The State of the Franchise Industry

Companies are optimistic. But business hasn’t been as strong as the good feelings.

Among other food trends, hamburger chains have proliferated in recent years.
Among other food trends, hamburger chains have proliferated in recent years. PHOTO:MATTHEW STAVER/BLOOMBERG NEWS

The mood of the franchise industry is upbeat right now. But recent performance hasn’t been quite as strong.

Optimism among franchisers and franchisees is “through the roof,” says Robert Cresanti, president and CEO of the International Franchise Association, an industry trade group. Much of that mood appears to be coming from the Trump administration’s less regulatory, more business-friendly approach than that of the Obama administration.

But the industry still has a way to go, Mr. Cresanti says. Growth isn’t as powerful as it could be. And there’s uncertainty in the sector over joint-employer rules.

For decades, one business couldn’t be held liable for employment-related matters at another unless it had direct control over the employees in question—which allowed franchise operations to flourish. But in 2015, the National Labor Relations Board said any franchiser could be held as a joint employer with local franchisees, liable to legal action and protests by employees.

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The move sent shock waves through the industry and led to lobbying and a grass-roots movement of local business owners. The Trump administration may roll back some aspects of the rule, but the industry is pursuing permanent changes.

Here are edited excerpts from the discussion with Mr. Cresanti.

MR. CRESANTI: It’s one thumb up, and it should be two thumbs up. Franchising is up from last year. We’re having a growth pattern within the normal trajectory you would expect. But we have huge opportunities to break through our averages. According to our 2017 forecast conducted by IHS Markit , there are going to be approximately 745,000 franchise establishments in the U.S. by year-end, up 1.6% from the year before. That is decent growth. Franchise employment is on the rise. It’s forecast to outpace growth in businesses economywide.

Things are good, but they could be a lot better. We’ve been through a cycle of eight years of regulatory, legislative and economic challenges, and this is us beginning to get our heads above the water.

We have lots of headroom if we get a little stimulus. A little legislative and tax relief would be nice.

Breaking It Down

A look at projections for franchise sections for 2017, in thousands, and percent change over the previous year

Source: IHS Markit for the International Franchise Association Franchise Education and Research Foundation

WSJ: Under the new administration, are you feeling more confident about what will happen with the issue of joint employment?

MR. CRESANTI: The one thing that casts the largest shadow is the joint-employer issue. We passed a bill out of the House of Representatives rolling back the National Labor Relations Board ruling, and we’re hopeful the Senate will take that up and pass the bill. We’ve had conversations with the White House that the president is willing to sign that bill.

That would be a strong positive for us, and it would clear the way for the kind of support that franchisers ought to be providing to owners that own the local franchise stores.

WSJ: You were very hopeful that Andy Puzder would be the Labor Secretary under the new administration. How is franchising faring under Secretary Alexander Acosta?

MR. CRESANTI: The current labor secretary comes from a very different background, so he sees things the way a lawyer would, and Andy would have seen things the way a businessman would. Having conversations with this Labor Department is a different exercise and an educational exercise for them and sometimes for us in the conversations. The great news is that we have an open door at the Labor Department to meet and talk to them and that they have been very curious about how franchising works, how come we are the juggernaut that we are economically, and what things impede us. At the same time, they’ve been asking us hard questions as well. It is by no means an easy process, but I think they’re open for discussion. They’re very engaged with this community about growing more jobs in this country and better jobs in this country.

WSJ: Do you see any new franchise trends emerging under the new administration?

MR. CRESANTI: We’re mobile and agile; we’re just not that mobile and agile. We’re only a year into the new administration. That said, we have the highest optimism ratings we’ve seen in over a decade or more. According to a survey we released in June, which was conducted by Morning Consult on behalf of the International Franchise Association, franchise business owners and prospective investors strongly believe the economy is improving and are more likely by a two-to-one margin to invest in a new business now than before the election, and over half of current franchise owners report being more optimistic about their future business plans. However, policy makers should continue to improve the economy for franchise owners and prospective investors.

WSJ: What areas in franchising are hot right now?

MR. CRESANTI: The food sector is continuing to grow. Hotels are growing also, but they are being challenged significantly by things like Airbnb. Real-estate-related businesses and home-services businesses are probably a little bit slower than we would have hoped.

I came from the technology industry prior to coming here, and we used to talk about disruptive innovation. I used to think that nothing could be more linear than the franchise business model. The shock to me has been how innovative and disruptive this business really is. Twenty years ago, you had three or four major hamburger brands. Why would anyone want to pay slightly more for a hamburger of different quality or marketing? Yet concepts are succeeding with gourmet burgers. They have different tastes and methods of preparation. I’m always amazed by the vibrancy in this business.

WSJ: Why is food hot now?

MR. CRESANTI: It’s easily accessible. People are creating interlinks with technology in ways they didn’t before, so you have app ordering, you have delivery of food in vehicles that bring it in temperatures unachievable before. You have people putting a lot of investment and thought into appealing to the consumer and particularly into millennials, who are becoming a greater economic force.

One of my CEOs put it correctly. It doesn’t matter what franchise business you’re in. If you’re not a technology company along with being a hotel company, a lodging company, a doggy day-care company, a food company, you’re not going to be in business long. There’s a lot of innovation coming, and it’s pushing through to making convenience the last mile in a way that has changed dramatically over time.

Ms. Garone is a writer in Alameda, Calif. Email reports@wsj.com.

Appeared in the November 27, 2017, print edition.