Franchise Business Economic Outlook for 2015

Transcription

1 Franchise Business Economic Outlook for 2015 September Forecast Update Prepared for: International Franchise Association Educational Foundation By: IHS Economics September 2015

2 About IHS Economics IHS Economics is one of the leading economic analysis and forecasting firms in the world. With over 600 economists and industry specialists in 25 offices worldwide, IHS Economics offers market intelligence for over 200 countries and coverage of over 170 industries that helps more than 3,800 clients to monitor, analyze, and interpret conditions affecting their business. IHS Economics has an established track record for providing rigorous, objective forecast analysis and data to businesses, governments, and industry associations around the world. About IHS ( IHS (NYSE: IHS) is a leading source of information and insight in critical areas that shape today s business landscape, including energy and power; design and supply chain; defense, risk, and security; environmental, health and safety, and sustainability; country and industry forecasting; and commodities, pricing and cost. IHS has been in business since 1959 and became a publicly traded company on the New York Stock Exchange in Headquartered in Englewood, Colorado, United States, IHS employs more than 5,500 people in more than 30 countries around the world. For more information, contact: John Reynolds President, IFA Educational Foundation jreynolds@franchise.org Alisa Harrison Senior Vice President, Communications and Marketing aharrison@franchise.org James Gillula Managing Director, IHS Economics James.Gillula@ihs.com For press information, contact: Katherine Smith Media Relations Manager, IHS Katherine.Smith@ihs.com (C) Copyright IFA Educational Foundation. ALL RIGHTS RESERVED. All information contained herein is obtained by IHS Economics from sources believed by it to be accurate and reliable. All forecasts and predictions contained herein are believed by IHS Economics to be as accurate as the data and methodologies will allow. Because of the possibilities of human and mechanical error, however, as well as other factors such as unforeseen and unforeseeable changes in political and economic circumstances beyond IHS Economics control, the information herein is provided as is without warranty of any kind, and IHS Economics, AND ALL THIRD-PARTY PROVIDERS, MAKE NO REPRESENTATIONS OR WARRANTIES EXPRESS OR IMPLIED TO ANY SUBSCRIBER OR ANY OTHER PERSON OR ENTITY AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OF THE INFORMATION OR FORECASTS CONTAINED HEREIN.

3 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 Employment by Business Line Output by Business Line Franchise Businesses' Contribution to GDP Distribution by Sector Output per Employee Composition of Franchise Business Lines Methodology... 23

4

5 EXECUTIVE SUMMARY This report presents an updated forecast of the franchise sector of the US economy in 2015 prepared by IHS Economics for the International Franchise Association Educational Foundation. Following a weak first quarter, real GDP in the second quarter was revised up to show a 3.7% gain. Stronger nonresidential investment accounted for much of the upward revision, along with a further increase in inventory accumulation. Consumer spending accelerated, and state and local government purchases rebounded from a first-quarter decline. The consumer spending outlook remains relatively bright, supported by solid gains in employment, real disposable income, and home sales. July retail sales were strong and the May and June numbers were revised up. We expect real consumer sales growth to average 3.1% in the second half of 2015 after posting 2.4% growth in the first half. Housing markets continue to gain momentum as credit availability is improving for homebuyers and builders. Capital spending is expected to accelerate further in the third quarter, led by investment in commercial and manufacturing structures, information-processing equipment, and industrial equipment. However, inventories are unsustainably high, and an expected inventory correction will create a drag on growth in the second half. Thus, on balance, our expectations for real GDP growth in 2015 are little changed from our June 2015 report on the outlook for the franchise sector. We expect the economy to expand at a 2.6% pace in the second half, putting growth for the year at 2.3%. The Franchise Business Index continues to signal steady growth in the franchise sector over the last three months despite the struggles of the broader economy. Monthly increases averaged 0.3% in May through July, and the index was 2.9% above its year-ago level in July. Franchise employment growth as reported by ADP also shows no signs of slowing, and economy-wide sales in certain sectors where franchises are prevalent notably restaurants continue to be strong. Thus, while we have revised the employment and outlook projections slightly for some franchise business lines (both up and down), our top-line forecast for the franchise sector in 2015 has changed little: Our forecast of growth of the number of franchise establishments in 2015 is unchanged at an increase of 1.6%, matching the pace of growth in Although employment growth economy-wide has moderated, employment in the franchise sector continues to outpace growth in businesses economy-wide, as it has in each of the last four years. We expect franchise employment to increase 2.9% in 2015, while total private nonfarm employment will increase 2.4%. Our forecast of output growth in nominal dollars for franchise businesses shows a 5.5% increase in 2015 ahead of the 5.0% gain in 2014 and up slightly from our June forecast. The gross domestic product (GDP) of the franchise sector will increase by 5.2% to $521 billion in This will exceed the growth of US GDP in nominal dollars, which is projected at 3.3%. The franchise sector will contribute approximately 3% of US GDP in nominal dollars. IHS Economics Page 1

