Franchise Business Outlook 12-17-2012

8/12/2019 Franchise Business Outlook 12-17-2012

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No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Franchise BusinessEconomic Outlook for 2013

Prepared for:

International Franchise AssociationEducational Foundation

By:

IHS Global Insight

December 17, 2012


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No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

About IHS Global InsightIHS Global Insight is one of the leading economic analysis and forecasting firms in the world. With over 600economists and industry specialists in 25 offices worldwide, IHS Global Insight offers market intelligence forover 200 countries and coverage of over 170 industries that helps more than 3,800 clients to monitor, analyze,and interpret conditions affecting their business. IHS Global Insight has an established track record forproviding rigorous, objective forecast analysis and data to businesses, governments, and industry associationsaround the world.

About IHS Inc. (www.ihs.com)IHS Inc. (NYSE:IHS) is a leading source of information and insight in critical areas that shape todays businesslandscape, including energy and power; design and supply chain; defense, risk, and security; environmental,health and safety, and sustainability; country and industry forecasting; and commodities, pricing and cost. IHShas been in business since 1959 and became a publicly traded company on the New York Stock Exchange in2005. Headquartered in Englewood, Colorado, United States, IHS employs more than 5,500 people in morethan 30 countries around the world.

For more information, contact:

John ReynoldsPresident, IFA Educational Foundation

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Alisa HarrisonVice President, Communications and Media Relations

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[email protected]

For press information, contact:

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All information contained herein is obtained by IHS Global Insight from sources believed by it to be accurate and reliable. All

forecasts and predictions contained herein are believed by IHS Global Insight to be as accurate as the data and methodologieswill allow. Because of the possibilities of human and mechanical error, however, as well as other factors such as unforeseenand unforeseeable changes in political and economic circumstances beyond IHS Global Insights control, the informa tion hereinis provided as is without warranty of any kind , and IHS Global Insight, AND ALL THIRD-PARTY PROVIDERS, MAKE NOREPRESENTATIONS OR WARRANTIES EXPRESS OR IMPLIED TO ANY SUBSCRIBER OR ANY OTHER PERSON OR ENTITY AS TO THACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OF THINFORMATION OR FORECASTS CONTAINED HEREIN.


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IHS Global Insight Page 1No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

EXECUTIVE SUMMARY

This report presents IHS Global Insight s forecast of the franchise sector of the U.S. economy in 2013,prepared for the International Franchise Association Educational Foundation. As this forecast is beingprepared, uncertainty about the resolution of the fiscal cliff continues to cast a shadow over the

economic outlook. We expect an agreement to be reached and that the result will be a combination oftax increases for upper-income taxpayers and federal spending reductions. This will remove some of theuncertainty that has been restraining economic activity, but it will also create a drag on growth. Thereare grounds for optimism that growth could accelerate. Credit conditions are gradually easing, andhousehold demand is increasing in two traditional drivers of recovery the automotive and housingmarkets. However, we expect momentum will build slowly, and our GDP projection for 2013 (1.9percent) shows slower growth than the 2.2 percent expected for 2012.

As the economic recovery continues at a slow pace, businesses conditions for small businesses are notimproving. Our forecast of the number of new businesses to be created economy-wide in 2013 shows

slightly weaker growth than estimated for 2012. We expect this pattern to hold for growth of thenumber of franchise establishments as well. However, the primary sources of the expected slowdown inGDP growth in 2013 (much weaker investment in nonresidential structures and a bigger decline infederal government spending) have a less direct impact on the franchise sector, and the franchise sectorhas outperformed the economy as a whole in 2012 based on most indicators. Thus, any fall-off infranchise sector growth in 2013 will be slight.

We expect the number of franchise establishments in the United States to increase by 1.4percent in 2013, just short of the 1.5 percent growth in 2012.

We expect employment in franchise establishments to increase 2.0 percent in 2013, following a

gain of 2.1 percent in 2012.

