SAN DIEGO. Former President Bill Clinton addressed a packed convention of franchising industry leaders at the 49th annual International Franchise Association (IFA) convention held in San Diego in February. Clinton encouraged the franchising industry to continue providing economic leadership through the “entrepreneurialism and networking” of franchising. Clinton predicted that a full economic recovery will require longer than 15 months, but added that he will be “surprised if it takes more than two years.”

“This country has been around since the Declaration of Independence in 1776 and we have been pronounced dead more times than a cat has lives,” Clinton said. “Everybody who has bet against America has lost money over the long run.”

Clinton suggested that the franchising model has been an age-old economic model that has proven successful time and time again to create economic wealth and prosperity.

“As early as I can determine, the most ancient precedent for what you do was in the Middle Ages in the guilds in the Italian City-States, where individual entrepreneurs who owned their own businesses nevertheless cooperated even then to bulk buy the materials they used to make the crafts that they sold, and to market,” Clinton said.

“Even today, in Italy, it’s not uncommon to pass a showroom with 5 windows showing furniture and the furniture was made in each case by individual small businesses but they have one ordering system for their material, they have one catalog, they have a common marketer, and it all grew out of the Middle Ages,” Clinton added. “Franchising just takes that, if you will, to another level. It’s no accident that the per capita income of Northern Italy is the highest in Europe, even higher than Germany’s. Because they have entrepreneurialism and networking and support.”

Clinton suggested that franchising, at its heart, incorporates business techniques that are increasingly relevant in the modern, global economy.

“You [franchisors] combine two of the things that are most important in an interdependent world, where borders don’t count for as much as they used to, and categories are constantly being broken through by technological developments. You combine entrepreneurialism with networking in connections and support.”

Clinton’s speech came as IFA leadership continued to urge the new administration and lawmakers to incorporate the IFA’s “Five Point Economic Recovery Plan” as part of efforts to spur an economic recovery.

The IFA, the world’s oldest and largest organization representing franchising, represents more than 1,300 franchise systems, 10,000-plus franchisees and more than 500 firms that supply goods and services to the industry. Its Five-Point Economic Recovery Plan aims to leverage the strength of franchising to stimulate economic growth.

The plan calls on lawmakers and the administration to (1) increase the amount of credit available by strengthening secondary markets; (2) increase access to capital through changes to SBA loan programs; (3) remove tax uncertainties and inequities for small business; (4) make small business health insurance more affordable; and (5) support veterans as small business owners.

“It is critical for Main Street, Wall Street and Washington to work together to provide the policies and actions that will stimulate business growth, business ownership and greater levels of innovation, productivity and employment,” said Matthew Shay, IFA president and CEO. “The franchising community is prepared to lead the way out of this economic downturn.”

In a letter submitted in January to a House Committee on Small Business forum on the role of small business in stimulating the economy, Shay explained that investors who normally flock to the security of federally guaranteed loans are currently seeking investments with higher interest rates. This forces lenders to keep SBA loans on their balance sheets instead of offering them in the secondary market. “Without a market, lenders are losing a critical source of additional funding to authorize new loans,” he added.

“Particularly in times of economic stress, franchising gives small businesses an extra margin of help through access to training, business methods and marketing support provided by the franchisor,” Shay said. “Franchising offers the U.S. economy a strong foundation from which to encourage job growth and recovery. Providing franchised businesses access to capital by improving operation of secondary markets will ensure that these small business entrepreneurs will be positioned to help lead us out of recession.”

The Five Point Plan echoes some of the findings of the IFA’s recently unveiled Franchise Business Economic Outlook for 2009, prepared by PricewaterhouseCoopers LLP. The report forecasts that the number of business format franchise establishments will decline in 2009 by 1.2 percent, from nearly 865,000 to less than 855,000—a net loss of some 10,000 establishments. Jobs in franchise businesses are expected to fall by 2.1 percent, for a loss of 207,000 jobs. Overall economic output, the gross value of goods and services produced by franchise businesses, will likely decline by 0.5 percent—a loss of $4.2 billion in 2009.