6 While the outlook remains positive, our forecast for the franchise sector is presented with a note of caution. The recent decision by the National Labor Relations Board that Browning-Ferris Industries is to be considered a joint employer with one of its subcontractors has created a cloud of uncertainty over employment relationships in the franchise sector, which could impede its growth. Franchise Business Economic Outlook: September 2015 Forecast Forecast Estimates (September 2015) Establishments 770, , , , , , , , ,182 Percent change 0.4% -3.5% -0.9% -0.5% 1.5% 1.4% 1.6% 1.6% Employment ('000) 7,994 8,028 7,800 7,780 7,940 8,127 8,334 8,573 8,826 Percent change 0.4% -2.8% -0.3% 2.1% 2.3% 2.5% 2.9% 2.9% Output ($Billions) Percent change 3.2% -3.2% 3.6% 5.0% 4.7% 4.7% 5.0% 5.5% GDP ($Billions) Percent change 1.8% -1.2% 2.2% 4.8% 4.4% 4.4% 4.8% 5.2% 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 2015 ranging from a low of 4.1% in the automotive business line to 6.3% in lodging. Other highlights of the industry forecast for 2015 are: IHS Economics Page 2

7 The quick service restaurants business line will continue to be among the growth leaders, ranking second in employment growth and third in output growth. The table/full service restaurants segment will match QSR output growth and trail slightly in employment growth. As overall consumer spending maintains a 3%+ growth pace in the second half of 2015, the outlook for the retail products & services business line will improve, boosting it to first in employment growth and second in output growth for the year. With housing market activity in 2015 progressing steadily but not accelerating strongly, growth indicators for the real estate and commercial & residential services business lines will be below the franchise sector averages. Franchise Business Economic Outlook 2015: September 2015 Forecast Establishments Amount Percent Change Over Previous Year Employment Amount Percent Change Over Previous Year Output ($Billions) Amount Percent Change Over Previous Year Automotive 31, % 192, % % Business Services 97, % 991, % % Commercial & Residential Services 63, % 372, % % Lodging 26, % 748, % % Personal Services 113, % 703, % % Quick Service Restaurants 157, % 3,341, % % Real Estate 90, % 319, % % Retail Food 62, % 517, % % Retail Products & Services 101, % 527, % % Table/Full Service Restaurants 37, % 1,110, % % TOTAL 782, % 8,825, % % Franchise Business Index The estimates of output, employment and the number of businesses 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) IHS Economics Page 3

8 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 (May through July), and the index was up 2.9% in July compared to July Among individual components of the index, all the labor market indicators that contribute to the index (ADP s franchise employment series, the economy-wide unemployment rate, and the indicator of selfemployment in the economy) made positive contributions to the index over this 3-month period. Small business optimism also improved steadily over the period. Month-to-month changes in credit conditions and retail sales of franchise-intensive retailers were mixed, but both were still positive on balance over the 3-month period. May June July 12-month July-July Franchise Business Index Percent Change 0.4% 0.2% 0.2% 2.9% IHS Economics Page 4