Franchise Business Economic Outlook: December 2012 ForecastForecast

(Dec 2012)2007 2008 2009 2010 2011 2012 2013

Establishments 770,835 774,016 746,646 740,098 736,114 746,828 757,055 Percent change 0.4% -3.5% -0.9% -0.5% 1.5% 1.4%

Employment ('000) 7,994 8,028 7,800 7,780 7,930 8,100 8,262 Percent change 0.4% -2.8% -0.3% 1.9% 2.1% 2.0%

Output ($Billions) 675 696 674 699 733 769 802 Percent change 3.2% -3.2% 3.7% 5.0% 4.9% 4.3%

GDP ($Billions) 403 410 405 414 434 454 472 Percent change 1.8% -1.2% 2.2% 4.8% 4.6% 4.1%

Estimates


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Our forecast of the output of franchise establishments in nominal dollars in 2012 has beenrevised slightly to show a 4.9 percent increase (down from 5.2 percent projected in our Augustforecast). We expect growth to slow to 4.3 percent in 2013.

The gross domestic product (GDP) of the franchise sector is projected to increase to $472 billion

in 2013. This is approximately 3.4 percent of U.S. GDP in nominal dollars.

Given that the fiscal cliff is avoided, the macroeconomic outlook for 2013 is one of modest improvementin employment and consumer spending, with overall economic growth held back by a slowdown inbusiness investment spending (down from a 7.3 percent gain this year to 3.8 percent in 2013) and abigger decline in federal government spending (down 2.9 percent in 2013).

Investment in nonresidential structures (including utility and mining facilities) will decline in2013 (-0.5 percent) after a strong 9.2 percent increase in 2012.

With much of Europe still in recession, exports will again make only a weak contribution togrowth up 3.6 percent in 2013 after 3.7 percent growth this year.

We expect a slight improvement in total employment growth (1.6 percent in 2013 comparedwith 1.4 percent this year). Private sector employment will increase by 1.8 percent in bothyears.

With unemployment remaining high, wage gains will continue to be limited, and consumerspending growth will accelerate modestly from 1.8 percent in 2012 to 2.2 percent in 2013.

-4%

-2%

0%

2%

4%

6%

8%

2008 2009 2010 2011 2012 2013

Establishments

Employment

Output

GDP

Franchise Business Growth by Year, 2008-2013: December2012 Forecast


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INTRODUCTION

This report presents a forecast of basic indicators of the franchise sector of the U.S. economy in 2013prepared for the International Franchise Association Educational Foundation by IHS Global Insight.

The following section presents a summary of IHS Global Insight's current forecast for the U.S. economyin 2013, with attention to economic indicators that relate to sectors of the economy where there is asignificant concentration of franchising.

We then present an overview of our estimates and forecasts of franchising for 10 business lines: 1

1. Automotive2. Business Services3. Commercial and Residential Services4. Lodging5. Personal Services

6. Quick Service Restaurants7. Table/Full Service Restaurants8. Real Estate9. Retail Food10. Retail Products and Services

For each of the 10 business format lines, the projections include revised estimates for 2007 11, anupdated forecast for 2012, and an initial forecast for 2013 of:

Franchise establishments 2 Franchise employment 3

Franchise nominal output4

1 This report does not include estimates for product-distribution franchises, such as automotive and truck dealers,gasoline service stations without convenience stores, and beverage bottlers.2 An establishment is a single physical location at which business is conducted or services or industrial operationsare performed. A business may consist of more than one establishment. An establishment may be owned by thefranchisor or the franchisee.3 Positions filled by part-time and full-time employees or by self-employed individuals.4 Nominal output is the gross value of goods and services produced, a concept that is comparable with "sales" formost industries. In government input-output accounts, the output of goods-producing industries is measured bythe value of shipments. For most other industries, output is measured by receipts or revenues from goods andservices sold. A special case is the output of the wholesale and retail industries, which is measured generally asthe difference between receipts or revenues and the cost of goods sold this difference is referred to as "margin."


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THE ECONOMIC OUTLOOK

As this forecast is being prepared, uncertainty about the resolution of the fiscal cliff (the scheduledexpiration of the Bush tax cuts and sharp reductions in federal spending on January 1) continues to casta shadow over the economic outlook. The forecast was produced with the expectation that an

agreement to avoid the fiscal cliff will be reached, either late in December or at the beginning ofJanuary. We expect current income tax rates for households earning less than $250,000 per year to beleft in place, while tax rates for upper-income households return to their pre-Bush levels and arecoupled with restrictions on deductions that are phased in gradually. We assume that the sequestrationof federal spending will be replaced by a combination of these tax increases with modest cuts toentitlement spending and perhaps also to discretionary spending, with the details to be settled later in2013.

