2008 What's Hot: Services Lead The Way In Franchise Growth

Last Saturday, mom and dad packed the kids into the minivan and headed out to the fitness center (Curves for her and Athletic Republic for him). First they dropped the kids off (one at Huntington Learning Centers, the other at Abrakadoodle). Before they left, they'd made sure the woman from Bathfitters knew exactly what they wanted done with their new shower, and reminded the man from Spring-Green to cut the back lawn extra short this week.

After the gym (where he'd enjoyed a nutritional snack from Max Muscle), dad picked mom up at Curves (after her stop into Planet Beach next door), scooped up the kids and headed over to grandma's for lunch. When they arrived, the kids scooted up the ramp (recently built by American Ramp). The home health aide from Visiting Angels was waiting at the door with grandma, before leaving to see his next client. Inside, the woman from Molly Maid had the house clean and sparkling, even arranging five neat settings on the dining room table around the fresh fruit basket delivered an hour earlier by Edible Arrangements. "We're hungry, let's eat!" shouted the kids.

After kissing grandma goodbye, they headed home, stopping to pick up Sparky at Dogtopia, while mom ran across the street to get her suit back from Martinizing Dry Cleaning.

Although this fictional scenario doesn't rank even as anecdotal evidence of what's hot in franchising today, it is entirely plausible--and underscores the continuing positive outlook for several franchise segments. It's easy to invent similar scenarios for other growing sectors (business services, for example).

Instead, we dug into the data to see what the numbers tell us about franchising opportunities and trends in 2008 and beyond.

We asked Darrell Johnson, president of FRANdata for (what else?) data, and analyzed traffic at our own franchising. com web site, where potential franchisees seek opportunities-- or simply want to learn more about franchising before wading in. (One of the common search strings was "what is franchising?")

We also invited two experts in the business of matching potential franchisees with the right franchisors to give us their take on franchising's hot spots in 2008: Doug Kushell, president of Franchise Search, a franchise recruitment firm in Nyack, N.Y., and Lori Kiser-Block, president of FranChoice, a nationwide network of thousands of franchise referral consultants.

Sorting it out

Admittedly, it's tough to neatly categorize the explosive growth in franchising--not only in number of units (33,000 added in 2006 alone), but also in new brands, segments, and subsegments. Is a fitness club healthcare? Is a spa? Is gymnastics fitness, health, education, or all of the above? You begin to see the problem.

So with some help from our experts (and reams of data), here's our take on what's hot in franchising--and where the opportunities lie in 2008. To get a working handle on the subject, we came up with four general categories:

• Residential services
• Business services
• Health and fitness-related services
• Child-related services

The common denominator, of course, is services. For more detail and a breakout on the subsectors included in each category, see the accompanying graphics.

New brands continue to proliferate as franchising adapts to changing demographics and market forces. Of the 2,600 brands seen as "actively franchising" by FRANdata, more than half have been at it for fewer than 10 years.

In the past three years, nearly 800 new concepts have appeared, 143 of them in the first half of 2007. Two observations from FRANdata on those 143 new brands: 1) non-food sector brands outpaced food-related brands almost two to one; and 2) a noticeable increase in brands selling services in the health and fitness sectors.

Says Kushell, "There are some very interesting concepts that are selling. If the people they sell them to can validate over the next year or so that it's a good franchise, and the franchisor is pretty decent, I think there's going to be a very exciting crop of new franchisors in the industry."

FRANdata's stats on franchise unit growth (see table) show that from 2000 to 2006 some sectors experienced phenomenal growth. It should be noted that for a sector like retail food, with its huge installed base, 27 percent growth is correspondingly huge. And, in case you're wondering if we forgot about food, fast or otherwise, the truth is that it deserves its own story, and we'll be sure to visit it in future issues.

Factors and forces

The force behind the creation and proliferation of many of today's concepts can be summed up in two words: Baby Boomers.

Franchising opportunities exist in any area that makes Boomers' lives easier, says Kiser-Block. Whether that's a 24-hour health and fitness club, day care for their children or pets, home care for their parents, residential services, or any of the services described in the fictional scenario above, there's growth to be had in meeting this generation's expanding needs. For the 70 million Boomers, it's all about trading money for time, and quality of life, and many are more than willing (and able) to pay. Among the coming generation of 73 million Millennials (now aged 8 to 28), many have ditched the idea (if they ever had it at all) of working for a large corporation--unless it's Google-- except perhaps for a few years, as a training ground for gaining the experience and savings to start their own business. (For insight on the Millennials and what they mean to franchising--as customers, employees, and franchisees--see page 51.) Those who do start their own businesses, whether Millennials or Boomers seeking a second career after decades in corporate life, provide another opportunity for franchisors.

