Consultants Gary Prenevost and Grant Bullington look toward this year’s franchising trends, the industries set for growth, and why franchising is a good option in tough economic times
As a franchisee, you’re faced with decisions that shape the direction and fate of your franchise journey. As the world changes quickly, and amid much economic uncertainty, it’s especially important to look ahead to what these changes will mean for the Canadian franchise industry, so you can best position your business for success.
Franchise Canada spoke to two franchise consultants to hear their outlook on the top trends for the coming year. From industries that are primed for growth, to grounding advice on the state of the economy, our experts provide their thoughts on the upcoming year in franchising and what it will mean for prospective franchisees from one side of the country to the other.
Read on for insights from Gary Prenevost, president, FranNet of Southern Ontario and Eastern Canada, and Grant Bullington, franchise specialist, FranNet Western Canada.
What are the franchise categories to watch in 2023? Which industries/sectors are you seeing the most growth in?
Gary Prenevost (GP): Given increased risk and uncertainty, we anticipate continued strong interest in service businesses: tutoring/supplemental education, home improvement and home maintenance, beauty, and hair care. Food service is also always popular.
Children’s education suffered tremendously as school boards and teachers struggled to adapt to the virtual classroom; that struggle is still going on as our educators strive to determine the right blend of virtual and in-person learning. Parents are investing heavily in their children’s education.
Most experts agree that home improvements add value to the property, even though some economists are forecasting a decline in home values. Canadians are still investing in optimizing their home, much of this being driven by the blended home/office work week that so many companies are adopting.
The beauty and hair care industries have historically been consistent performers, regardless of economic conditions; some budget brands see a sales increase during economic downturns. Tie in the feel-good aspect of pampering themselves to look better and you can see why consumers are spending more on themselves here.
Grant Bullington (GB): There are two ways to predict industries and categories that will see growth. The easiest (and possibly safest) method would be to look back and see which ones have been performing over the last year or two. Residential services and repairs, business services, education, and personal services (esthetics, hair care, etc.) were either strong performers throughout COVID or have strongly recovered.
I expect that we will also see the prevailing appetite for these lower cost and lower risk options to continue – particularly given the anticipation of an economic recession. Residential service franchises like painting or residential cleaning, for example, have a relatively low initial investment, launching with the absolute minimum equipment and contractors required. But they are highly adaptable to demand fluctuations. One could aggressively add contractors to meet demand, giving the ability to adapt to stagnating or declining demand with a high degree of precision. From a risk standpoint, there is considerably lower monthly overhead compared to businesses with a real estate component (i.e., expensive retail lease). Nor are there as many costs associated with winding down this type of business early (i.e., selling your vehicles vs. breaking a lease).
Another method would be to look at categories that, prior to COVID, were performing well and had a strong base of independent and franchised location, and then investigate where the erosion of independent locations skews disproportionately compared to franchised. If it’s an industry or category that’s expected to perform, there may be a temporary window opening in the marketplace.
One example would be the fitness industry. COVID was not friendly to this industry and many independent fitness gyms and studios haven’t fared well. As Canadians’ fitness habits and goals haven’t changed, the demand remains strong, so it might be a suitable time to explore this category. This second approach, however, involves a higher degree of speculation and is inherently riskier.
What do you foresee as the biggest franchising trends in 2023?
GB: Prior to COVID, most of my clients were in career transition and exploring franchise ownership as an alternative to returning to employment. It seems that this has reversed and in the last two years, almost all my clients have been looking into franchising while gainfully employed. I predict we’ll see more people confidently entering franchises in reaction to the “quiet quitting” trend and exiting employment.
GP: I see a lot of interest in lower-cost, service-based franchises, in part due to current economic uncertainty, and in part due to new access to capital. The Canada Small Business Finance Program (CSBFP) increased the 75 per cent guarantee cap from $350,000 to $500,000. This additional $150,000 can be used to pay for franchise fees and the working capital of the business. This enables the financing of many home and mobile service-based franchises with sub-$250,000 investment levels, which, before July 2022, had very limited funding options.
COVID has taught most of us how precious our lives and relationships are; this has led many people to redefine their values, priorities, and how they want to engage with their careers. 2022 saw a hot job market, so new franchise sales were soft across many industries. Given the looming economic uncertainty, it’s doubtful that the job market will remain hot; in fact, we should expect some big layoffs. Many of these people will consider franchise ownership, either as a full-time career, or as a semi-absentee wealth-building hedge against future uncertainty.