Although uncertainty surrounding the fiscal cliff has contributed to a slowing of business investmentand consumer spending, the ground is being prepared for faster growth. Credit conditions are gradually

easing, while household demand for the traditional drivers of recovery vehicles and houses is gainingmomentum. Employment growth has been modest, but it is good news that employment growth hasheld up despite fiscal-cliff fears. If we can move towards a credible long-term deficit-reduction plan, andat the same time avoid tightening fiscal policy too much, too soon, the combination of a continuinghousing recovery with a return of business confidence should see growth accelerate sustainably overthe course of 2013 and into 2014. However, momentum will build slowly, and our 2013 GDP growthprojection of 1.9% is less than the 2.2% expected in 2012.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2011:1 2011:3 2012:1 2012:3 2013:1 2013:3

Real GDP Growth(Percent change, annual rate)

IHS Global Insight, December 2012 forecast


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Even if a resolution of the fiscal cliff boosts consumer confidence, households still face too manynegatives to allow a robust consumer spending recovery high debt burdens, low house prices, modestemployment growth, and a lack of confidence in the government's ability to make things better. Weexpect consumer spending to have risen only 1.8% in 2012, down from 2.5% in 2011. We expect modestacceleration to 2.2% growth in 2013. Light-vehicle sales are the brightest spot, as pent-up demand is

coming through, and we expect sales of 14.4 million units in 2012, followed by 15.1 million in 2013.

The housing recovery finally seems to be under way. Household formation is reviving, despite sluggishemployment growth, and the recovery in demand is spreading from rental units to the owner-occupiedsector. For 2012 overall, we should see a 27% increase in housing starts, albeit from a low base(778,000 units, compared with 610,000 in 2011). We expect starts to improve to 982,000 in 2013.Recent evidence suggests that home prices are stabilizing in most markets and beginning to rise.

Capital equipment should remain an important driver of GDP growth, but its momentum hasdisappeared, at least temporarily. Business equipment and software spending actually fell slightly in thethird quarter as firms became more cautious on capital investment plans ahead of the fiscal cliff. Weexpect spending to grow again in the fourth quarter (led by vehicles and aircraft), helped by theanticipated expiration of bonus depreciation at the end of the year, and then to accelerate during 2013.But on a calendar-year basis, spending growth in 2013 (5.5%) will still fall short of 2012 (6.5%).

A combination of slower growth around the world and a stronger U.S. dollar is creating headwinds forU.S. export growth, which we expect to decelerate from 3.7% in 2012 to 3.6% in 2013.

The Economic Outlook for 2013

(Annual percent change) 2010 2011 2012 2013

Real Gross Domestic Product 2.4 1.8 2.2 1.9

Total Nonfarm Employment -0.7 1.2 1.4 1.6

Accommodations and Food Services -0.2 2.5 2.7 2.3

Personal Services -0.7 0.2 0.7 1.1

Real Disposable Income 1.8 1.3 1.3 1.9

Real Personal Consumption 1.8 2.5 1.8 2.2

Food Services 1.9 3.4 2.8 1.5

Accommodations 6.2 5.3 4.4 3.1

Personal Services 0.3 0.7 0.7 2.3

Retail Sales (nominal dollars) 5.5 8.0 5.0 3.3

Existing Home Sales -3.4 2.4 8.5 8.9

Com'l & Indus. Loans Outstanding, Com'l.Bank -5.4 10.3 11.8 5.5

IHS Global Insight, December 2012 Forecast


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Competition for the financial resources of the consumer will intensify as we move out into 2013.Following several years of consumer restraint, the pressure to replace older vehicles, household goodsand other items is expected to intensify, and income growth in 2013 will not be strong enough to allowconsumers to buy everything they want. To provide background for our view of how different segmentsof the franchise sector will fare in 2013, we review IHS Global Insights forecasts of employment and

output in the industrial sectors where there is a large concentration of franchise activity. Key drivers ofthe franchise economy drawn from our U.S. industry forecast are summarized below.