9 INTRODUCTION This report presents an updated forecast of basic indicators of the franchise sector of the US economy in 2015 prepared for the International Franchise Association Educational Foundation by IHS Economics. The following section presents a summary of the current IHS forecast of the US economy in 2015, 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 an updated forecast for 2015 of: Franchise establishments 2 Franchise employment 3 Franchise nominal output 4 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." IHS Economics Page 5

10 THE ECONOMIC OUTLOOK After a gain of only 0.6% in the first quarter, real GDP growth in the second quarter was revised upward from 2.3% to 3.7%. The biggest contributor to this upward revision was stronger investment, with most of the adjustment coming in nonresidential investment, although inventory accumulation was also revised upward. Consumer spending accelerated to a 3.1% increase in the second quarter, and local government purchases rebounded from a first-quarter decline. A high rate of inventory accumulation twice the sustainable pace in the first and second quarters raises a cautionary flag. Reduced inventory investment will be a drag on real GDP growth in the second half, offsetting solid growth in final sales. Much of the correction in wholesale inventories will come out of imports, so US trading partners will share the pain. Nonetheless, net trade will continue to remain a drag on the US economy as export growth lags. We expect the economy to expand at a 2.6% annual pace in the second half of 2015, with solid growth in consumer spending, residential construction, and investment in equipment. But given the weak first quarter, real GDP is projected to increase only 2.3% for the year unchanged from the forecast at the time of our June report on the franchise business outlook. Industrial production growth will continue to trail real GDP growth through the final quarters of 2015, reflecting the headwinds from a strong dollar and lackluster growth in the global economy. 5% Real GDP Growth (Percent change, annual rate) 4% 3% 2% 1% 0% -1% -2% 2013Q1 2014Q1 2015Q1 IHS Economics, September 2015 Forecast Second-quarter real consumer spending growth came in at a 3.1% annual rate, an improvement over the weather-impacted 1.8% rate in the first quarter. July retail sales were strong and the May and June numbers were revised up. In July, the University of Michigan's consumer sentiment and Conference Board s consumer confidence indexes took a beating due to stock market volatility and the headline effects of concern over China s financial markets and the Greek debt issue. The indexes revived in IHS Economics Page 6

11 August, but a further deterioration in consumer mood can be expected given the late-august volatility in the stock market. Nonetheless, the consumer spending outlook remains relatively bright. Solid jobs and income growth, improved household finances, and lower energy prices are all supporting US consumer expenditures. Moreover, despite worries about weak wage growth, US wage gains continue to outpace inflation. Recent strong sales of light vehicles have been contributed to the pick-up in consumer spending. We expect real consumer spending to grow 3.1% the third quarter and 3.2% in the fourth, which will yield 3.0% growth for the year. Housing markets continue to gain momentum. In July, existing home sales volumes advanced for the third month in a row up 2.0% to a 5.59-million-unit annual rate. The median price for a single-family home rose 5.8% from July Single-family home sales occurred at the fastest pace since February Housing starts advanced 0.2% to a 1.2-million-unit annual rate in July on top of an upwardly revised June number. This is the highest level since October Single-family starts jumped 12.8%, to a 782,000-unit annual rate. Our forecast continues to show a gradual recovery in housing starts and existing home sales. We expect existing home sales to increase 7.8% to 5.3 million in 2015 and housing starts to be up 11.5% to 1.12 million for the year. As demand rises, it should continue to lift prices, releasing more homeowners from negative equity and expanding the inventory of homes for sale. The Economic Outlook for 2015 (Annual percent change) Real Gross Domestic Product 1.6% 2.2% 1.5% 2.4% 2.3% Total Nonfarm Employment 1.2% 1.7% 1.7% 1.9% 2.1% Accommodations and Food Services 2.7% 3.2% 3.6% 3.1% 3.0% Personal Services 0.6% 1.3% 1.0% 1.6% 1.3% Real Disposable Income 2.5% 3.1% -1.4% 2.7% 3.3% Real Personal Consumption 2.3% 1.5% 1.7% 2.7% 3.0% Food Services 2.4% 2.1% 1.3% 3.1% 5.1% Accommodations 3.3% 5.5% 3.0% 2.6% 4.9% Personal Services 1.3% 1.7% 0.4% 3.7% 3.1% Retail Sales (nominal dollars) 7.3% 4.9% 3.9% 3.8% 1.9% Existing Home Sales 2.3% 8.9% 9.0% -3.0% 7.8% Com'l & Indus. Loans Outstanding, Com'l.Banks 9.3% 13.2% 6.9% 12.7% 9.3% IHS Economics, September 2015 Forecast IHS Economics Page 7

