2011 Outlook: Annual Franchise Development Report Predicts Slow Growth, Part 2 of 3

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 its 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 and analyzed to provide an in-depth view into the recruitment and development practices, budgets, and strategies of a wide cross-section of franchisors. Below are sample highlights from the report. (Click here to see sample highlights from Part 1.)

• Online alternative resources. Selling franchises through social media platforms still has a long way to go, according to survey participants, who reported only five sales made through this channel in 2010; this compares with seven sales reported in 2009 and seven sales in 2008. The percentage of franchisors using social media as a sales tool actually dropped in 2010: 58 of 126 (46 percent) placed online ads, videos, or press releases on social or business networks, blogs, YouTube, Craigslist, etc. compared with 62 of 116 (53 percent) in 2009.
  
  "This is still not a direct sales source, but it strengthens your brand awareness. We're not there yet, but we have to watch it closely as a recruitment tool," says Olson. "Most of the success we've seen is definitely on the retail side. Social media can contribute, but it's still not a direct recruiting vehicle yet, with the exception of a few concepts." The main point for franchisors, he says, is to continue to experiment with social media as a recruiting tool, but, he advises, "Don't throw a lot of money at it."
• Overall closing ratios in 2010 were about the same as in 2009: leads to sales for both years came in at 1 percent; applications to sales fell slightly from 10 percent in 2009 to 8 percent in 2010; and discovery days to sales remained at 65 percent. "We continue to see a slight dip in the application-to-sales ratios," says Olson. "During the boom years, we were seeing that number at around 20 percent." He attributed the decline to the ongoing tight credit situation. Also, he says there are fewer potential buyers today, and they are more cautious about investing in any type of business. His message to franchisors: "You have to expand your recruiting pool to make up the difference."
• Brokers. The use of brokers in 2010 inched up slightly from the previous year, rising from 52 to 57 percent, but the percentage of those closing deals through brokers dropped from 78 percent in 2009 to 67 percent in 2010. The "sweet spot" for broker deals is still in the up-to-$150,000 range, and looks to remain there for now. The predominant users are service businesses and lower-cost retail or food concepts. Median commissions paid to brokers in 2010 rose to $15,000 per deal, an increase of $4,000 from 2009 (median broker commissions from $13,000 in 2008 to $11,000 in 2009). "Franchisors are spending a little more money with brokers again, because of the tighter ad budgets and the advantages of no money invested up front with brokers," says Olson.
• Franchise sales performance. Since the bottom fell out of the economy in mid- to late 2008, setting sales goals has become a tricky proposition. Yet set we must, whether those goals are more conservative or not. For 2010, 19 percent of franchisors reported they are exceeding their goals, 21 percent said they are meeting them, and 59 percent reported that they expected to end the year below their sales goals. In 2009, 9 percent exceeded their goals, 33 percent met them, and 59 percent were below. Despite lowered expectations to account for the recession, a pool of cautious prospects, and consumer uncertainty, for six in 10 franchisors the market continues to prove challenging. One positive note is that the number of franchisors exceeding their goals in 2010 doubled from the previous year.
• Franchisors exceeding goals. The distribution of franchisors exceeding their goals was largely unchanged from 2009 to 2010 for the service category (47 percent in 2010, 50 percent in 2009) and the retail non-food category (21 percent in 2010, 20 percent in 2009). In the retail food category, franchisors exceeding their sales goals dropped from 20 percent in 2009 to 11 percent in 2010. The food category, however, rose from 10 percent in 2009 to 21 percent in 2010. "Lower-cost and service businesses did fairly well, but we saw drops in retail food, which includes juice, coffee, pretzels, and other food concepts that involve minimal preparation," says Olson.

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

Next month: More sample highlights from the 2011 AFDR, including measuring costs, referrals, qualifiers, web analytics, and website navigation.

AFDR DATA DRIPLET