Automotive: As expected, the recovery in light vehicle sales continued in 2012 with sales now expectedto reach 14.4 million units up 13 percent but still way below pre-recession levels. Sales averagedroughly 16 million units for a string of years before collapsing to 10.4 million in 2009. Thus far, and inthe near-term, replacement demand drives volume as the fleet is about as old as it has ever been.Longer term, demographics sustain sales. The bottom line: an expanding economy, even a sluggishlyexpanding one as we expect in 2013, will support additional sales gains. Eventually the economy willstrengthen and support volume levels that are more normal for the auto industry. Sales are now pegged

at 15.1 million units in 2013, an increase of 5 percent. The industry has done a great job reducingcapacity and cost; it has become more profitable and once volume returns, it will become even more so.

-4%

-2%

0%

2%

4%

6%

8%

Establishments Employment Output GDP

2009

2010

2011

2012

2013

Franchise Business Growth, 2008-2013: December 2012 Forecast


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Consumer spending on motor vehicle parts and accessories grew by over 7 percent per year in 2010 and2011 in nominal terms as vehicle miles travelled advanced and the fleet continued to age. As more newcars have been added to the fleet and older ones scrapped, the growth in spending on motor vehicleparts and accessories slowed to 3.7 percent in 2012. Parts and accessories for commercial vehicles havefollowed a follow a similar course. Rising business and trucking industry activities have translated intoincreased usage of the equipment on the road, but older units have been removed from the fleet, newunits added and newer equipment requires less maintenance.

We expect growth to slow further in 2013. As more new light vehicles are added to the fleet and theneed for consumers to stretch the life of older units subsides, spending on motor vehicles and parts willgrow by only 2.7 percent. On the commercial front, 2013 will see an additional infusion of newequipment as major fleet owners know that it costs more to operate and maintain an older fleet. Thebottom line for auto parts and repair franchises is slower sales growth in the near term.

Commercial and Residential Services: Activity accelerated between 2011 and 2012 and will do so againin 2013. There are clear signs of life in residential construction, and stronger growth is expected as theemployment situation continues to improve. Multi-family housing starts are set to total 242,000 units in2012 and advance to 337,000 units in 2013. Single family starts are pegged at 536,000 units in 2012 and645,000 units in 2013. In addition to the expansion in new home construction, existing home sales areon the rise as well up an estimated 8.5 percent this year, with similar growth expected in 2013. Withthis growth as a backdrop, the broadly defined residential services market is enjoying a renaissance.Employment opportunities among special trade contractors should continue to improve.

On the commercial side of the business, vacancy rates in retail, industrial and commercial building havecome down, and there has been investment in new building construction as well as remodeling andretrofitting of existing facilities. Construction of nonresidential nonfarm buildings is expected to

-24%

-18%

-12%

-6%

0%

6%

12%

18%

2008 2009 2010 2011 2012 2013

Light Vehicles Sales Growth (units)


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increase 9.6 percent in 2012. However, spending fell 1.6 percent in the third quarter, after sharpincreases in the first half of the year, and we expect spending to rise only 3.0% in 2013.

Quick Service Restaurants: In general 2012 has been a year of sluggish progress for the economy on theemployment and income fronts. The number of people unemployed and under-employed remains

enormous, and lower-income consumers still have to allocate their limited financial resources. Weexpect 2013 to be more of the same. The bottom line: there will not be enough improvement in theeconomy in 2013 to draw current customers who are economically/financially challenged to moreupscale/expensive restaurants. At the same time, the meager improvement we do anticipate on theeconomic front will bring back some of those battered customers who abandoned even lower costrestaurants. A number of quick service restaurants have been quick to tweak their offerings recently toboost sales and respond to changes in the pricing climate. We estimate that quick-service franchiserestaurants improved their performance slightly in 2012, with sales growth of 5.1 percent following a 4.2percent increase in 2011. Our forecast for 2013 shows growth continuing at this pace up 5.2 percentfor the year.