12 OUTLOOK FOR FRANCHISE BUSINESS Outlook Summary Many of the factors that are creating a drag on real GDP growth, such as weak exports, flat government spending and an expected inventory correction in the second half of 2015, are of less direct relevance for the health of the franchise sector of the economy. As summarized above, the fundamentals of consumer spending are positive and business investment is beginning to accelerate. Thus, many franchise businesses will continue to see good business conditions for the remainder of 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 expect a 1.6% increase in the number of franchise businesses in 2015, which is in line with the growth of overall business formation across the economy. We expect employment in franchise establishments to be up 2.9% in 2015 matching the 2014 pace. In comparison, total private sector nonfarm employment is projected to increase 2.4% in 2015 (total non-farm employment will be up 2.1%, with government employment up only 0.3%). Growth of the output of franchise businesses in nominal dollars will accelerate to 5.5% in 2015 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 5.2% to $521 billion. Franchise Business Economic Outlook: September 2015 Forecast Forecast Estimates (September 2015) Establishments 770, , , , , , , , ,182 Percent change 0.4% -3.5% -0.9% -0.5% 1.5% 1.4% 1.6% 1.6% Employment ('000) 7,994 8,028 7,800 7,780 7,940 8,127 8,334 8,573 8,826 Percent change 0.4% -2.8% -0.3% 2.1% 2.3% 2.5% 2.9% 2.9% Output ($Billions) Percent change 3.2% -3.2% 3.6% 5.0% 4.7% 4.7% 5.0% 5.5% GDP ($Billions) Percent change 1.8% -1.2% 2.2% 4.8% 4.4% 4.4% 4.8% 5.2% Although the franchise outlook is positive, there is considerable downside risk to this forecast due to the recent NLRB decision that Browning-Ferris Industries is to be considered a joint employer with one of its subcontractors. The threat that this fundamental revision of the joint employer standard will apply to franchises will impose additional costs on franchisors due to the need for more oversight and insurance against risk. Uncertainty about how the NLRB s ruling would apply to individual franchisors could impede the growth of franchise business formation, employment and output. IHS Economics Page 8

13 The following chart shows how the franchise economy has fared over the last three years, along with our 2015 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 2015, 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 our US Industry and US Macroeconomic forecasts are summarized below. Automotive: The growth of light vehicle sales is forecast to slow to 3.9% in 2015 from 5.8% in 2014, as unit sales have now regained pre-recession levels after five years of solid growth. 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 and tires declined by 0.7% in the first quarter of Therefore, our forecast for full-year 2015 spending in this category shows a slowdown in growth from The revised forecast shows the growth of consumer spending on auto parts and tires slowing from 2.7% in 2014 to 1.7% in 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. The American Trucking Association reported their advanced seasonally adjusted For-Hire Truck Tonnage Index equaled (2000=100) in July, which was the second highest level on record; the all-time high of occurred in January Trucking companies will need to make investments in new fleet capacity as IHS Economics Page 9

