franchise out look jan 2016

8/19/2019 Franchise Out Look Jan 2016

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No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Franchise Business Economic

Outlook f or 2016

Prepared for:

International Franchise AssociationEducational Foundation

By:

IHS Economics

January 2016


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About IHS Economics

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Table of Contents

EXECUTIVE SUMMARY .................................................................................................................................. 1

Franchise Business Index .......................................................................................................................... 3

INTRODUCTION ............................................................................................................................................. 5

THE ECONOMIC OUTLOOK ............................................................................................................................ 6

OUTLOOK FOR FRANCHISE BUSINESS ........................................................................................................... 8

Outlook Summary ..................................................................................................................................... 8

Establishments by Business Line ............................................................................................................. 14

Employment by Business Line ................................................................................................................. 15

Output by Business Line .......................................................................................................................... 17

Franchise Businesses' Contribution to GDP ............................................................................................ 18

Distribution by Sector ............................................................................................................................. 18

Output per Employee .............................................................................................................................. 20

Composition of Franchise Business Lines ............................................................................................... 22

Methodology ........................................................................................................................................... 23


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IHS Economics Page 1No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

EXECUTIVE SUMMARY

This report presents a forecast of the franchise sector of the US economy in 2016 prepared by IHS

Economics for the International Franchise Association Educational Foundation.

The US economy still faces headwinds from a weak global economy and a strong dollar, but recent data

confirm the mostly sound foundations of the US economic recovery led by solid growth in consumer

spending and housing. IHS expects that real GDP growth will accelerate between the fourth quarter of

2015 and the end of 2016. Consumer spending will rebound from a weak fourth quarter, and the

inventory cycle that depressed growth in 2015 will likely come to an end in the first half of 2016. In

addition, the drag from the plunge in energy-sector capital spending will wind down, and the recent

congressional agreement on taxes and spending will add 0.1-0.2 percentage point to growth over the

coming year.

As expected, the Federal Reserve Board raised the federal funds rate by 25 basis points in December.

We expect the Fed to continue to raise rates by 25 basis points in each quarter of 2016. But this will not

hinder the durability of the recovery. We expect real GDP growth to accelerate from 2.4% in 2015 to2.7% in 2016.

With data for 2015 now nearly complete, we estimate that the franchise sector finished the year slightly

stronger than projected in our September 2015 report. We estimate that the number of franchise

establishments increased 1.7% in 2015, franchise employment was up 3.0%, and franchise output grew

5.6%. All of these figures are higher than our mid-2015 forecasts, and all represent an improvement

over rates of growth in 2014.

We see further improvement in the pace of growth of the franchise sector in 2016 as consumer

spending remains strong and business spending accelerates:

We expect the number of franchise establishments to increase by 1.7% in 2016, matching the

pace of growth in 2015.

Employment growth in the franchise sector will continue to outpace the growth of employment

in all businesses economy-wide, as it has in each of the last five years. We expect franchise

employment to increase 3.1% in 2016, while total private nonfarm employment will increase

1.9%. Over the six-year period, 2011-2016, average annual job growth in the franchise sector, at

2.7%, will be 0.5 percentage points higher than for all businesses economy-wide.

Growth of the output of franchise businesses in nominal dollars will accelerate to 5.8% in 2016 –

ahead of the 5.6% gain ion 2015 – as output per worker in the franchise sector increases slightly.

The gross domestic product (GDP) of the franchise sector will increase by 5.6% to $552 billion in

2016. This will exceed the growth of US GDP in nominal dollars, which is projected at 4.4%. The

franchise sector will contribute approximately 3% of US GDP in nominal dollars.


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Our analysis is based on a grouping of franchise businesses into 10 broad business lines. The growth

outlook differs among the groups, with output growth in 2016 ranging from a low of 4.4% in the

commercial & residential services business line to 6.6% in lodging. Other highlights of the industry

forecast for 2016 are:

As overall consumer spending maintains a 3% growth pace in 2016, the outlook for the retail

products & services franchises will remain strong. The retail business line is projected to rank

first in employment growth at 3.7% and second in output growth at 6.4%.

Business spending will also accelerate in 2016, giving a boost to business services franchises,

which are projected to rank first in growth of the number of establishments and tied for second

in employment growth with a 3.3% gain.

Both the quick service and table service restaurant business lines will continue to be among the

growth leaders, each with 3.3% employment growth and 6.3% output growth in 2016.

-4%

-2%

0%

2%

4%

6%

8%

2009 2010 2011 2012 2013 2014 2015 2016

Establishments

Employment

Output

GDP

Franchise Business Growth by Year, 2009-2016: January 2016 Forecast


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Franchise Business Index

The estimates of output, employment and the number of establishments in the franchise industry

reported here provide valuable measures of the size and growth of the industry. But, because most of

the key data inputs required to make these estimates are published only on an annual basis, the

estimates are made only at an annual frequency. A more timely reading of the business environment for

franchise operations in the US is provided by the Franchise Business Index (FBI) – a monthly index of

franchise activity that was developed for IFA by IHS. The FBI combines indicators of the growth or

decline of industries where franchise activity has historically been concentrated with measures of the

demand for franchise business services and the general business environment. The components of the

index are:

Employment in Franchise Businesses (ADP)

Number of Self Employed (BLS)

Unemployment Rate (BLS)

Retail Sales of Franchise-Intensive Industries (Census Bureau)

Small Business Optimism Index (NFIB)

Small Business Credit Conditions Index (NFIB)

The Franchise Business Index increased by an average 0.3% per month over the last three months

(September through November), and the index was up 2.5% in November compared to November 2014.