Table/Full Service Restaurants: Franchise full-service restaurant sales have steadily accelerated sincethe recession with gains of 3.8 percent in 2010, 6.0 percent in 2011, and an estimated 7.0 percent in2012. Upper income households, who have a higher propensity to dine at full service restaurants, havefared better to date during the course of the economic recovery, and business travel spending has beenincreasing, which also boosts full-service restaurants. However, the household budgets of higher-income consumers could face a little more pressure with the tax increases that will be implementednext year. And Corporate America has become much more cautious and cost-conscious given concernsabout the global economy, tax policy, and the looming fiscal cliff. With this as a backdrop, we believebusiness travel growth and related expenditures, while still growing, will do so at a somewhat more

-4%

-2%

0%

2%

4%

6%

8%

10%

2008 2009 2010 2011 2012

Full Service Restaurants Quick Service Restaurants

Industry-wide Restaurant Sales Growth


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modest pace. Therefore, we expect sales growth of the full-service restaurant industry to slow in 2013,and results for the franchise segment of the industry will reflect this trend.

Retail Food: The overall demand for food remains relatively inelastic, but consumers alter their buyinghabits and gravitate toward the best deals and lower-priced items during bad economic times and then

swing back to normal buying patterns when good times return. We are seeing slow progress on theemployment and income front, and as 2012 draws to a close consumers are still very price consciousand in no way have they swung back to pre-recession purchasing patterns. We expect more of the samein 2013, but the prospect of higher food prices as a result of the 2012 drought will boost the dollar valueof sales. We expect overall consumer retail spending on food and beverages in nominal dollars to rise3.9 percent in 2013 following an estimated increase of 2.7 percent in 2012.

Lodging: The lodging industry took it on the chin during the recession, but sales grew 7.5-8.0 percent inboth 2010 and 2011. Indications are now that lodging revenue will increase by about 6.0 percent in2012 as growth in business travel and consumer spending on lodging taper off. There is every reason toexpect another up year for the lodging industry in 2013, but growth will be slower than in 2012, atperhaps 4.0-4.5 percent. As noted above, the prospects for business travel and lodging spending havedimmed somewhat. The prospects for consumer travel in 2013 remain favorable, but not overly so.Growth in real disposable income is pegged at 1.9 percent in 2013 versus 1.3 percent in 2012. However,competition for the consumers disposable income will intensify next year as the recoveries in lightvehicles and housing continue and spending shifts to meet pent up demand for appliances and otherhousehold goods.

Real Estate: The long awaited recovery in real estate is actually upon us. We expect sales of new homesto increase by 19 percent in 2012. Sales of existing single-family homes, coops and condos are expectedto be up 8.5 percent this year and 8.9 percent in 2013. On the non-residential side, vacancy rates forretail, commercial, and industrial properties have been coming down as the economy continues to gainground. There are also signs of life on the new construction front. New building construction appearsheaded for a 9.6 percent increase following a string of sharply down years. Growth will slow to 3.0percent in 2013 but the stage will be set for much stronger growth beginning in 2014.

Retail Products and Services: Sales of franchise businesses in the retail products and services businessline grew by 6.5 percent in 2011 and appear headed for an increase of 5.0 percent in 2012. We expectgrowth to slow further to 3.7 percent in 2013. While we anticipate modest additional gains inemployment, income, and consumer confidence in 2013, we expect increased competition forhousehold financial resources. Personal income will advance 3.6% compared to 3.3 percent in 2012.

However, consumers are now fueling recoveries in light vehicles and housing, and that will limit broadergains for retail products and services. We expect the growth of total retail sales to slow from 5.0percent in 2012 to 3.3 percent in 2013.

Business Services: Corporate America has done well since emerging from the recession and remainsflush with cash. Increased manufacturing and other business activities and accompanying capitalexpenditure programs have had a very positive impact on a broad range of business services such as


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warehousing and storage, data-processing services, office administrative services, employment services,tax preparation, heavy equipment leasing, cleaning services, and office coffee and food servicedistribution. Growth in franchise business services sales should reach 4.3 percent in 2012, up from 3.6percent in 2011. Looking ahead to 2013, Corporate America has tightened its grip on the purse stringsduring the course of 2012 and will enter 2013 with an eye toward keeping a lid on expenses.

