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IFA publishes ‘The Value of Franchising Report’ from Oxford Economics

IFA publishes ‘The Value of Franchising Report’ from Oxford Economics

Here are the key takeaways from the report.

Words by Raghav Patel, digital content writer at Global Franchise

The International Franchise Association (IFA) and Oxford Economics have teamed up to produce a report on the value of the franchising industry in the U.S. When commissioned to produce this report, Oxford Economics was asked to consider and analyze pay for workers in franchised locations versus those who work in non-franchised locations, assessing franchising as a path to entrepreneurship and understanding the value a franchise brings to a local area in terms of its supply chain and charitable activities.

“This week, the IFA launched ‘the value of franchising’ report, and we saw it as economic research to help address some of the misapprehensions that many in the public, but also thought leaders, stakeholders and lawmakers seem to have about franchising,” said Michael Layman, the International Franchise Association’s (IFA) vice president of federal governmental relations.

How franchised businesses treat their employees

  • Employees in franchised businesses earn 2.2-3.4 per cent more ($0.24-0.37 per hour) than corresponding employees in small establishments in the wider U.S. economy
  • Franchise workers were promoted to manager sooner than their non-franchised counterparts; 14 per cent versus 11 per cent after 20 months of employment
  • Employees in franchised businesses can take up to eight months to reach pay parity with their non-franchised counterparts but tend to outearn them by month 11
  • 65 per cent of franchise workers are covered with health insurance, as opposed to 51 per cent of non-franchised workers.

“We’re finding a lot of employees are coming to our chain restaurants from independents. They’re getting more understanding environment, one that’s willing to pay more and treat their people better,” said Dan Rowe, founder and CEO of Fransmart, the franchise developer behind the likes of Five Guys Burger & Fries, QDOBA Mexican Grill and many more.

Employees in franchised locations enjoy a number of benefits over their non-franchised counterparts, though many of these benefits are not particularly substantial. Franchise firms clearly do better in some areas; from the promotion of workers to manager roles to providing more non-wage compensation in the form of paid sick leave, holidays and health insurance. The one area in which franchises come worse off, is providing workers with retirement plans.

Franchising as a path to entrepreneurship

  • Franchises report sales 1.8 times larger and create 2.3 times as many jobs as non-franchised businesses, on average. This statistic cuts across all demographics too; black-owned franchise businesses earn 2.2 times as much in sales than black-owned non-franchised businesses on average
  • 21 per cent of franchise respondents report being capital constrained when starting their first franchise business and that being a franchisee provided them with access to capital. 42 per cent of respondents received access to capital support
  • 32 per cent of respondents claim that they would not have been able to own their own business without the franchising model
  • This proportion is even greater among female owners and owners for whom a franchise was their first business (39 per cent)
  • 29 per cent of franchisees opted for the model because they were ready to be their own boss
  • 17 per cent of independent businesses are owned by people of color, compared to 26 per cent of franchises being owned by people of color.

Franchising has often been considered the easiest and most accessible path to entrepreneurship, and the figures prove this. Franchisees opt for the franchise model for the numerous economic benefits (marketing, ready-built brand, procurement) that can more easily facilitate running a business.

“Depending on what statistic you look at, around 80 per cent of independent businesses fail where 80 per cent of franchise businesses succeed. When you have a franchise, you basically are buying into a proven, predictable system,” said Rowe.

“Success leaves clues in in any system. You’re going to find the best and the worst across the spectrum, but you can at least look at what the most successful franchisees in any given system are doing.”

The size of franchises often means that a franchisee can benefit from significant economies of scale, something an independent business does not have. The nature of franchising allows for more risk-taking too, since some of the risk is held by the franchisor, unlike independent business owners who take on 100 per cent of the risk when starting a business.

Franchising also gives lesser-represented minority groups a better chance at business ownership. The 2016 Annual Survey of Entrepreneurs also suggests that franchise establishments are more likely to have an owner of color than non-franchises and that can be seen across the entire franchise industry, not just in a few isolated sectors.
“We have long-standing data prior to this report. that there’s a higher percentage of people of color owning a franchise, higher percentage of women owning a franchise,” said Layman.

“26 per cent of franchises are owned by people of color, compared with 17 per cent of independent businesses.”

Franchising’s impact on the local community

  • Franchisees purchase 21 per cent of their inputs from their local market, and over a third purchase at least 25 per cent of their intermediate goods locally
  • 65 per cent of franchisees donate to local charities, one percent less than independent businesses, and an average of six per cent of profits
  • U.S.-based franchises donated a collective $1.5bn to charity in the year before the pandemic and raised over $900m over the same period
  • Franchised businesses sponsored over 18 million hours of volunteer work.

“Franchise businesses tend to have higher sales, so you’re basically you can afford to pay people more and you’re going to be paying more in taxes,” said Rowe.

“Every franchise I’m involved with actually has a specific mandate to get involved in their local community, to sponsor local events and give money back to their community.”

While many franchisors extract royalties and small portions of profit from their franchisees, many leave much of the profit with franchisees to facilitate their growth and expansion. The consequence of this is that franchisees spend and employ locally to keep growing their business. Local taxes paid by franchisees also contribute to the upkeep and development of an area.

The nature of franchising often means that workers in franchised locations require specific training, much of which comes from the franchisor and receive on average, 33.4 hours of formal training a year, something many employees in independent businesses cannot offer.

Franchising is a valuable part of the American economy

In 2019, franchising recorded an output of around $787.5bn, worth around three per cent of GDP and employed 8.4 million people. Franchising covers a large portion of the American economy and has laid roots in every single nook and cranny of the U.S economy, it’s impossible to imagine the business landscape and lack of choices consumers would have without franchising.

“Franchising has often been considered the easiest and most accessible path to entrepreneurship, and the figures prove this”

Franchising isn’t simply cold, hard business; it has a strong human element. So many franchisees are people with entrepreneurial spirit who have worked salaried roles for most of their life and want to start something new for themselves and their families. Franchising has afforded them that opportunity without the huge risks that come with independent businesses.

It also, directly and indirectly, impacts the local community. Whether it’s hiring the services of a local builder to construct a new location or hiring local people, a lot of the money generated and spent by a franchisee remains in the local economy. Franchisees are often mandated to spend money in their local community too, franchisors recognize the value and profitability of investing in the local community.

This report also confirms a long-held notion that franchising gives lesser-represented groups a chance at entrepreneurship.

Franchising is a significant part of the American economy, and will play an important role in its recovery and resurgence.

The full report can be found here.

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