All components of the index made positive contributions to the FBI over this 3-month period. Among

individual components, strong gains in employment (as measured by ADP’s franchise employment

series) and retail sales of franchise-intensive retailers contributed most. Small business optimism

Franchise Business Economic Outlook 2016: January 2016 Forecast

Establishments

Amount

Percent

Change Over

Previous Year

Amount

Percent

Change Over

Previous Year

Amount

Percent

Change Over

Previous Year

Automotive 31,968 1.5% 199.3 3.0% 43.84 4.6%

Business Services 99,029 2.0% 1,026.7 3.3% 175.60 5.9%

Commercial & Residential Services 64,670 1.6% 384.5 2.8% 59.31 4.4%

Lodging 27,479 1.8% 771.7 2.8% 96.33 6.6%

Personal Services 115,783 1.8% 720.5 2.6% 101.53 4.9%

Quick Service Restaurants 159,839 1.5% 3,446.8 3.3% 248.28 6.3%

Real Estate 91,950 1.7% 327.8 2.4% 57.44 5.7%

Retail Food 63,840 1.5% 535.5 3.2% 44.61 4.7%

Retail Products & Services 103,130 1.9% 547.0 3.7% 46.58 6.4%

Table/Full Service Restaurants 38,244 1.6% 1,152.2 3.3% 70.09 6.3%

TOTAL 795,932 1.7% 9,111.9 3.1% 943.60 5.8%

Output

($Billions)

Employment

(thousands)


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improved steadily over the period. Month-to-month changes in credit conditions and were mixed but

still positive on balance over the 3-month period.

August Sept Oct Nov 12-month

2015 2015 2015 2015 Nov-Nov

Franchise Business Index 116.2 116.7 116.9 117.4

Percent Change -0.1% 0.4% 0.2% 0.4% 2.5%


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INTRODUCTION

This report presents a first look at the outlook for the franchise sector of the US economy in 2016

prepared by IHS Economics for the International Franchise Association Educational Foundation.

The following section presents a summary of the current IHS forecast of the US economy in 2016, with

attention to economic indicators that relate to sectors of the economy where there is a significant

concentration of franchising.

We then present an overview of our estimates and forecasts of franchising for 10 business lines: 1

1. Automotive

2. Business Services

3. Commercial & Residential Services

4. Lodging

5. Personal Services

6. Quick Service Restaurants

7. Table/Full Service Restaurants

8. Real Estate

9. Retail Food

10. Retail Products and Services

For each of the 10 business format lines, the projections include estimates through 2015 and an initial

forecast for 2016 of:

Franchise establishments2

Franchise employment3

Franchise nominal output4

1 This report does not include estimates for product-distribution franchises, such as automotive and truck dealers,

gasoline service stations without convenience stores, and beverage bottlers.

2 An establishment is a single physical location at which business is conducted or services or industrial operations

are performed. A business may consist of more than one establishment. An establishment may be owned by the

franchisor or the franchisee.

3 Positions filled by part-time and full-time employees or by self-employed individuals.

4 Nominal output is the gross value of goods and services produced -- a concept that is comparable with "sales" for

most industries. In government input-output accounts, the output of goods-producing industries is measured by

the value of shipments. For most other industries, output is measured by receipts or revenues from goods and

services sold. A special case is the output of the wholesale and retail industries, which is measured generally as the

difference between receipts or revenues and the cost of goods sold—this difference is referred to as "margin."


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THE ECONOMIC OUTLOOK

Recent data confirm the mostly sound foundations of the US economic recovery—solid growth in

consumer spending and housing, but pain in parts of the manufacturing sector because of a strong

dollar and an inventory cycle. Although real GDP grew 2.0% in the third quarter and is expected to

advance only 1.2% in the fourth quarter, the corresponding growth rates of real final sales to domestic

purchasers (GDP less inventories and less exports) are 2.7% and 2.3%. IHS expects that real GDP growth

will accelerate between the fourth quarter of 2015 and the end of 2016, as some of the drags on growth

ease. First, the inventory cycle will likely come to an end in the first half of 2016. Second, the drag from

the plunge in energy-sector capital spending will wind down. Third, the recent congressional agreement

on taxes and spending will add 0.1-0.2 percentage point to growth over the coming year. Together, this

means that growth will improve from 2.4% in 2015 to 2.7% in 2016.

As expected, the Federal Reserve raised its overnight federal funds rate by 25 basis points at its

December policy meeting, signaling confidence in the recovery’s sustainability. This was the first rate

hike in more than nine years—and seven years since rates were pushed to zero. We expect there will be

four more 25-basis-point rate increases in 2016, but this gradual pace of rising short-term interest rates

will not slow the recovery.