Uncertainty about the future path of the economy abounds and managers do not know what the rulesof the game will be when it comes to taxes and regulations. Falling off the fiscal cliff is clearly somethingCorporate America is worrying about, but they are also concerned about how any agreement that allowsus to avoid going off of the cliff will impact their business. As concerned as big business is, the lay of theland for small business is even more uncertain. We expect business of all sizes to be in cost controlmode in 2013, which will result in slower growth of business services revenue up only 3.9 percent.

Personal Services: Franchise-operated personal services business posted revenue growth of 5.7 percentin 2011. However, with only modest growth in employment and income and the economy still saddledwith a huge number of unemployed and under-employed, we estimate that revenue growth slowed to

3.7 percent in 2012. There is little reason to expect a pickup in personal service related business in2013. We are anticipating only modest gains in employment and income and pent up demand fordurable goods and housing are expected to capture the lion s share of the modest increase expected inconsumer financial resources. Consumer spending on health care is set to rise 2.7 percent in 2013compared to 3.2 percent in 2012. Transportation services spending will accelerate from 3.5 percent in2012 to 4.0 percent next year, but most of that gain reflects increased auto leasing. We expectfranchise-operated personal service business revenue to expand by only 3.0 percent in 2013.

-6%

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4%

6%

2008 2009 2010 2011 2012

Growth in Laundry & Dry Cleaning Spending


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Establishments by Business Line

The total number of franchise establishments across the 10 business-format franchise lines is expectedto increase 1.4 percent in 2013. This increase will be above the growth of total (non-franchise as well asfranchise) establishments in those business lines (1.2 percent), and it will be nearly 1.0 percent abovetotal business formation in the U.S. economy. Historically, total U.S. establishments have exhibitedgrowth of 1 to 2 percent in recovery years, followed by a more moderate 0.7 to 1.3 percent increase inother expansionary years. While challenging economic conditions slow the growth of business

formation, with franchise activity more focused in the services sectors of the economy, the growth rateis slightly above the U.S. average.

Most of the 10 business-format franchise lines experienced declines in the number of establishmentsduring the 2009 2010 period. In 2011 only 3 of the 10 business-format franchise lines saw an expansionof business establishments. In 2012, however, we estimate that all 10 business-format lines grewmodestly. This pattern will continue in 2013, but growth will down-shift slightly in several business lines.Lodging will be the growth leaders in 2012, expanding at 2.1 percent, followed closely by Quick ServiceRestaurants, Business Services and Personal Services, each growing close to 2.0 in 2012.

We expect Business Services (1.9 percent growth) and Quick Services Restaurants (1.7 percent growth)

to be amongst the leaders in 2013 as well. Commercial & Residential Services is expected to have thelargest increase in growth, advancing 1.8% in 2013 from 1.1% in 2012.

-6%

-3%

0%

3%

6%

9%

2008 2009 2010 2011 2012

Growth in Personal Care Service Spending


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-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

2008 2009 2010 2011 2012 2013

Franchise Business Establishments Growth: December 2012 Forecast

Franchise Establishments by Business Line, 2007-2013: December 2012 ForecastForecast

Estimates (Dec 2012)2007 2008 2009 2010 2011 2012 2013

Automotive 31,307 31,653 30,012 29,687 29,984 30,314 30,526

Percent change 1.1% -5.2% -1.1% 1.0% 1.1% 0.7%

Business Services 102,370 96,289 89,691 89,147 90,035 91,836 93,581

Percent change -5.9% -6.9% -0.6% 1.0% 2.0% 1.9%Commercial & Residential Services 64,715 65,325 62,650 61,272 60,169 60,831 61,926

Percent change 0.9% -4.1% -2.2% -1.8% 1.1% 1.8%

Lodging 25,830 26,572 25,588 25,410 25,003 25,528 25,911

Percent change 2.9% -3.7% -0.7% -1.6% 2.1% 1.5%

Personal Services 107,428 110,696 106,510 106,100 105,463 107,467 109,079

Percent change 3.0% -3.8% -0.4% -0.6% 1.9% 1.5%

Quick Service Restaurants 150,291 151,887 150,316 149,547 147,902 150,860 153,425

