2011 Outlook: Annual Franchise Development Report Shows Slow Growth Ahead

Each year, for more than a decade, Franchise Update Media Group has surveyed hundreds of franchisors about their sales and development practices and compiled the results in the Annual Franchise Development Report (AFDR).

This year, the AFDR gathered data on sales and recruitment practices from 126 franchisors representing more than 42,000 units (38,563 franchised and 3,528 company-owned). Their responses are sorted out and analyzed to provide an in-depth view into the recruitment and development practices, budgets, and strategies of a wide cross-section of franchisors.

On the whole, says Franchise Update Media Group Publisher Steve Olson, who unveiled the findings at the company's Leadership & Development Conference in late September, there have been some noticeable improvements in performance by franchisors compared with last year. "This is the first time in the 13 years we've conducted the surveys that we've seen a greater number of franchisors implementing best practices in development," he says. "We're seeing more positive change in development practices in this survey than we have since we started this."

This growing improvement, says Olson, is franchisors responding to the economic environment, working with franchisee buyers and existing franchisees to continue to make growth happen--whether through incentives for potential buyers, or with franchisees to provide improved support and services to strengthen their validation. "Failure is not failing," says Olson. "Failing is not making changes to respond, reinvent, and reengineer."

Among all respondents, growth plans for 2011 target a total of 3,100 franchisees and 3,850 new That represents a reduction from plans for 2010, when respondents from 116 franchisors forecasted they would add 3,400 franchisees and 5,360 units. (However, a majority of franchisors did not hit their sales targets, so perhaps expectations from this year's respondents have been tempered by the realities of the past two years.) Despite franchisors planning on more conservative growth after the recent body blows landed by the economy, Olson says development is "taking baby steps" and he sees "a very positive forward" in 2011. "It's getting better but in increments. Recovery to previous years' numbers still will take a couple of years."

Some sample highlights from the report:

  • Recruitment budgets. For 2011, average recruitment budget plans were down slightly from the year before, dropping from $162,000 to $152,800, after climbing to an all-time high of $198,000 in 2009. Median recruitment budgets for 2011 dropped to $80,000, compared with $88,000 the year before, after coming in at $138,000 in both 2008 and 2009. "We can see it was leveling off," says Olson. "Recruitment budgets will go up as the market rebounds and credit becomes available, but slowly." In the coming years, he says, "We'll see more franchisors pumping money into their development budgets."
  • Where the money goes. Projected development spending by category has remained fairly steady over the 5 years from 2007 to 2011. The Internet still accounts for about half of all recruitment dollars, followed by print (18 percent), trade shows (13 percent), public relations (10 percent), and "other" (12 percent), which has risen slowly and steadily over the past 5 years, most probably from increased spending on social media.
  • Internet spending. Discernible shifts appeared this year in how franchisors plan to allocate their Internet spend. Most dollars are still being spent on online ad portals and an increasing amount on search engine optimization (SEO). The percentage of SEO spending rose from 18 percent to 24 percent, while pay-per-click remained steady, dropping 1 percentage point to 14 percent. Social networking spending rose from 6 percent to 10 percent, and is expected to continue rising as franchisors continue to try new ways to use social media platforms for franchise recruitment in the coming years.
  • Top sales producers. The Internet is still the top sales producer, although other lead sources are gaining ground. Its role for generating buyers had been steadily rising until 2005 (46 percent), after which it declined for 4 years before increasing slightly in 2010. Referrals accounted for one in four sales in 2010, brokers remained steady at 17 percent, print dropped from 8 percent to 5 percent, and "other" (think social media) rose from 13 percent to 17 percent from the previous year.
  • Top Internet sales producers. Online ad portals continued as the top online sales producer, although its numbers declined this year. While SEO rose only from 26 percent last year to 28 percent this year, the general sense at this year's Leadership & Development Conference was that ad portals still play a valuable role in franchise sales, but there is an ever-increasing interest in SEO and better-designed franchisor websites (with separate sites for consumers and potential franchisees).

Pay-per-click (PPC) accounted for 11 percent of sales in this year's survey, up from 8 percent from 2009. Nevertheless, for both 2009 and 2010, PPC was judged by respondents to have the lowest return per budget expenditure. Interestingly, those who said they "Don't know" what their top Internet sales producers are rose to nearly one in four (24 percent), up from 16 percent last year.

The big buzz this year, says Olson, was around SEO and franchisors optimizing their own recruitment websites. "The increase in sales attributed to SEO shows more Internet dollars are going toward site optimization as a top generator of prospects in the online space," he says. "This really should be the case."

To learn more or order the 2011 Annual Franchise Development Report, click here.

Next month: More sample highlights from the 2011 AFDR, including online alternative resources, overall closing ratios, brokers, franchise sales performance, and more.

Data Driplet

(from the 2011 Annual Franchise Development Report; representing 126 franchisors with more than 42,000 units)

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