14 well as try to maintain the current fleet. Thus, it will also behoove fleets and individual owner operators to step up their equipment maintenance. Our forecasts of franchise output and employment growth in the automotive business line are unchanged. Output of the automotive business line is now expected to increase 4.1% in 2015 and employment is expected to be up 2.5%. 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 eighth in employment growth and last in output growth. Commercial & Residential Services: Nominal spending on household services is expected to rise 4.8% in 2015 after increasing 4.7% in Our forecasts of existing home sales and housing starts in 2015 are little changed from our June forecast report. Existing home sales are expected to grow 7.8% in 2015 after declining 3% in Housing starts will increase 11.5% to 1.12 million for the year. This should boost such businesses as architectural, project management and contracting firms and special trade contractors. We have held steady our 2015 forecasts of output and employment of the commercial & residential services business line; we expect the output of franchise businesses in this business line to increase by 4.2% in 2015 and employment will be up 2.4%. 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. Full service restaurant sales growth has outpaced the QSR segment in three of the last four years, with growth averaging 6.1%. It appears that one area where consumers have spent some of their windfall in purchasing power from lower gasoline prices is in eating out. In the first half of this year, sales of both segments of the restaurant industry showed very strong growth, with the table service segment at 9.6% year-over-year growth just ahead of the QSR segment. However, we do not expect this pace to be maintained for the year. IHS Economics Page 10

15 Industry-wide Restaurant Sales Growth 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% ytd Full Service Restaurants Quick Service Restaurants Within the franchise full service restaurant business line, we have boosted our forecast of 2015 sales slightly, and it now shows a 5.9% increase. This will translate into higher productivity, as we project a 2.8% increase in employment up slightly from our previous forecast. 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 of 2.1% in 2015 slightly ahead of the 1.9% growth achieved in 2014 and 0.1% higher than our June forecast. The improving economy along with prospective increases in the minimum wage in many states is tightening the labor market especially for the restaurant industry. In September Chipotle will host a career day and is anticipating hiring 4000 workers in one day. Other QSR restaurants have increased their benefits in efforts to attract employees. We estimate the number of QSR establishments increased by 1.5% in 2014, and we expect this pace to continue in We have revised our forecast of total output (sales) of the QSR franchise business line up 0.2% to 5.9% in The QSR business line will remain among the leaders of the franchise sector in employment growth in 2015, with a 3.2% gain. 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 increased only 2.4% in 2014, and growth is expected to slow to 1.5% in Retail sales of food stores of all types (including their sales of non-food items) increased 2.9% in 2014, and their sales growth is expected to slow slightly to 2.8% in IHS Economics Page 11

16 We expect franchise employment and output within the retail food business line to outpace these industry-wide growth trends. However, the retail food business line will remain one of the slowest growing parts of the franchise sector. Our forecast of the retail food franchise business line shows sales growth of 4.3% in 2015, with a 2.8% increase in employment both growth rates ranked near the middle among franchise business lines. Lodging: The lodging industry has posted several years of solid growth, with sales gains continually outpacing the annual increase in employment, although overall consumer spending on accommodations was revised down slightly in the latest GDP revisions. 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 project franchise employment in the lodging business line to increase 2.5% in 2015 employment growth that will support an output gain of 6.3%. This will make lodging the leader in output growth among the 10 business lines in Real Estate: As noted above in discussing the commercial & residential services business line, with continued improvements in employment and wages we expect existing home sales to continue their steady improvement. Expectations of the Federal Reserve increasing interest rates in the second half of 2015 could be fueling the recent spurt in demand for homes. We do not expect the rate increase when it comes to be rapid enough to choke off the housing market recovery. Our forecast of new and existing home sales is little changed from our June forecast. In line with the steady improvement in the housing market, we expect sales of franchise businesses in the real estate business line to increase 5.2% in 2015 compared to 4.7% growth in Employment in the real estate business line is expected to increase 2.1%. IHS Economics Page 12

