The International Franchise Association (IFA) recently released its 2023 Franchising Economic Outlook. Developed in partnership with FRANData, the Franchising Economic Outlook is the IFA’s “annual study . . . detailing the franchise sector’s performance for the past year and projected economic outlook for the year ahead, as well as an in-depth state outlook for all 50 states and Washington, D.C.”
As the IFA goes on to explain, the 2023 Franchising Economic Outlook “highlights sector growth across eight key franchising business lines and details regional trends, including the top states for franchise growth.” The IFA continues, “It also provides key insights into the state of the U.S. economy, trends in business, and challenges facing small business owners.” Here, franchise lawyer Jeffrey M. Goldstein discusses some of the key data from the report:
IFA: Period of “Moderation” in Franchising Will Continue in 2023
Overall, the IFA is predicting a 1.9 percent increase in the total number of franchised outlets in 2023. The 2023 Franchising Economic Outlook suggests that franchising is currently in “a period of moderation,” following “exceptional growth and recovery [from the economic impacts of the COVID-19 pandemic] in 2021.”
Here are some more of the key figures for 2023:
- Projected Increase in Number of Franchised Establishments: Approximately 15,000 units (1.9 percent increase from 2022)
- Projected Increase in Franchise-Related Employment: Approximately 254,000 jobs (3.0 percent increase from 2022)
- Projected Increase in Franchisee Economic Output: Approximately $35 billion (4.2 percent increase from 2022)
- Projected Increase Franchise GDP: Approximately $21 billion (4.2 percent increase from 2022)
Regional Trends in Franchise Growth
The IFA’s 2023 Franchising Economic Outlook highlights some noteworthy regional trends in the projected growth of the franchise industry throughout the remainder of the year. For example, of the 10 states projected to experience the most significant growth in franchising during 2023, seven are in the Southeast and Southwest regions. These 10 states are:
- North Carolina
- South Carolina
According to the IFA, “[t]he Southeast region, which has the largest franchise concentration in the U.S., will have an estimated 234,079 total establishments by 2023, employing 2.5 million workers and contributing $250 billion in output to the U.S. economy.” The IFA attributes the current regional disparities in its franchise outlook to factors including migration trends, the labor market and disparities in business climates.
Which state is expected to see the most growth in franchising? Based on the IFA’s data-driven projections, Texas tops the list in terms of raw figures, while Illinois is projected to see the highest rate of growth.
It is also worth noting that while the Southeast and Southwest are expected to outpace the other U.S. regions in terms of franchise growth in 2023, they aren’t expected to do so by much. The IFA is projecting that all five regions will experience growth in 2023 as follows:
- Midwest: 1.9 percent
- Northeast: 0.8 percent
- Southeast: 2.2 percent
- Southwest: 2.9 percent
- West: 1.2 percent
The IFA also notes that “[t]he Southeast region is the largest franchise market, with approximately 234,000 total forecasted units in 2023, employing 2.6 million people and providing $250.0 billion in total output.” The IFA defines the Southeast region to include: West Virginia, Virginia, Kentucky, Tennessee, North Carolina, South Carolina, Georgia, Arkansas, Louisiana, Mississippi, Alabama and Florida.
In its 2023 Franchising Economic Outlook, the IFA writes that “[t]he growth of service-based businesses and QSRs is expected to outpace the rest of the franchising sector, which is still recovering from the pandemic to a greater degree.” In fact, while the IFA is projecting a 1.9 percent increase in the number of franchised outlets in 2023 overall, it is projecting negative growth in certain sectors (i.e., real estate, which the IFA forecasts will lose 0.5 percent of its current franchise establishments).
From most growth to least, here are the IFA’s industry-specific forecasts for 2023:
- Personal Services: 2.5 percent increase
- Quick Service Restaurants (QSR): 2.5 percent increase
- Commercial and Residential Services: 2.1 percent increase
- Retail Food, Products and Services: 2.1 percent increase
- Business Services: 1.8 percent increase
- Table/Full-Service Restaurants: 1.1 percent increase
- Lodging: 0.8 percent increase
- Real Estate: 0.5 percent decrease
These figures represent some notable shifts from prior years. For example, while the Business Services sector saw a 4.8 percent decrease in 2020 (and is forecast to see a 1.8 percent increase in 2023), the Lodging sector saw a modest increase in 2020 (1.3 percent) and is projected to see an even more-modest increase this year. Similarly, while the QSR sector is rebounding from significant negative growth in 2020 (6.7 percent), the Real Estate Sector is now forecast to decline after experiencing growth during the pandemic.
Opportunities for New and Existing Franchisees
Notably, while the IFA is projecting a 1.9 percent increase in franchised outlets in 2023, it is projecting a 4.8 percent increase in total franchising output. This means that both new and existing franchisees have opportunities to increase their revenue based on the IFA’s data. The IFA attributes this opportunity to factors including:
- “Brands will focus on creating a loyal customer base and acquiring new customers in innovative ways.”
- “Franchises [will] . . . benefit from the systems, scale, and marketing of a larger brand.”
- “As franchised businesses grow, th[eir] relationship [with the franchisor] helps them scale more efficiently, incorporate new technology in their systems and processes, and gather consumer insights that help attract repeat customers.”
Ultimately, however, the availability of these benefits is highly franchisor-specific. Some franchisors do much more to support their franchisees than others. Additionally, while finding new and innovative ways to attract customers can be beneficial, it can also be costly—and these are costs that franchisees will typically be required to incur regardless of whether they believe in their franchisor’s new direction. With this in mind, individuals who are thinking about buying a franchise in 2023 should hire a franchise lawyer to carefully review the FDD and franchise agreement, and franchisees who are dissatisfied with the direction of their brands should consult with a lawyer about the options they have available.
Request a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
If you have questions or concerns about buying or owning a franchise in 2023, we invite you to get in touch. Call 202-293-3947 or contact us online to request a free consultation with franchise lawyer Jeffrey M. Goldstein.