“The U.S. economy is in the midst of the most severe recession since at least the early 1980s, with adverse impacts on a broad range of sectors of the economy, including franchise businesses,” said Drew Lyon, partner in PwC’s National Economics & Statistics practice. “The report’s macro view of the economy anticipates a continuation of the sharp downturn well into 2009 with a slow recovery.” Overall, nominal gross domestic product (GDP) is expected to decline by 0.7 percent while employment is projected to fall by 1.9 percent in 2009, according to the report.

Despite these predictions, franchising veterans remain optimistic. Responding to an IFA Franchise Business Leader Survey in November, many noted that the industry has emerged from previous recessions even stronger. As credit markets stabilize, they see many opportunities for growth.

“Franchising industry veterans know that the current conditions, although extremely challenging, are temporary,” said Shay. “Our survey shows that franchise business leaders have confidence in the entrepreneurial spirit of their franchisees and the fundamentals of the franchise business model as factors that will help them weather the economic storm.”

Franchising has withstood such turmoil before, Shay said. After the recession of 2000-2001, and the events of September 11, 2001, the industry created more than 140,000 new businesses and 1.2 million new jobs over a five-year period. The February, 2008 Volume 2 of the Economic Impact of Franchised Businesses documented that franchising grew at a faster pace than many other sectors of the economy from 2001 to 2005, expanding by more than 18 percent.

The PwC report suggests that the adverse impact of the recession will have different effects on growth in establishments, employment and economic output within each franchise business sector.

While most of the business lines are estimated to experience reductions in the number of establishments, the quick-service restaurant and table/full service restaurant sectors are expected to have a small net increase in units (1.5 percent and 1.3 percent respectively).

The sectors that are estimated to experience the largest percentage reductions in employment are automotive, retail food and retail products and services, each contracting employment by more than 5 percent.

The sectors that are projected to see the largest percentage reduction in economic output are lodging (3.2 percent), business services (2.8 percent), and real estate (2.1 percent).

These estimated declines can be attributed, in part, to the unfolding credit crisis. The report refers to a preliminary study by FRANdata, a firm that specializes in franchise industry data. The FRANdata study predicts borrowing by franchises will fall by approximately 27 percent in 2009 compared to the previous year, limiting the expansion of existing franchises as well as new establishments. Another factor is the sharp drop in consumer spending, which according to the PwC report, is expected to continue well into 2009 with adverse impacts on many sectors of the economy.

Despite some of the declines, the PwC report shows that franchising will remain a strong source of jobs and economic output, with franchising continuing to provide jobs for millions of American workers and generating hundreds of billions of dollars of economic output.

Many franchise leaders are cautiously optimistic about the prospects for their own business. The Franchise Business Leader Survey found that franchise executives see both challenges and opportunities in the year ahead.

Only one-quarter (24.6 percent) of the survey respondents believe that the economy will do better in 2009 than in 2008. Nearly half (49.1 percent), on the other hand, believe that their own businesses will do better in 2009.

Franchise executives reported that they are tightening budgets, cutting overhead costs and implementing other strategies to deal with the economic downturn, such as providing direct financing for franchisees.

Topping the list of economic issues for 2009, based on Franchise Business Leader Survey responses, are the business climate, the financial crisis/credit crunch and franchise sales and development.

In San Diego, Clinton called on IFA convention attendees to be involved as lawmakers seek to grapple with the current economic conditions.

“We need people like you, who are out there trying to help them [lawmakers] fine-tune this, and improve it, and who haven’t given up on America,” Clinton said.

Clinton, for one, suggested that franchising will help return the county to economic prosperity, saying that he does “agree with what was said earlier in terms of the enormous potential of the whole franchising method and the people who are drawn to lead this country’s economic recovery.” | BOJ