The consumer outlook for 2016 remains positive. Real disposable income is expected to increase 3.1% in

2016 after a 3.6% gain in 2015. Real consumer spending growth is expected to increase 3.1% in 2015

and 3.0% in 2016. Auto sales still remain a bright spot, but less dependent on pent-up demand than in

the early years of the recovery. We expect light-vehicle sales to increase from 17.4 million units in 2015

to 17.8 million units in 2016.

-2%

-1%

0%

1%

2%

3%

4%

5%

2013Q1 2014Q1 2015Q1 2016Q1

Real GDP Growth(Percent change, annual rate)

IHS Economics, January 2016 Forecast


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The pending home sales index that measures contract signing activity has fallen in three of the last four

months, which suggests that there is underlying softness in the market for existing homes. Thus, existing

home sales are expected to improve modestly to 5.3 million units in 2016, up only 1.7%. However, the

outlook for housing starts is stronger. We expect starts to surpass a 1.3-million-unit annualized rate by

the end of 2016 – up 14% for the year. New home sales will follow, averaging 588,000 units in 2016, the

highest level since 2007.

Nonresidential construction, which grew at a spectacular 42.8% annual rate in the second quarter as

spending on manufacturing plants soared, has plateaued. Manufacturing construction, which is at

elevated levels, is set to contract significantly in 2016.

The trade-weighted dollar exchange rate was 10% higher at the end of 2015 than it was at the start. IHS

expects the dollar to strengthen further over the first half of this year because of tightening Fed policy

and accelerating US growth. Thereafter, as world growth picks up and other countries start to raise

interest rates, the dollar should begin a slow multiyear descent. Exports and imports will respond to the

stronger dollar, taking small slices off growth every quarter, but not enough to keep overall growth from

accelerating in 2016.

The Economic Outlook for 2016

(Annual percent change) 2012 2013 2014 2015 2016

Real Gross Domestic Product 2.2% 1.5% 2.4% 2.4% 2.7%

Total Nonfarm Employment 1.7% 1.7% 1.9% 2.1% 1.7%

Accommodations and Food Services 3.2% 3.6% 3.1% 3.1% 1.7%

Personal Services 1.3% 1.0% 1.6% 1.2% 0.3%

Real Disposable Income 3.1% -1.4% 2.7% 3.6% 3.1%

Real Personal Consumption 1.5% 1.7% 2.7% 3.1% 3.0%

Food Services 2.1% 1.3% 3.1% 4.6% 3.6%

Accommodations 5.5% 3.0% 2.6% 3.8% 2.5%

Personal Services 1.7% 0.4% 3.7% 3.2% 2.3%

Retail Sales (nominal dollars) 4.9% 3.9% 3.9% 2.1% 3.7%

Existing Home Sales 8.9% 9.0% -3.0% 5.9% 1.7%

Com'l & Indus. Loans Outstanding, Com'l.Bank13.2% 6.8% 12.6% 11.1% 6.3%

IHS Economics, January 2016 Forecast


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OUTLOOK FOR FRANCHISE BUSINESS

Outlook Summary

Many of the factors that have been creating a drag on real GDP growth, such as weak exports, flat

government spending and an inventory correction, are of less direct relevance for the health of thefranchise sector of the economy. As summarized above, the fundamentals of consumer spending are

positive and business investment (outside the oil industry) is beginning to accelerate. Thus, many

franchise businesses saw good business conditions in 2015 and will continue to see good business

conditions in 2016. By most measures, the franchise sector will continue to grow at rates that exceed

the economy-wide growth of industries where franchises are concentrated:

We estimate that the number of franchise establishments increased by 1.7% in 2015, and we

expect this pace of establishment growth to be maintained in 2016.

Franchise employment was up an estimated 3.0% in 2015, and we project a comparable gain of

3.1% in 2016. In comparison, total non-farm private sector employment is projected to increase

1.9% in 2016 after a 2.4% gain in 2015.

Growth of the output of franchise businesses in nominal dollars will accelerate from an

estimated 5.6% in 2015 to 5.8% in 2016 as output per worker in the franchise sector increases in

several business lines.

The gross domestic product (GDP) of the franchise sector will increase by 5.6% to $552 billion in

2016. This will exceed the growth of US GDP in nominal dollars, which is projected at 4.4%. The

franchise sector will contribute approximately 3% of US GDP in nominal dollars.

Franchise Business Economic Outlook: January 2016 Forecast

Forecast

Estimates (Jan. 2016)

2008 2009 2010 2011 2012 2013 2014 2015 2016

Establishments 774,016 746,646 740,098 736,114 747,359 757,857 769,782 782,573 795,932

Percent change 0.4% -3.5% -0.9% -0.5% 1.5% 1.4% 1.6% 1.7% 1.7%

Employment ('000) 8,028 7,800 7,780 7,940 8,127 8,334 8,573 8,834 9,112

Percent change 0.4% -2.8% -0.3% 2.1% 2.3% 2.5% 2.9% 3.0% 3.1%

Output ($Billions) 696 674 699 734 768 804 845 892 944

Percent change 3.2% -3.2% 3.6% 5.0% 4.7% 4.7% 5.0% 5.6% 5.8%

GDP ($Billions) 410 405 414 434 453 473 496 523 552

Percent change 1.8% -1.2% 2.2% 4.8% 4.4% 4.4% 4.8% 5.5% 5.6%


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The following chart shows how the franchise economy has fared over the last three years, along with

our 2016 forecast, by various measures. Growth rates of output and GDP are in nominal dollars.

