FRANalyst Fridays: What lies ahead in 2020?

February 14th, 2020 by Ritwik Donde

Another year has come to an end. 2019 has been a year of several ups and downs. We have seen numerous new concepts opt for the franchise business model and a few others lose traction. There were regulatory hurdles and there were operational hurdles that franchisors had to deal with in 2019. So, what’s hot for the franchise business model? Here is a quick look at some of the key trends in the franchise industry over 2019 and the impact they will create in 2020:

  • Name Change became a Game Changer: To earn a refresh out of their legacy branding, a significant number of established franchises opted to change their brand image by recreating their brand name. Dunkin’ dropped “Donuts”, Jamba dropped “Juice” and Dig dropped “Inn” from their original branding, allowing these brands to focus on menu diversification and growth. Others in a similar position, opted to spin off their “OG” business model into other industries to adapt themselves to shifting demographics. For example, Dine Brands announced that it planning to roll out a new fast casual concept, “Flip’d by IHOP”; the company is also testing a new fast casual format for its Applebee’s brand, called Applebee’s Express; Buffalo Wild Wings launched B-Dubs Express and Famous Dave’s experimented with a fast-casual venture called Real Famous BBQ.

Prediction for 2020: As global growth is set to slow further in 2020, weighed down by the U.S.-China trade standoff and continued political uncertainty; complicated further by growing shift of generational transitions in spending patterns, retail real estate pressures; expect more mature brands to diversify into other market verticals. For example, we can expect to see more fine-dining and casual dining brands to open sister concepts in other adjacent industries to attract a new customer base.

  • Not all Franchises Handled Pressures of 2019 Well: After declining for eight consecutive years, total bankruptcy filings during calendar year 2019 increased 0.28% year-over-year in 2019. Commercial filings were up close to 3% in 2019; and franchisors were not indifferent to the impact. Several well-known franchises filed for Ch.11 bankruptcy protection in the year. Perkins, Frutta Bowls, Bar Louie, Krystal and Burgerim were among the notable ones that went into debt protection. And to top all that, The Supreme Court in a judgement earlier in the year blunted franchisors’ ability to use Ch. 11 bankruptcy to both restructure their debts and to demand concessions from franchisees.

Prediction for 2020: It is common knowledge that lenders have scaled back on the more stringent lending and underwriting standards that followed the 2008 financial crisis, leading to a loser credit market. But the cost of underwriting loans remains high. Higher credit costs are likely to spur an increase in the number of bankruptcy filings, both on the consumer and commercial side in 2020.

  • Private Equity Continued to Ride the Golden Waves: 2019 was the year of legacy acquisitions. While 2018 was the year of the “unicorns”, the year since has been the year of the “old war horse”. FRANdata analysis shows that nearly 69% of the franchise brands that were acquired by PE firms in 2019 were brands that had been franchising for more than 10 years. This proportion has increasingly gained traction in 2019 at close to 80%. This year alone several legacy franchises like ABRA Auto Body & Glass (acquired by Roark Capital Group), Servpro (acquired by Blackstone Group), Jenny Craig (by HIG Capital), Intelligent Office (by Incline Equity Partners), and Perkins (by Elysium Management) become the target of acquisitions.

Prediction for 2020:  Private equity firms are ready to pounce in 2020, armed with a record level of cash. Firms have amassed almost $1.5 trillion in unspent capital, the highest year-end total on record. This massive stockpile of capital is a concern and may push down valuations, in turn impacting how deal sizes as the race for finding new diamonds in the rough gets increasingly tough.

  • Boutique Fitness Continues its Dominance: Fitness centers and gyms segment continued to attract new franchise players in 2019; close to 21 new franchise concepts began franchising in this vertical. But it was the boutique/niche concepts in the segment that managed to cash in the most. Take Mayweather Boxing + Fitness, for instance. In just the first year of franchising, it has over 100 franchise locations in development across the United States; Blink Fitness plans for 300+ gyms in the next three years; while STRIDE is projecting to have 200+ franchised locations sold by 2020.

Prediction for 2020: Growth in fitness is strong now, but analysts are already warning of a slowdown if the economy slows down in 2020. Boutiques would be hit hardest in an economic downturn, given their price premium.

  • Old is Still Gold: More than 50% of all franchisees in the U.S. are now multi-unit operators, counting those that are multi-brand owners. The “hot”-ness for multi-brand franchisees can be directly correlated to the non-compete clauses that most franchisors have in their franchise agreements. For instance, a burger franchisor may not allow its franchisees to open or operate another burger concept that competes with its own. Consequently, the franchisees of such a brand are forced to look for growth opportunities in other industry verticals, giving rise to multi-unit/multi-brand franchisee operators. And it is the new and emerging brands that are making the most out of this trend in recent times.

Prediction for 2020: As franchisors continue to shift their focus on seeking out entrepreneurs who are only interested in multi-unit ownership, this trend is here to stay. The model for multi-unit ownership is also likely to evolve to its next iteration in 2020. To draw people out, we are now beginning to see the creation of mini-social communities with around 5-6 integrated services woven together by the same franchisee owner. Think fitness, massage, café, sports bar.  This looks like the multi-unit operator of the future.

  • Technology Becomes a Winner: 2019 was a flashpoint in the use of technology and how franchisor used their expertise and niche-ness in technology services to distinguish themselves in the eyes of prospective franchisees. From converging CRM systems with dashboards to enable big data analytics on consumers and franchisee performance, to integrating more innovation back of the house options to manage inventory and other costs; franchisors have come a long way in 2019 in terms of technology adoption.

Prediction for 2020: Franchisors will take this to the next level in 2020.  Whether it’s customer relationship management (CRM) systems, point of sales (POS) systems or product tracking, franchisors will be integrating tech that will make things simpler for franchisees and their staff. This might look like online food tracking systems for fast-casual franchises, or proprietary POS systems that help franchisees aggregate daily financial data. In 2020, expect to see more franchisors showcasing the ways technology is a part of their business model.

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