Food is also always a growth focus. What’s particularly popular at present is quick service restaurant (QSR) “street food,” where franchisors are bringing international flavour profiles to Canada. A caution here though—you’ll want to make sure the business model is strong enough to endure through consumers’ fickle changing tastes.
Generally, what do you expect the Canadian franchise industry to look like in 2023?
GP: The convergence of funding, the CSBFP, and an economic downturn should pique attention as franchise sales are typically counter-cyclical and do incredibly well during economic downturns. While the increased access to capital will create additional interest in franchise sales, this will be softened by the increased borrowing costs, more stringent mortgage lending requirements, and tightening scrutiny on how the banks assess risk.
The labour shortage will continue to be of particular concern, especially for businesses that rely on hourly, transient workers (i.e., QSR, retail product stores) as the shift is away from these jobs to higher-paying ones. In some cases, the increased labour costs needed to attract and retain staff might erode the profitability of the business and alter the financial modelling.
Prospective franchisees should anticipate that the cost of goods will continue to remain high in 2023, impacting construction projects and inventory, depending on the business category. Other goods will also remain higher than normal. Profitability forecasting needs to take this into consideration.
GB: Both new and established franchisors survived a crisis and are poised for growth, especially considering the amount of private equity activity and acquisitions over the last couple of years. Micro-emerging and emerging franchisors might seem independent, but upon closer inspection, you’ll see that many are backed by multi-brand franchisors with resources, experience, and bench strength. These organizations are positioned to expedite their expansion and can make for compelling investment opportunities. Also noteworthy is banks’ willingness to lend. It’s great that they’re lending, but I recommend you factor the increased cost of borrowing into your budget.
Why is franchising a strong option for entrepreneurs who want to start their own business in the current economic climate?
GB: When compared to launching an independent business, joining a franchise offers access to a proven system for starting and scaling a business. Of course, not all independent businesses are doomed to fail, nor will franchising guarantee your success. However, aligning with an established franchise hedges your bets considerably. A core element of a franchise is their established system to successfully launch. There are many major decisions to make, including: which location is best, who to hire, when to hire, how to market, and how much it will cost. Getting even one of these wrong could be disastrous. And let’s not forget the tacit benefit of being with a group of fellow franchisees who can provide an additional level of support and guidance.
GP: Franchising provides proven marketing and operational systems that have been tested by numerous people in multiple markets (assuming the franchisor has been operating for a while). New franchisees have these processes to follow, instead of the costly trial and error path that first-time entrepreneurs must experience. In addition to the proven systems, good franchisors provide an abundance of initial training to get the new franchisee up and running, then provide ongoing coaching and support to help them optimize and grow their business. The collective of peer franchisees who run the same business is available to new franchisees, which further compresses the learning curve and time to profitability. Some degree of recognized branding is an asset. Take caution here though: if the new owner can’t do the work it takes to deliver the brand promise at or above customers’ expectations (leading people, managing operations, executing the marketing plan, etc.), it doesn’t matter how strong the brand is, that owner won’t succeed.
What advice do you have for prospective franchisees who are considering getting started in 2023?
GP: Align your franchise search to your best talents. Passion paired with the work ethic it takes to run the business is the biggest determinant of success.
Be cautious, not afraid of the impending economic downturn. If our next recession keeps in pattern with history, people who start their business during the downturn will be best poised to ride the front end of the next growth curve, instead of waiting until the recession is over and missing the first year of that new wave.
Also bear in mind that some businesses will fail, freeing up in-demand retail space. That space will be rapidly consumed by people who do their research and make their franchise buying decisions within the next six months or so. Involve your spouse or partner in your research from the very start, even if they’re not going to be involved in the business. Your new business will compete for time, attention, and money, so make sure you have full alignment and support before you buy.
GB: Growth in franchising tends to peak when the economy is at its peak and when times are extremely uncertain. This includes during recessions. Economists are predicting one in mid-2023. Why wait until then to plan your next move? Many franchisors continue to report strong growth: adding franchisees and increasing their average unit volume. But not all franchisors. In addition to confirming that the sector and franchisor is a compelling choice, ensure that you are the right franchisee for the system! Be sure that you truly understand the full scope of your roles and functions as the owner of the business and confirm that you not only can but will perform them to a high degree.
Gary Prenevost is one of Canada’s leading franchise experts; he and his team have helped over 2,000 people search for their optimum franchise. Gary’s book, The Unstoppable Franchisee: 7 Drivers of Next-Level Growth, will be released in February 2023.
Grant Bullington is the president of FranNet of Western Canada. He and his team have been helping serious prospective franchisees find and research opportunities since 2009. Grant is also the host of the Franchise Scout podcast.