A Glut in Franchise Development?

The fact that there seems to be a backlog in franchised businesses is down to several reasons. But it is not necessarily for the reasons as suggested FranchiseGrade in a recent Franchise Times piece. So I dug and dug and dug some further checking out the numbers of agreements signed but unit not opened (SBNOs) for the period of 2010 to 2014. The following is based on 226 brands, 70 in food and 156 in non-food sectors. In all they operate 191,000 franchised businesses as of 2013, growing at CAGR of 2.6% since 2010.

The ratio of SBNOs to franchised units is calculated by taking the SBNOs as of the document year over the year-end numbers of franchised units presented in item 20. For example, Panera reports 881 franchised locations as of the end of 2013 in their 2014 FDD. The one SBNO was taken from the as of 2014 date which was the closest to the point in time when the franchised locations were recorded resulting in a ratio of 0.1%.

Overall, it may seem that FranchiseGrade is on to something. However, they end their reporting in 2013 and as we will see later, the figures for 2014 are telling. They are also ignoring other indicators that would point out a crisis, if there was one.

As the chart suggests, the backlog in units has certainly increased, peaking at 4.4% in 2012 decreasing to 3.7% again in 2013. Given that this is based on a sample representing between 40% to 50% of all franchised units in the United States, it may be fair to assume that there are well over 10,000 SBNOs out there.

And yet, if there was a constant hangover of SBNOs, we should also expect an increase in terminations over time. Franchisors do not let franchisees hang on to agreements if there is no business attached to it. This is why many of them have a clause in their agreement that unless the unit is not open within a certain time frame after the agreement has been signed, the franchisor will terminate said agreement.

Against this background the chart below appears to tell a more nuanced story. There is a spike in SBNOs in 2013, at over 8,200 significantly up from just over 5,000 in 2010. And clearly, the actual openings are lagging behind. There is a slight increase in 2012 but this is followed by a drop in 2013. But what is happening to terminations? They hover around in the 4,000s only to drop even further to 3,700 in 2013. A glut of SBNOs should have shown somewhere in the termination trends.

What about franchisors hiding things under “ceased other”? Not much different there. “Ceased other” breaks through the 3,000s in 2011 but overall declined at a compound annual rate of 5.2% between 2010 and 2013.

And to top it all, look at what happened in 2014? The number of SBNOs decreases from over 8,200 to just under 7,100, a drop of 14%. All the while the number of franchised units increased, the number of openings remained relatively stable and terminations and “ceased other” do not seem to indicate that franchisees are running away from their agreements.