As Published in Franchise Update
Whether you are the glass half-full or glass half-empty type- one thing is certain, after living through the economic “deflation” and expansion, the worst in 70 years, economic indicators continue to tell us that the economy is growing, there is good cause for cautious optimism.
Nearly seven years after the recession ended in 2009 the American economy has become a slow growth machine. Through all this, the franchise business model has found ways to expand. It is impossible to shed light on the entirety of the franchise ecosystem without looking at its parts, insights at the sector level gives us solid clues about what’s in store for 2016 and beyond.
Projections on New Concepts
We are projecting that, on average, about one new concept will begin to franchise every day in 2016. It will continue a streak of increases in annual new concept growth that started 2010. If the number of new franchise concepts were a small fraction of all franchise concepts, that wouldn’t be all that significant. However, we are adding new concepts at about a 6-8% per year clip. That’s impressive by any measure in this weak expansionary economy. To understand it, I’ll start with the faster growing segments.
Fastest Growing Industries
We are constantly asked by media about top growing industries within franchising, and rightly so- these industries mirror growth found in the economy as a whole. The following is a graph of the top growing industries by percentage of new brands added since 2013:
These industry segments each added between one fifth and one third of their current brands in the last three years. Several observations jump out of that graph. First, only two of the eight segments are in food. Second, all the other six sell services, not products. Third, four of the six non-food segments are personal or family discretionary services (Real Estate, Child-Related, Health & Fitness, and Education-Related). Finally, all of these segments have been significantly changed by technology.
Trendwatch: Sub-Sector Specialization
Not obvious from the above graphs is a trend that applies to all of them – sub-sector specialization. As industries mature, the franchising business model is being used to fill in the gaps quickly. For instance, the fastest of all the above in new concept percentages is the Education-Related industry. Education reform has been a hot topic in national media and politically for some time. There is concern that US students are falling behind students in other countries, especially in STEM (science, technology, engineering and math) subjects. Moving beyond general education concepts, the franchise business model is being used to more quickly expand innovative new ideas, programs and technologies into the market and in doing so reshape the way we educate America’s youth.
- Example: The Little Medical Schools conduct after school and summer camp programs that feature medical themed projects, that give children (5-10 years old) a fun and interactive head start to understanding medicine, science and the benefits of good health.
- Example: theCoderSchool teaches kids how to code in various computer languages with a focus on logical thinking and collaboration for children ages 8 through 18.
Some of these sub-sectors are realizing tremendous new concept growth on a relative basis:
The second fastest growing industry by new concept percentage is Health & Fitness, which has added 107 new concepts since 2013. Growth is coming from a shift in big box gyms to boutique/specialized fitness centers (a changing pattern reflected in almost all retail industry categories). New concepts offer a complete package of services and classes in addition to access to equipment. They often specialize in niche services that feature proprietary technology, training programs or workout routines that differentiate the concept from the masses of existing fitness centers.
Looking at the companies that own of all the new concepts, a significant number are coming from existing franchise companies and I believe this is an important economic signal. In order to capture a narrower slice of the market, these existing franchise companies are investing capital and making material modifications to their proven concepts to work in new brands that diversify their market reach. . In other words, we are seeing sub-sector specialization in large part because growth is otherwise difficult when the overall economy is growing sluggishly.
A key factor in sub-sector specialization and evidenced in all of these fast growth segments, is how technology is becoming a key component in the actual delivery of services. In franchising, the use of technology is rapidly moving beyond the marketing and operations sides of the business, and being woven more comprehensively into the delivery of the service experience itself. Health & Fitness brands are demonstrating that almost every time a new brand arises. They are integrating personal health and physical achievement monitoring programs with fitness networks online as well as in studios.
2016 In A Nutshell
2016 is going to be a difficult economic year for same store sales growth. If it develops into an economic downturn, expect new concept growth to decline as it did in 2007/2008. If 2016 continues on a positive but sluggish path, expect more franchisors to launch new brands with a narrower customer focus.
Related Links — Zeroing in on New Concepts for Growth