To provide background for our view of how different segments of the franchise sector will fare in 2016,

we review IHS forecasts of employment and output in the industries where there is a large

concentration of franchise businesses. Key drivers of the franchise economy drawn from the IHS US

Industry and US Macroeconomic forecasts are summarized below.

Automotive: On the commercial vehicle side, capacity in the trucking industry is tight and getting

tighter. As the economy continues to recover and grow, the demand for shipping has roared back. TheAmerican Trucking Association reported their advanced seasonally adjusted For-Hire Truck Tonnage

Index equaled 135.1 (2000=100) in September, which was the second highest level on record; the all-

time high of 135.8 occurred in January 2015. Trucking companies will need to make investments in new

fleet capacity as well as try to maintain the current fleet. Thus, it will also behoove fleets and individual

owner operators to step up their equipment maintenance.

The growth of light vehicle sales is forecast to slow to 2.1% in 2016 after growing an estimated 5.8% in

2015. However, the age of the average vehicle on the road is near record highs. The continued

improvement in the labor market, along with continued low interest rates in the near term, should help

boost confidence for bigger ticket item purchases. Economy-wide, consumer spending on auto parts is

expected to increase 4.3% in 2016. We estimate that output of the automotive franchise business line

increased 4.6% in 2015, and the forecast for 2016 shows growth continuing at this pace.

-4%

-2%

0%

2%

4%

6%

8%

Establishments Employment Output GDP

2013

2014

2015

2016

Franchise Business Growth, 2013-2016: January 2016 Forecast


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Employment in the automotive business line is expected to be up 3.0% in 2015 and to continue this pace

in 2016. While this will outpace the overall auto parts and tire sales industry, it will keep the automotive

business line among the slowest growing of the 10 franchise business lines, ranking sixth in employment

growth and ninth in output growth.

Commercial & Residential Services: Nominal spending on household services is expected to rise 4.4%

in 2016 after increasing 4.7% in 2015. Existing home sales grew an estimated 5.9% in 2015, but growth is

expected to slow to 1.7% in 2016. However, housing starts increased an estimated 11% in 2015 and are

forecast to grow 14% in 2016. This should boost such businesses as architectural, project managementand contracting firms and special trade contractors. Our estimates of employment and output of the

commercial & residential services business line in 2015 show growth of 2.8% and 4.4%, respectively,

which is slightly stronger growth than we forecast in our September report. We expect a similar pace of

growth for this business line in 2016.

Table/Full Service Restaurants: As the job market continues to improve, gasoline prices remain low and

wages are starting to see some modest pick-up, consumers are able to spend more on food away from

home. It appears that one area where consumers have spent some of their windfall in purchasing power

from lower gasoline prices is in eating out, as economy-wide sales in both segments of the industry are

on a pace to finish the year with growth rates near 8-9%. Full service restaurant sales growth outpaced

the QSR segment in three of four years during 2011-2014 and likely did so again in 2015.

Within the franchise full service restaurants business line, we have boosted our forecast of 2015 sales

slightly, and it now shows a 6.1% increase in 2015. We project 6.3% growth of sales in 2016. This will

translate into higher productivity, as we project a 3.3% increase in employment in 2016.


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Quick Service Restaurants: Improving employment and wage growth in the overall economy is

particularly good for the QSR industry as time for meals becomes crunched with more people working

and spending time commuting. As reported above, we expect total nonfarm employment growth

(including government employment) of 1.7% in 2016 – slightly lower than the 2.1% growth in 2015. The

improving economy along with prospective increases in the minimum wage in many states is tightening

the labor market – especially for the restaurant industry. Some QSR restaurants have increased theirbenefits in efforts to attract employees. We estimate the number of QSR establishments increased by

1.4% in 2015, and we expect a slight uptick in 2016 to 1.5% growth. The QSR business line will remain

among the leaders of the franchise sector in employment growth in 2016, with a 3.3% gain, and we

expect QSR output (sales) to grow by 6.3% in 2016.

Retail Food: A sharp increase in spending on food away from home has come to some extent at the

expense of slower growth of consumer purchases of food for off-premises consumption. Economy-wide

consumer spending on food and beverages for off-premises consumption grew an estimated 1.3% in

nominal dollars in 2015 – below the average pace of 2.1% of the previous three years.

The retail food franchise business line ranked last in establishment growth of the ten industries in 2015

and this ranking is expected to hold in 2016 with establishment growth of 1.5%. Retail sales of food

stores of all types (including their sales of non-food items) grew by 2.7% in 2015, and their sales growth

is expected to increase to 3.1% in 2016. We expect franchise employment and output within the retail

food business line to outpace these industry-wide growth trends. Our forecast for this business line

shows a 3.2% increase in employment and sales (output) growth of 4.7% in 2016.


