State of the Franchising Union: A Balance of Unique and Simple

January 25, 2018Articles The Legal Intelligencer

No question exists that franchising is strong and it continues to evolve. No longer do we have franchise outlets for video tapes, formal wear, mobile carpet stores and glamour photography. Ten years ago, we did not see robust franchising in massage shops, property management, lash and brow shops, spa services pain and sip concepts, and trampoline parks. The Entrepreuer Magazine listing of the Franchise 500 shows how strong this business strategy is, and why the growth in franchised units in the United States increased from 2016 to 2017 by 5.6 percent.

Franchising requires a balance of entrepreneurial risk-taking with adherence to a brand wide system. The system needs to be unique to draw customers but simple enough to be replicated across geographies. The brand needs to promise a reliable customer experience while entertaining innovations to keep mature customers interested while attracting new guests.

In 2017, most of the growth of U.S.-based franchisors was outside of the United States. Interestingly as well, few of the emerging franchise brands, and a plurality of the mature franchise brands have no locations outside of the United States. This demonstrates the untapped potential for many of these brands and viability of expanding U.S.-based brands overseas.

Food continues to lead the franchise categories, with reliable brands in quick service retail (QSR) leading the pack. Frozen custard is making a resurgence and new categories, like poke (rhymes with OK) are starting to franchise. Poke is raw fish salad targeting those who want alternative, fast and casual dining. The street food of Hawaii exploded when imported to Southern California, and now it’s a hot health food fad. Poke would join the recent fashion in bowl foods craved by millennials.

Franchising is being shaped by providing solutions to the stressed. Raising young children, caring for aging parents and establishing careers requires balancing and decision-making. Franchise business have exploded catering to these needs. No more regular childcare. Instead, your toddler is attending a swim lesson during the week at Goldfish Swim School. On alternative days, it is a play date at Gymboree Play & Music. Plenty of enrichment awaits the children as they mature. Math and reading educational franchises abound, with more fun with performance oriented music lessons at School of Rock. Busy parents no longer need to feed their kids at the QSR drive in lane. Franchised kitchens can prepare meals or meal ingredients in advance. Modern franchised businesses are geared to give the children every advantage and option available.

These societal shifts also create gaps in parenting roles now fulfilled by franchised businesses. No “lady of the house” remains home to answer the door to the salesperson as everyone has the opportunity to have a career. Consequently, the chores accomplished by one of the partners of the marriage are left undone or are now fulfilled by a franchised business. Franchised repair persons, plumbing, electric businesses are now on Main Street. Many franchised businesses are helping take care, relocating and staying with aging parents formerly cared for by the a married person who stayed home from work. The bubble of aging seniors, created by the baby boom, is guaranteed by demographics to be a continuing source of business by franchised companies. Those that use data strategically will be the companies that thrive.

Franchise companies are tracking their customers to keep them on track with their programs and to anticipate their future needs. Educational companies track the age of the parents, age of children, driving distance to potential locations, retail and educational spending habits. Companies catering to seniors use an age and income “heat map” to know where to concentrate their focus.

One area that may constrain franchising is the rise in interest of states to regulate the franchise relationships. Only 18 state regulate franchising in any way, and very few are tinkering with their existing statutory scheme. For that reason, it is interesting that two states that have very dense penetration by franchise companies have pending legislation that is intended to give franchisees more leverage against franchisors.

The “Protect Florida Small Business Act” would prohibit a franchisor from terminating or not renewing a franchise except for “good cause.” Good cause would be a material breach of the franchise agreement, which is not cured within 60 days, and gives at least 90 days’ notice of termination or nonrenewal. This cure and notice provision for material breaches would exceed any other statutory notice provisions for material breach and allow the franchisee to remain in material breach during the cure period. The Florida bill currently is under consideration in the Florida Senate. The New Jersey modification to the existing Franchise Practice Act would, among other things, eliminate “excessive damages” against franchisees, eliminate personal guarantees upon termination and virtually eliminate post-term noncompetition covenants, except in the county in which the franchise is located. Both the Florida and New Jersey bill would do more than just level the playing field in franchising, and for that reason, expect considerable opposition to these proposed laws.

Franchising is thriving because of a certain balance in the market and the economy. Enacting laws which unnecessarily tinker with that balance is probably unnecessary as enlightened courts can probably render justice better than legislative initiatives in this practice area.

Reprinted with permission from the January 25 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.