Percent change 1.1% -1.0% -0.5% -1.1% 2.0% 1.7%

Real Estate 96,848 94,599 88,372 86,153 84,947 86,221 87,601

Percent change -2.3% -6.6% -2.5% -1.4% 1.5% 1.6%

Retail Food 60,935 62,247 60,374 60,173 60,474 60,776 61,262 Percent change 2.2% -3.0% -0.3% 0.5% 0.5% 0.8%

Retail Products & Services 94,966 98,527 97,519 96,921 96,630 96,920 97,308

Percent change 3.7% -1.0% -0.6% -0.3% 0.3% 0.4%

Table/Full Service Restaurants 36,145 36,221 35,614 35,688 35,507 36,075 36,436

Percent change 0.2% -1.7% 0.2% -0.5% 1.6% 1.0%

Total 770,835 774,016 746,646 740,098 736,114 746,828 757,055


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Employment by Business Line

All 10 business-format franchise lines posted gains in employment over each of the last two years, andwe expect this pattern to continue in 2013. We estimate total franchise employment grew 2.1 percentin 2012 and we expect a 2.0 percent increase in 2013.

Business Services, which ranked ninth out of the ten business lines in employment growth since 2008,saw an acceleration to become the growth leader, at 2.9 percent, in 2012. Quick Service and Table/FullService Restaurants are each estimated to have grown 2.3 percent in 2012, followed closely by PersonalServices and Retail Food at 2.2 and 2.0 percent, respectively.

We expect Commercial & Residential Services to be the growth leader in 2013, with an increase of 2.8percent, up from 1.7% in 2012. Three other sectors that are expected to show employment growthabove the overall franchise average of 2.0 percent are Business Services and the two restaurant sectors.

Franchise Employment by Business Line, 2007-2013: December 2012 ForecastForecast

Estimates (Dec 2012)2007 2008 2009 2010 2011 2012 2013

Automotive 181,845 184,826 174,889 173,546 177,538 180,734 182,541

Percent change 1.6% -5.4% -0.8% 2.3% 1.8% 1.0%

Business Services 1,016,222 955,080 889,721 874,087 883,702 909,329 932,972

Percent change -6.0% -6.8% -1.8% 1.1% 2.9% 2.6%

Commercial & Residential Services 354,940 357,475 343,531 336,317 341,025 346,822 356,533

Percent change 0.7% -3.9% -2.1% 1.4% 1.7% 2.8%

Lodging 677,744 696,878 671,702 674,953 691,827 700,129 706,430 Percent change 2.8% -3.6% 0.5% 2.5% 1.2% 0.9%


Percent change 3.0% -3.8% 0.8% 2.0% 2.2% 2.0%

Quick Service Restaurants 2,888,554 2,919,701 2,887,550 2,882,638 2,948,939 3,016,765 3,083,134

Percent change 1.1% -1.1% -0.2% 2.3% 2.3% 2.2%

Real Estate 323,974 316,969 295,954 290,329 291,200 296,442 302,371

Percent change -2.2% -6.6% -1.9% 0.3% 1.8% 2.0%

Retail Food 472,945 483,138 468,868 468,172 473,790 483,266 490,515

Percent change 2.2% -3.0% -0.1% 1.2% 2.0% 1.5%


Percent change 3.5% -1.1% 1.0% 1.4% 1.5% 1.2%

Table/Full Service Restaurants 1,001,184 1,003,208 985,999 988,044 1,010,906 1,034,157 1,056,908

Percent change 0.2% -1.7% 0.2% 2.3% 2.3% 2.2%

Total 7,993,651 8,028,452 7,800,319 7,779,833 7,929,695 8,099,521 8,262,058


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Output by Business Line

All 10 franchise business lines have posted output gains in each of the last two years, led by the TableService Restaurant and Lodging industries with average annual increases near 6.5 percent. We estimatethat the output growth leader in 2012 was Real Estate, with an 8.7 percent gain stimulated by thehousing market recovery. Both segments of the franchise restaurant industry also posted aboveaverage output growth in 2012.