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Lodging: The lodging industry has posted several years of solid growth, with sales gains continually

outpacing the annual increase in employment. Employment growth in the industry in 2015 is estimated

at 1.3%, and it is expected to slow to less than half a percent in 2016. Recent data on the lodging

industry from the ADP National Franchise Report and our industry data indicate that the franchise

segment of the industry has shared in these trends. We estimate that franchise employment in the

lodging business line grew 2.8% in 2015 and will show a similar increase in 2016. Output growth in the

lodging business line is expected to slow to 6.6% in 2016, but it will remain the fastest growing business

line based on output.

Real Estate: As noted above in discussing the commercial & residential services business line, we expect

existing home sales to show further gains in 2016, but at a somewhat slower pace than in 2015. Despite

the recent action by the Federal Reserve to begin what will likely be a series of increases in the federal

funds rate, we do not expect mortgage interest rates to rise enough to derail the housing market

recovery. The federal funds rate will likely be more than 1 percentage point higher in the fourth quarter

of 2016 than in the fourth quarter of 2015. But we expect the 30-year conventional mortgage rate to

increase by only 0.7 points over the year, from 3.9% in 2015:Q4 to 4.6% in 2016:Q4.

We estimate that the output of the franchise real estate business line increased 5.2% in 2015, and we

expect a 5.7% increase in 2016 – near the average for the franchise sector as a whole. Employment in

the real estate business line is expected to increase 2.4% in 2016.

Retail Products & Services: Retail sales excluding food and automotive products grew an estimated

3.4% in 2015 and are expected to grow 4.5% in 2016. However, growth will slow in two categories of

retailers – sporting goods and hobby stores where growth is projected to slow to 3.2% growth in 2016

after seeing 6% growth in 2015, and clothing and accessory stores where growth will slow to 2.0%

growth in 2016 after 2.9% growth in 2015.


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Employment data from the ADP National Franchise Report indicate that the franchise retail products &

services business line continues to outperform the franchise sector as a whole and other retail

industries. This business line will rank number one in terms of employment growth in 2016 (at 3.7%) as

it did in 2015. This will support strong sales growth of 6.4% in 2016 and establishment growth of 1.9%

ranking it second in terms of growth by both measures.

Business Services: The IHS US Industry Service forecasts healthy growth in 2016 in a wide range of

business services. Employment in all professional and technical services is expected to be up 4.5%,

including accounting and bookkeeping services up 2.0%, and architectural and engineering services up

4.4%. The franchise business services industry has been one of the leaders among franchise business

lines in establishment and employment growth, with increases of 2.0% and 3.3%, respectively, in 2015.

We project similar growth rates in 2016, and this will support output growth of franchise business

services of 5.9%, ranking it fifth among business lines.

Personal Services: The personal services business line includes a diverse array of services such as

educational services, health care, entertainment and recreation, personal and laundry services, and

selected financial activities. Economy-wide personal consumption spending in the category that includes

most of these personal services grew by an estimated 3.6% in 2015 – down slightly from our mid-year

forecast. However, 2016 growth in spending on these personal services is expected to improve to 4.5%.

We estimate that employment in franchise personal services increased 2.6% in 2015, with output up

4.9%. We expect similar growth rates by both measures for this business line in 2016.


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Establishments by Business Line

Historically, total US establishments have exhibited growth of 1 to 2% in the initial years of a recovery

and then accelerated. However, during the current recovery business formation has lagged, as has

growth of the number of establishments. IHS estimates that growth of the number of establishments

economy-wide has improved only slightly since 2012.

We estimate that the number of franchise establishments increased 1.7% across all 10 business-format

lines in 2015 and growth will match this pace in 2016. The business services line will take the lead with

2.0% growth, followed closely by the retail products & services line at 1.9% growth.

Franchise Establishments by Business Line, 2009-2016: January 2016 Forecast

Forecast


2009 2010 2011 2012 2013 2014 2015 2016

Automotive 30,012 29,687 29,984 30,344 30,648 31,002 31,481 31,968

Percent change -5.2% -1.1% 1.0% 1.2% 1.0% 1.2% 1.5% 1.5%

Business Services 89,691 89,147 90,035 91,746 93,581 95,268 97,130 99,029

Percent change -6.9% -0.6% 1.0% 1.9% 2.0% 1.8% 2.0% 2.0%

Commercial & Residential Services 62,650 61,272 60,169 60,951 61,804 62,666 63,660 64,670

Percent change -4.1% -2.2% -1.8% 1.3% 1.4% 1.4% 1.6% 1.6%

Lodging 25,588 25,410 25,003 25,553 25,987 26,490 26,980 27,479

Percent change -3.7% -0.7% -1.6% 2.2% 1.7% 1.9% 1.8% 1.8%

Personal Services 106,510 106,100 105,463 107,572 109,293 111,728 113,739 115,783

Percent change -3.8% -0.4% -0.6% 2.0% 1.6% 2.2% 1.8% 1.8%

Quick Service Restaurants 150,316 149,547 147,902 151,156 152,970 155,189 157,429 159,839

Percent change -1.0% -0.5% -1.1% 2.2% 1.2% 1.5% 1.4% 1.5%

Real Estate 88,372 86,153 84,947 86,221 87,687 88,945 90,383 91,950

Percent change -6.6% -2.5% -1.4% 1.5% 1.7% 1.4% 1.6% 1.7%

Retail Food 60,374 60,173 60,474 60,776 61,323 62,070 62,924 63,840

Percent change -3.0% -0.3% 0.5% 0.5% 0.9% 1.2% 1.4% 1.5%

Retail Products & Services 97,519 96,921 96,630 96,823 97,840 99,321 101,187 103,130