17 Retail Products & Services: As overall consumer spending maintains its pace of growth near 3% in constant dollars in 2015, expenditures on the broad range of retailers that are included in the retail products and services business line should also show steady gains. However, the pace of growth in nominal dollars will be held down by very low inflation. Retail sales excluding food and automotive products are expected to grow 3.5% in Sporting goods and hobby stores are expected to see a return to growth in 2015 after contracting in Clothing and accessory stores are expected to see 2.9% growth in 2015, slower than the 3.7% growth in Furniture and home furnishing stores are projected to grow 4.8% in 2015 up from 3.4% in Conventional department stores will continue to face a competitive challenge from specialty stores; their sales are expected to contract by 1.8% in Employment data from the ADP National Franchise Report indicate that the franchise segment of the retail products & services industry continues to outperform other industries. We have revised upward our forecasts of franchise employment and output growth in this business line for We project franchise employment in the retail products & services business line to be up 3.6% in 2015, supporting sales growth of 6.2%. These growth rates put the retail products & services business line first and second, respectively, among the 10 franchise business lines. Business Services: The business services industry has been one of the leaders in job growth, with employment gains of 3.0% for Based on data from the ADP National Franchise Report, we estimate that employment in franchise business services firms has grown at a similar pace in the first seven months of The IHS US Industry Service forecasts show a wide range of businesses seeing improved growth prospects in We expect franchise business services to show a 3.0% increase in employment in 2015 (unchanged from our June report) and 5.8% output growth (revised up slightly from our last forecast). 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 was recently revised upward to show growth of 7.8% pace in nominal dollars in The IHS forecast for consumer spending in this category in 2015 has also been revised upward since our June report and now shows growth of 4.0% in As a result, we have revised our forecasts for the personal services franchise business line upward slightly. We now project employment growth of 2.8% and output growth of 5.0% in IHS Economics Page 13

18 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 held steady around 1.5% since We estimate that the number of franchise establishments will increase 1.6% across all 10 businessformat lines in 2015, matching the pace of The personal services sector will again be the growth leader in 2015, expanding by 1.9%. Franchise Establishments by Business Line, : September 2015 Forecast Forecast Estimates (September Automotive 31,653 30,012 29,687 29,984 30,344 30,648 31,002 31,404 Percent change 1.1% -5.2% -1.1% 1.0% 1.2% 1.0% 1.2% 1.3% Business Services 96,289 89,691 89,147 90,035 91,746 93,581 95,268 97,006 Percent change -5.9% -6.9% -0.6% 1.0% 1.9% 2.0% 1.8% 1.8% Commercial & Residential Services 65,325 62,650 61,272 60,169 60,951 61,804 62,666 63,529 Percent change 0.9% -4.1% -2.2% -1.8% 1.3% 1.4% 1.4% 1.4% Lodging 26,572 25,588 25,410 25,003 25,553 25,987 26,490 26,942 Percent change 2.9% -3.7% -0.7% -1.6% 2.2% 1.7% 1.9% 1.7% Personal Services 110, , , , , , , ,826 Percent change 3.0% -3.8% -0.4% -0.6% 2.0% 1.6% 2.2% 1.9% Quick Service Restaurants 151, , , , , , , ,521 Percent change 1.1% -1.0% -0.5% -1.1% 2.2% 1.2% 1.5% 1.5% Real Estate 94,599 88,372 86,153 84,947 86,221 87,687 88,945 90,348 Percent change -2.3% -6.6% -2.5% -1.4% 1.5% 1.7% 1.4% 1.6% Retail Food 62,247 60,374 60,173 60,474 60,776 61,323 62,070 62,842 Percent change 2.2% -3.0% -0.3% 0.5% 0.5% 0.9% 1.2% 1.2% Retail Products & Services 98,527 97,519 96,921 96,630 96,823 97,840 99, ,181 Percent change 3.7% -1.0% -0.6% -0.3% 0.2% 1.1% 1.5% 1.9% Table/Full Service Restaurants 36,221 35,614 35,688 35,507 36,217 36,724 37,103 37,583 Percent change 0.2% -1.7% 0.2% -0.5% 2.0% 1.4% 1.0% 1.3% Total 746, , , , , , ,182 IHS Economics Page 14