Small businesses need all kinds of help and continue to provide another hot spot for growth. This includes not only the usual services of accounting and taxes, personnel, cleaning and maintenance, catering, printing and publishing, and IT, but also the emerging sector of business coaching and consulting.

Business-related services

The high price of retail space, lack of prime locations, increased construction costs (though the housing slump may mitigate this), and tightened credit are driving potential franchisees to consider concepts that avoid these problems, such as homebased or mobile businesses, despite rising fuel prices. (For more on how macro-level economic forces will affect franchising in 2008, see page 55.)

Technology has enabled an increasing number of businesses to be location-independent, although many small and homebased businesses need "professional help" to get wired--more opportunity for companies like Geeks On Call and other IT support franchises.

Owners of home-based and small businesses continue to shop outside for many other essential services: copying, printing, shipping, cleaning, supplies, personnel and, more recently, coaching. These types of services, says Kiser-Block, "fit well with corporate refugees with a background in sales and management.

They know how to build a business and can coach others." Kushell notes that coaching franchises "seem to be popping up more and more." Examples include FocalPoint International (partnered with Brian Tracy International) and ActionCoach. And in January 2007, The Entrepreneur's Source (career coaching and consulting) announced its first co-branded franchise with Business Advisers International (business coaching), both founded by Terry Powell.

Retail

Based on some of the companies he works with, Kushell sees a lot of activity in the retail sector. "We're very surprised how active tanning is, and how much room for growth there is," he says. He expects rental juggernaut Aaron's to sell close to 200 franchises in 2007, despite the brand's high cost of entry. Another retailer, Edible Arrangements, added another couple of hundred franchises in 2007, he says, approaching the 800 unit range. And with the addition of in-store fruit smoothies, says Kushell, strong growth should continue this year.

Mining our own data

Not surprisingly, the overwhelming majority of inquiries in 2007 on franchising.com--Franchise Update Media Group's online resource--were related to fast food brands. Based on frequency of search terms used by visitors, the leading brands were KFC, Taco Bell, Pizza Hut, White Castle (not a franchisor), Jamba Juice, Maggie Moo's, and Dunkin' Donuts. This, of course, reflects the state of the industry as a whole--not only the number of franchise units and brands, but also the mindset of potential franchisees.

"One thing I have found is that people are drawn into franchising because of the brands," says Kiser-Block. "They come to us and say, 'I want to own a Subway' or other large brand." However, once they understand the actual business characteristics-- what life is like on the other side of the counter--that's not necessarily what they end up with, she says.

On the non-food side, searches by brand name at franchising. com in 2007 were led by Gymboree, United Check Cashing, Adam & Eve, Pump It Up, Matco Tools, Merle Norman, Supercuts, CurvesComplete.com, Max Muscle, Handyman Connection, Faces, Decorating Den, Rapid Refill Ink, and Liberty Tax Service. Searches by category or description were led by check cashing, clothing franchise, spa franchises, owning a gym, grocery, faces makeup, and cash advance franchise.

Fitness heating up

These searches from potential franchisees mirror trends observed by both Kiser-Block and Kushell.

Kushell sees 24/7 fitness as "very hot right now." He says Anytime Fitness has opened more than 600 franchises and has sold another 600 to 700. He chalks this up to the combination of consumer demographics (time-starved, on the run lifestyles) with the brand's three different models and low cost of entry (less than $30,000 for the Fitness Express model, though startup costs can approach $300,000).

While Anytime Fitness members can drop in and hit the machines solo at 3 a.m., the pitch at Fitness Together is the personal trainer, who provides one-on-one training "in the privacy of individual suites." Kushell says this approach is working too: in November, Fitness Together announced the sale of its 600th studio.

The membership model popularized by gyms and health clubs has expanded into health and beauty and related concepts, says Kushell. At Massage Envy, another company on the move, founder John Leonesio applied his health club background to make massage affordable on a membership basis. The brand sold 50 franchises in its first 6 months by promoting massage as a wellness concept, says Kushell. As of last August, Massage Envy had awarded nearly 400 licenses, had opened 125 clinics, and was looking to open 40 more by year-end. Facelogic, founded in 2005, applied this approach to facial spas and sold 60 franchises in its first 21 months.

Reflecting on the trends driving the fictional opening scenario, Kiser-Block sees opportunity in anything that makes the Baby Boomer's life easier. For the "sandwich generation," whose cares include both their children and their parents, she says franchises providing everything from day care to in-home care are hot. So are segments offering services for kids where the public schools have left off: athletics, arts, music, science, math, and gymnastics.

"A lot of franchisors are emerging now offering those unique types of opportunities," she says. However, she cautions, while "franchisors are doing quite well in selling those concepts, time will tell as to how many of them survive in two years."