Percent change -1.0% -0.6% -0.3% 0.2% 1.1% 1.5% 1.9% 1.9%

Table/Full Service Restaurants 35,614 35,688 35,507 36,217 36,724 37,103 37,660 38,244

Percent change -1.7% 0.2% -0.5% 2.0% 1.4% 1.0% 1.5% 1.6%

Total 746,646 740,098 736,114 747,359 757,857 769,782 782,573 795,932


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Employment by Business Line

We estimate that total franchise employment grew 3.0% in 2015, and we expect a similar pace of

employment growth in 2016 (3.1%). Six of the business lines will maintain their growth pace of 2015,

while four business lines – quick service and full service restaurants, real estate and retail food – will see

slightly higher growth in employment in 2016. Our forecast shows retail products & services maintaining

its 2015 lead in employment growth in 2016 at 3.7%, followed closely by business services, which will

take over second place from quick service restaurants.

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2009 2010 2011 2012 2013 2014 2015 2016

Franchise Business Establishments Growth: January 2016 Forecast


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Franchise Employment by Business Line, 2009-2016: January 2016 Forecast

Forecast


2009 2010 2011 2012 2013 2014 2015 2016

Automotive 174,889 173,546 177,885 180,198 183,802 187,875 193,510 199,316

Percent change -5.4% -0.8% 2.5% 1.3% 2.0% 2.2% 3.0% 3.0%

Business Services 889,721 874,087 883,702 903,143 933,850 961,927 993,766 1,026,669

Percent change -6.8% -1.8% 1.1% 2.2% 3.4% 3.0% 3.3% 3.3%


Percent change -3.9% -2.1% 1.7% 1.7% 2.2% 2.4% 2.8% 2.8%

Lodging 671,702 674,953 691,827 699,437 709,229 730,264 750,681 771,673

Percent change -3.6% 0.5% 2.5% 1.1% 1.4% 3.0% 2.8% 2.8%


Percent change -3.8% 0.8% 2.0% 1.9% 2.2% 3.5% 2.6% 2.6%

Quick Service Restaurants 2,887,550 2,882,638 2,951,821 3,046,279 3,140,714 3,238,075 3,337,993 3,446,816

Percent change -1.1% -0.2% 2.4% 3.2% 3.1% 3.1% 3.1% 3.3%

Real Estate 295,954 290,329 294,974 301,168 308,095 313,541 320,223 327,801

Percent change -6.6% -1.9% 1.6% 2.1% 2.3% 1.8% 2.1% 2.4%

Retail Food 468,868 468,172 473,790 481,844 490,035 503,450 518,819 535,491

Percent change -3.0% -0.1% 1.2% 1.7% 1.7% 2.7% 3.1% 3.2%


Percent change -1.1% 1.0% 1.6% 1.5% 2.2% 2.9% 3.7% 3.7%

Table/Full Service Restaurants 985,999 988,044 1,012,745 1,036,038 1,056,759 1,080,731 1,115,369 1,152,235

Percent change -1.7% 0.2% 2.5% 2.3% 2.0% 2.3% 3.2% 3.3%

Total 7,800,319 7,779,833 7,940,484 8,126,879 8,333,790 8,573,000 8,833,994 9,111,945

-4%

-2%

0%

2%

4%

6%

2009 2010 2011 2012 2013 2014 2015 2016

Franchise Business Employment Growth: January 2016 Forecast


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Output by Business Line

We estimate that total output across all franchise business lines grew 5.6% in 2015 – up from 5.0%

growth recorded in 2014. We expect further improvement in the pace of growth in 2016 to 5.8%. The

lodging business line was the growth leader in 2015, and it is expected to maintain that position in 2016,

with growth of 6.6% in both years. Retail products & services is projected to maintain its second placeamong business lines with expected 2016 growth of 6.4% – up from 6.2% in 2015. Both restaurant

business lines are also projected to see output growth rates over 6% in 2016.

Franchise Output by Business Line, 2009-2016: January 2016 Forecast

Forecast


($billions) 2009 2010 2011 2012 2013 2014 2015 2016

Automotive 31.16 33.56 36.32 37.62 38.72 40.08 41.92 43.84

Percent change -7.2% 7.7% 8.2% 3.6% 2.9% 3.5% 4.6% 4.6%

Business Services 128.62 132.61 137.38 142.60 149.45 156.49 165.77 175.60

Percent change -4.1% 3.1% 3.6% 3.8% 4.8% 4.7% 5.9% 5.9%

Commercial & Residential Services 46.32 46.55 48.23 50.20 52.36 54.40 56.80 59.31

Percent change -4.3% 0.5% 3.6% 4.1% 4.3% 3.9% 4.4% 4.4%

Lodging 62.79 67.62 72.83 75.82 79.23 84.80 90.38 96.33

Percent change -7.6% 7.7% 7.7% 4.1% 4.5% 7.0% 6.6% 6.6%

Personal Services 74.43 77.85 82.29 85.42 88.15 92.22 96.77 101.53

Percent change -2.3% 4.6% 5.7% 3.8% 3.2% 4.6% 4.9% 4.9%

Quick Service Restaurants 173.55 179.51 187.48 197.23 209.26 220.77 233.55 248.28

