Franchising business still growing but faces challenges

After suffering losses in 2020 due to COVID-19, franchising made a strong comeback last year.

In 2021, franchise establishments increased by 2.8% to 774,965, a net gain of 21,195 compared with 2020, according to a recent report released by the International Franchise Association with FRANdata.

This year, given growing economic uncertainty, franchising is still expected to grow, but at a slower pace than last year, the report predicts.

“We’ve mostly recovered from the impact of the pandemic," says Matthew Haller, President/CEO of the International Franchise Association (IFA), a membership organization for franchisers, franchisees, and franchise suppliers. "Still, the challenges everyone is facing in this economy will impact us, but to a lesser degree."

That’s because in a franchise model, franchisees have the backing of an established brand (the franchiser) and with this comes access to established systems, training models and bulk purchasing, along with relationships with a national network of vendors and suppliers, he says.

The IFA/FRANdata report forecasts franchising will end 2022 with more than 792,000 establishments, adding a net gain of 17,000 new locations, with a marginally lower growth rate of 2.2% compared with 2.8% in 2021.

Labor shortages will remain a problem and franchise employment is forecast to grow at a lower rate of 3.1% with a projected total of approximately 8.5 million jobs by year-end, a net gain of almost 257,000 jobs compared with 2021, according to the report. That’s still lower than the 8.8% growth seen in 2021. 

Tougher New York climate

For New York, employment grew 7.4% from 2020 to 2021, but will show only 3.1% growth in 2022 over 2021 given labor supply constraints, according to the report.

The number of franchise establishments in New York grew only 1.5% from 2020 to 2021, but that figure is projected to grow 2.2% in 2022 over 2021 — still behind other states like Texas, Florida and Arizona with stronger population growth.

Another reason New York sees more modest growth than the West and South is partly due to tougher franchise registration laws, says Harold Kestenbaum, a partner in the Melville office of Spadea Lignana, which only represents franchisers. 

It’s also more expensive to do business in New York than many other states, he says.

Despite economic uncertainty, Kestenbaum’s seeing strong growth in franchising, noting there’s still capital available even at higher interest rates and given the effects of the pandemic “landlords are making deals so they can fill up their space.”                

“I see growth continuing,” Kestenbaum says.

Franchised establishments in the personal services sector are predicted to lead growth in 2022, expanding at a rate of 3.1%, says Haller, noting this category includes fitness studios, salons and gyms.

Also in this category are concepts like StretchLab, a boutique fitness studio focused on one-on-one assisted stretching with sessions generally 25 or 50 minutes long.

Stretching an opportunity

It’s a newer concept on Long Island with only three franchisees presently here including James Immordino, who opened a StretchLab in 1,250 square feet of space in East Northport this month.

“I really liked how unique this was in the boutique fitness market and it was something that was highly beneficial to potential clients,” says Immordino, 40, who has a day job as a sales operations executive.

He says this franchise concept allows him to oversee the franchise, but delegate day-to-day operations to staff including a full-time manager.

He always wanted to get into entrepreneurship and follow in the footsteps of his grandfather, who was also an entrepreneur.

Even despite economic uncertainty, he’s glad he bought into a franchise, noting he’s already a month ahead of his target sales goals. He foresees eventually expanding elsewhere on Long Island.

Tom Scarda, a franchise consultant with offices in Wantagh and Venice, Florida, and president of The Franchise Academy, which matches individuals with franchising businesses, says he’s seeing many new franchisees who have a day job, but are getting into franchising as an added source of income.

He says personal services is a hot area, but so is home improvement concepts. He’s also been advising people to take a page from the last recession and look to buy into a business that people need regardless of the economy.

He said the last quarter of 2021 and first quarter of 2022 were exceptionally strong in terms of people buying into franchises, and the second quarters are also very strong, based on his experience.

Helping fuel growth within franchising is pent-up consumer demand.

“People just want to get back to normal,” Scarda says.