19 Employment by Business Line All 10 business-format franchise lines posted gains in employment over each of the last four years, and we expect this pattern to continue in We estimate total franchise employment grew 2.9% in 2014 and we project a 2.9% increase in 2015 as well. Our updated forecasts show retail products and services as the leader in employment growth in 2015 at 3.6%, followed closely by quick service restaurants at 3.2%. Our forecast of 2015 employment growth of the retail food, retail products and services, and full service restaurants business lines have also been revised upward slightly. IHS Economics Page 15

20 Franchise Employment by Business Line, : September 2015 Forecast Forecast Estimates (September 2015) Automotive 184, , , , , , , ,569 Percent change -5.4% -0.8% 2.5% 1.3% 2.0% 2.2% 2.5% Business Services 955, , , , , , , ,262 Percent change -6.8% -1.8% 1.1% 2.2% 3.4% 3.0% 3.0% Commercial & Residential Services 357, , , , , , , ,567 Percent change -3.9% -2.1% 1.7% 1.7% 2.2% 2.4% 2.4% Lodging 696, , , , , , , ,550 Percent change -3.6% 0.5% 2.5% 1.1% 1.4% 3.0% 2.5% Personal Services 642, , , , , , , ,372 Percent change -3.8% 0.8% 2.0% 1.9% 2.2% 3.5% 2.8% Quick Service Restaurants 2,919,701 2,887,550 2,882,638 2,951,821 3,046,279 3,140,714 3,238,075 3,341,826 Percent change -1.1% -0.2% 2.4% 3.2% 3.1% 3.1% 3.2% Real Estate 316, , , , , , , ,977 Percent change -6.6% -1.9% 1.6% 2.1% 2.3% 1.8% 2.1% Retail Food 483, , , , , , , ,483 Percent change -3.0% -0.1% 1.2% 1.7% 1.7% 2.7% 2.8% Retail Products & Services 468, , , , , , , ,178 Percent change -1.1% 1.0% 1.6% 1.5% 2.2% 2.9% 3.6% Table/Full Service Restaurants 1,003, , ,044 1,012,745 1,036,038 1,056,759 1,080,731 1,110,928 Percent change -1.7% 0.2% 2.5% 2.3% 2.0% 2.3% 2.8% Total 8,028,452 7,800,319 7,779,833 7,940,484 8,126,879 8,333,790 8,573,000 8,825,712 IHS Economics Page 16

21 Output by Business Line All 10 franchise business lines posted output gains in each of the last four years, led by the lodging business line, which again is projected to hold the top spot in 2015, even with the slight downward revision of its growth forecast to 6.3%. Total output across all business lines is projected to grow 5.5% in 2015 up from the 5.0% growth of Retail products and services moves up to second place among business lines with expected 2015 growth revised up to 6.2%, compared to 4.8% growth in Franchise Output by Business Line, : September 2015 Forecast Forecast Estimates (September 2015) ($billions) Automotive Percent change -7.2% 7.7% 8.2% 3.6% 2.9% 3.5% 4.1% Business Services Percent change -4.1% 3.1% 3.6% 3.8% 4.8% 4.7% 5.8% Commercial & Residential Services Percent change -4.3% 0.5% 3.6% 4.1% 4.3% 3.9% 4.2% Lodging Percent change -7.6% 7.7% 7.7% 4.1% 4.5% 7.0% 6.3% Personal Services Percent change -2.3% 4.6% 5.7% 3.8% 3.2% 4.6% 5.0% Quick Service Restaurants Percent change 1.2% 3.4% 4.4% 5.2% 6.1% 5.5% 5.9% Real Estate Percent change -8.7% -5.9% 1.5% 7.8% 6.8% 4.7% 5.2% Retail Food Percent change -7.9% 6.9% 6.9% 3.5% 3.6% 4.2% 4.3% Retail Products & Services Percent change 1.0% 7.2% 6.5% 4.2% 3.7% 4.8% 6.2% Table/Full Service Restaurants Percent change -0.8% 3.8% 5.6% 7.0% 3.6% 4.8% 5.9% Total IHS Economics Page 17