Percent change 1.2% 3.4% 4.4% 5.2% 6.1% 5.5% 5.8% 6.3%

Real Estate 44.83 42.18 42.82 46.16 49.29 51.63 54.34 57.44

Percent change -8.7% -5.9% 1.5% 7.8% 6.8% 4.7% 5.2% 5.7%

Retail Food 31.92 34.12 36.47 37.75 39.11 40.74 42.60 44.61

Percent change -7.9% 6.9% 6.9% 3.5% 3.6% 4.2% 4.6% 4.7%

Retail Products & Services 31.89 34.19 36.41 37.94 39.37 41.24 43.79 46.58

Percent change 1.0% 7.2% 6.5% 4.2% 3.7% 4.8% 6.2% 6.4%

Table/Full Service Restaurants 48.78 50.64 53.48 57.22 59.28 62.15 65.94 70.09

Percent change -0.8% 3.8% 5.6% 7.0% 3.6% 4.8% 6.1% 6.3%

Total 674.30 698.84 733.71 767.97 804.22 844.52 891.85 943.60


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Franchise Businesses' Contribution to GDP

By analyzing the components of value added in each of the industries where franchise businesses are

concentrated and calculating the relationship between gross output (sales) and value added in these

industries, IHS Economics developed estimates of the contribution to US GDP by the franchise sector as

a whole. We estimate that franchise businesses accounted for approximately 3% of US GDP or a total of

$523 billion in 2015. Based on our employment and output forecasts for franchising in 2016, we project

that nominal GDP of the franchise sector will increase by 5.6% to $552 billion in 2016. This will exceed

the growth of total US GDP in nominal dollars, which – with moderately low inflation – is projected atonly 4.4% in 2016.

Distribution by Sector

This section focuses on the distribution of the 10 franchise business lines in terms of the number of

establishments, employment, and output, based on our forecast for 2016. The quick service restaurants

business line is the largest category, with 20% of all franchise establishments, and accounts for 38% of

franchise employment. This business line is expected to contribute 26% of total output in 2016. Second

in size in terms of the number of establishments is the personal services line, with 15% of the total.

However, these are generally smaller businesses. The personal services group will account for only 8% offranchise employment and 11% of output.

The table/full service restaurants group occupies the second-largest share of employment, accounting

for 13% of the total. The business services segment, which has higher ratios of output per establishment

and per employee, is the second-largest contributor to the value of output in the franchise sector, with

19% of the total.

-4%

-2%

0%

2%

4%

6%

8%

2009 2010 2011 2012 2013 2014 2015 2016

Franchise Business Output Growth: January 2016 Forecast


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Output per Employee

Average output per employee in franchise businesses is projected to increase to $103,557 in 2016 –

up2.6% compared to 2.5% growth in 2015. In 2015, this output-per-worker ratio varied among the 10

franchise business lines from a low of $59,116 (table/full service restaurants) to a high of $216,624

(automotive).

The average output per worker in the franchise sector has grown since 2009, increasing at a compound

annual growth rate of 2.6%, and will continue to rise in 2016. The productivity pattern of franchise

businesses during and after the recession is consistent with other US industries, where revenues initially

fell at a greater rate than worker lay-offs, and later rose at a faster pace because employers started to

rehire workers only slowly. In 2010, average productivity rose by nearly 4% as the economy began to

bounce back from the recession. We estimate that franchise sector productivity gained 2.9% in 2011 and

2.3% in 2012. Productivity growth continued to show modest gains in 2013 and 2014 with annual

increases of 2.1%, and accelerated to 2.5% growth in 2015. The lodging business line and the

automotive line were the fastest growing in terms of output per worker over the 2010-2016 timeframe,

with compound annual growth rates of 4.3% and 2.3% respectively. The real estate sector, which

experienced declines in 2010 and 2011, had the slowest growth of output per worker over this period.


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Franchise Productivity by Business Line, 2009-2016: January 2016 Forecast

Forecast


(Dollars per worker) 2009 2010 2011 2012 2013 2014 2015 2016

Automotive 178,197 193,404 204,158 208,793 210,635 213,348 216,624 219,949

Percent change -1.9% 8.5% 5.6% 2.3% 0.9% 1.3% 1.5% 1.5%

Business Services 144,563 151,710 155,461 157,895 160,033 162,685 166,810 171,040

Percent change 3.0% 4.9% 2.5% 1.6% 1.4% 1.7% 2.5% 2.5%


Percent change -0.5% 2.7% 1.9% 2.4% 2.1% 1.5% 1.6% 1.6%

Lodging 93,477 100,190 105,273 108,397 111,710 116,122 120,396 124,827

Percent change -4.2% 7.2% 5.1% 3.0% 3.1% 3.9% 3.7% 3.7%


Percent change 1.5% 3.8% 3.6% 1.9% 1.0% 1.1% 2.3% 2.3%

Quick Service Restaurants 60,102 62,273 63,514 64,745 66,629 68,180 69,967 72,033

