maintain a similar fee structure, with values roughly equivalent to Home Instead. Going forward, the trend toward “aging in place” is expected to strengthen and, as a result, the In-Home Senior Care Franchises industry will continue to rapidly expand in the five years to 2017.
For more information on the industries mentioned in this article, click on the report titles below.
New Car Dealers, Sandwich and Sub Stores, Pharmacies and Drug Stores, Gas Stations with Convenience Stores, Supermarkets and Grocery Stores, In-Home Senior Care Franchises
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