22 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 $496 billion in Based on our employment and output forecasts for franchising in 2015, we project that nominal GDP of the franchise sector will increase by 5.2% to $521 billion. This will exceed the growth of total US GDP in nominal dollars, which with very low inflation is projected at only 3.3% in 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 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 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% of franchise 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. IHS Economics Page 18

23 Establishments Distribution by Sector 2015 Retail Products & Services 13% Table/Full Service Restaurants 5% Automotive 4% Business Services 12% Retail Food 8% Real Estate 12% Quick Service Restaurants 20% Commercial & Residential Services 8% Lodging 3% Personal Services 15% September 2015 Forecast IHS Economics Page 19

24 Real Estate 6% Output Distribution by Sector 2015 Table/Full Service Restaurants Retail Products & 7% Services 5% Retail Food 5% Automotive 5% Business Services 19% Commercial & Residential Services 6% Quick Service Restaurants 26% Personal Services 11% Lodging 10% September 2015 Forecast Output per Employee On average, output per employee in franchise businesses is estimated to be $98,509 per worker in 2014 and is forecast to grow to $100,973 in This output-per-worker ratio varies within the 10 franchise business lines from a low of $59,237 (table/full service restaurants) to a high of $216,674 (automotive) in The average output per worker in the franchise sector has grown since 2008, and will continue to rise through 2015, increasing at a compound annual growth rate of 2.2% since 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 2009, the average productivity dipped slightly amidst the global recession, but then rose by nearly 4% in We estimate that franchise sector productivity gained 2.9% in 2011 and 2.3% in Productivity growth continued to show modest gains in 2013 and 2014 with annual increases of 2.1%, and is forecast to accelerate to 2.5% growth in The retail products & services business line and the lodging line were the fastestgrowing segments in terms of output per worker during the period , with a compound annual growth rate of 3.0%. The real estate sector had the slowest growth of output per worker over this period. IHS Economics Page 20

25 Franchise Productivity by Business Line, : September 2015 Forecast Forecast Estimates (September 2015) (Dollars per worker) Automotive 181, , , , , , , ,674 Percent change -1.9% 8.5% 5.6% 2.3% 0.9% 1.3% 1.6% Business Services 140, , , , , , , ,025 Percent change 3.0% 4.9% 2.5% 1.6% 1.4% 1.7% 2.7% Commercial & Residential Services 135, , , , , , , ,145 Percent change -0.5% 2.7% 1.9% 2.4% 2.1% 1.5% 1.8% Lodging 97,543 93, , , , , , ,408 Percent change -4.2% 7.2% 5.1% 3.0% 3.1% 3.9% 3.7% Personal Services 118, , , , , , , ,682 Percent change 1.5% 3.8% 3.6% 1.9% 1.0% 1.1% 2.2% Quick Service Restaurants 58,707 60,102 62,273 63,514 64,745 66,629 68,180 69,964 Percent change 2.4% 3.6% 2.0% 1.9% 2.9% 2.3% 2.6% Real Estate 154, , , , , , , ,750 Percent change -2.3% -4.1% -0.1% 5.6% 4.4% 2.9% 3.1% Retail Food 71,730 68,074 72,879 76,984 78,347 79,811 80,927 82,108 Percent change -5.1% 7.1% 5.6% 1.8% 1.9% 1.4% 1.5% Retail Products & Services 67,368 68,733 72,920 76,437 78,470 79,660 81,074 83,066 Percent change 2.0% 6.1% 4.8% 2.7% 1.5% 1.8% 2.5% Table/Full Service Restaurants 49,042 49,477 51,248 52,805 55,231 56,098 57,507 59,237 Percent change 0.9% 3.6% 3.0% 4.6% 1.6% 2.5% 3.0% Total 86,721 86,445 89,827 92,401 94,497 96,501 98, ,973 IHS Economics Page 21

26 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, dataprocessing 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 related activities, and personal transportation. IHS Economics Page 22

27 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 Data were aggregated to the 10 Business Format 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 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 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). IHS Economics Page 23