Percent change 2.4% 3.6% 2.0% 1.9% 2.9% 2.3% 2.6% 3.0%

Real Estate 151,469 145,293 145,151 153,254 159,996 164,662 169,682 175,234

Percent change -2.3% -4.1% -0.1% 5.6% 4.4% 2.9% 3.0% 3.3%

Retail Food 68,074 72,879 76,984 78,347 79,811 80,927 82,105 83,298

Percent change -5.1% 7.1% 5.6% 1.8% 1.9% 1.4% 1.5% 1.5%


Percent change 2.0% 6.1% 4.8% 2.7% 1.5% 1.8% 2.4% 2.5%

Table/Full Service Restaurants 49,477 51,248 52,805 55,231 56,098 57,507 59,116 60,826

Percent change 0.9% 3.6% 3.0% 4.6% 1.6% 2.5% 2.8% 2.9%

Total 86,445 89,827 92,401 94,497 96,501 98,509 100,956 103,557


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APPENDIX

Composition of Franchise Business Lines

1. Automotive: Includes motor-vehicle parts and supply stores, tire dealers, automotive equipment

rental and leasing, and automotive repair and maintenance.

2. Commercial & Residential Services: Includes building, developing, and general contracting; heavy

construction; special trade contractors; facilities support services; services to buildings and dwellings;

and waste management and remediation services.

3. Quick Service Restaurants: Includes limited-service eating places, cafeterias, fast-food restaurants,

beverage bars, ice cream parlors, pizza-delivery establishments, carryout sandwich shops, and carryout

service shops with on-premises baking of donuts, cookies, and bagels.

4. Table/Full Service Restaurants: Establishments primarily engaged in providing food services to

patrons who order and are served while seated (i.e., waiter/waitress services) and pay after eating

5. Retail Food: Includes food and beverage stores; convenience stores; food-service contractors;

caterers; retail bakeries; and beer, wine, and liquor stores; as well as gas stations with convenience

stores.

6. Lodging: Includes hotels, motels, and other accommodations.

7. Real Estate: Includes lessors of buildings, self-storage units, and other real estate; real estate agents

and brokers; and property management and other related activities.

8. Retail Products & Services: Includes furniture and home furnishings stores, electronics and appliance

stores, building-material and garden-equipment and supplies dealers, health and personal-care stores,

clothing and general merchandise stores, florists and gift stores, consumer-goods rentals, photographic

services, and book and music stores.

9. Business Services: Includes printing, business transportation, warehousing and storage, data-

processing services, insurance agencies and brokerages, office administrative services, employment

services, investigation and security services, tax-preparation and payroll services, and heavy equipment

leasing.

10. Personal Services: Includes educational services, health care, entertainment and recreation,

personal and laundry services, veterinary services, loan brokers, credit intermediation and relatedactivities, and personal transportation.


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IHS Economics Page 23

Methodology

The statistics in this report were derived from various published sources as well as IHS Economics

propriety databases. The primary source for the report was the 2007 Economic Census Franchise Report.

This report provides US estimates of establishments, employment, and annual payroll and output from

business with paid employees by detailed sector for 2007. Data were aggregated to the 10 BusinessFormat Lines.

The 2007 Economic Census only covers businesses with paid employees; the data were integrated with

other data sources to include franchise businesses without paid employees. Other data sources were:

The 2007 Survey of Business Owners – The US Census Bureau publishes the 2007 Survey of

Business Owners (SBO). From this data source we were able to determine the number of

franchised businesses for businesses without paid employees.

2007 Nonemployer Statistics – The US Census Bureau publishes the 2007 Nonemployer Statistics

(NES). NES includes the number establishments and total annual receipts by industry of

businesses without paid employees that are subject to federal income tax. Most often,

nonemployers are self-employed individuals. IHS Economics determined the total number of

businesses without paid employees and combined it with the SBO data to derive franchise

businesses without paid employees and the number of independent contractors working out of

franchised establishments owned by others.

IHS Economics Business Market Insights (BMI) – This is a database that is based on the Census

Bureau’s County Business Patterns. It contains information on establishments, employees, and

sales at the country level at six-digit North American Industry Classification System (NAICS). The

data were integrated with the SBO to determine the number of businesses with paid employees

in NAICS 55, which was not included in the 2007 Economic Census Franchise Report.

To develop our estimates and forecasts, we reviewed and replicated previous studies done by PWC,

which had made estimates of franchise businesses for 2007-2010. Our estimates were largely in

agreement with theirs. We present our revised estimates, which are based on our work with the 2007

Economic Census and more up-to-date data from the Survey of Business Owners and Nonemployer

Statistics.

We also acquired and reviewed data from Dun & Bradstreet on the number of franchise businesses in

various years. These data did not cover all franchise establishments, but in some cases could be used to

assess recent growth in the number of franchise establishments.

IHS Economics estimated econometric models to create forecasts for establishments, employment, and

output of each of the 10 business lines. The models include both macroeconomic (credit availability) and

industry-specific variables, using a nested modeling approach (i.e., franchise establishment formation

affects employment requirements, which further influences output forecasts).

franchise out look jan 2016

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