Real Estate is expected to continue to be the output growth leader in 2013, increasing 6.3 percent.Seven of the 10 franchise business lines will show a slowdown in output growth in 2013 compared withthis years results. Commercial & Residential Services and Retail Food are each expected showsomewhat stronger growth rates in 2013, and Quick- Service Restaurants sales growth will be near thisyears pace.

-4%

-2%

0%

2%

4%

6%

2008 2009 2010 2011 2012 2013

Franchise Business Employment Growth: December 2012 Forecast


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Franchise Output by Business Line, 2007-2013: December 2012 ForecastForecast

Estimates (Dec 2012)($billions) 2007 2008 2009 2010 2011 2012 2013Automotive 30.21 33.59 31.16 33.56 36.32 37.52 38.23

Percent change 11.2% -7.2% 7.7% 8.2% 3.3% 1.9%Business Services 131.77 134.09 128.62 132.61 137.38 143.29 148.88

Percent change 1.8% -4.1% 3.1% 3.6% 4.3% 3.9%

Commercial & Residential Services 45.00 48.42 46.32 46.55 48.23 50.59 53.37

Percent change 7.6% -4.3% 0.5% 3.6% 4.9% 5.5%

Lodging 65.26 67.98 62.79 67.62 72.83 76.54 79.76

Percent change 4.2% -7.6% 7.7% 7.7% 5.1% 4.2%

Personal Services 74.29 76.18 74.43 77.85 82.29 85.34 87.90

Percent change 2.5% -2.3% 4.6% 5.7% 3.7% 3.0%

Quick Service Restaurants 164.67 171.41 173.38 179.43 186.93 196.37 206.50

Percent change 4.1% 1.2% 3.5% 4.2% 5.1% 5.2%

Real Estate 52.62 49.12 44.83 42.18 42.82 46.54 49.47 Percent change -6.7% -8.7% -5.9% 1.5% 8.7% 6.3%

Retail Food 31.80 34.66 31.92 34.12 36.47 37.39 38.69

Percent change 9.0% -7.9% 6.9% 6.9% 2.5% 3.5%

Retail Products & Services 30.11 31.59 31.89 34.19 36.41 38.23 39.65

Percent change 4.9% 1.0% 7.2% 6.5% 5.0% 3.7%Table/Full Service Restaurants 48.79 49.20 48.72 50.57 53.62 57.36 59.93

Percent change 0.8% -1.0% 3.8% 6.0% 7.0% 4.5%

Total 674.54 696.24 674.07 698.70 733.30 769.17 802.38

-4%

-2%

0%

2%

4%

6%

8%

2008 2009 2010 2011 2012 2013

Franchise Business Output Growth: December 2012 Forecast


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Franchise Businesses' Contribution to GDP

By analyzing the components of value added in each of the industries where franchise businesses areconcentrated and calculating the relationship between gross output (sales) and value added in theseindustries, IHS Global Insight developed estimates of the contribution to U.S. GDP by the franchise

sector as a whole. We estimate that franchise businesses accounted for more than 3 percent of U.S.GDP or a total of $454 billion in 2012. Based on our employment and output forecasts for franchising in2013, we project that nominal GDP of the franchise sector will increase by 4.1 percent to $472 billion in2013.

Distribution by Sector

This section focuses on the distribution of the 10 franchise business lines in terms of the number ofestablishments, employment, and output, based on our forecast for 2013. The Quick ServiceRestaurants business line is the largest category, with 20 percent of all franchise establishments, andaccounts for 37 percent of franchise employment. This business line also is forecasted to contribute 26percent of total output in 2013. Second in size in terms of the number of establishments is the PersonalServices line, with 14 percent of the total. However, these are generally smaller businesses. ThePersonal Services group will account for only 8 percent of franchise employment and 11 percent ofoutput.

The Table/Full Service Restaurants group occupies the second-largest share of employment, accountingfor 13 percent of the total. The Business Services segment, which has higher ratios of output perestablishment and per employee, is the second-largest contributor to the value of output in thefranchise sector, with 18 percent of the total.


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Automotive4%

Business Services12%

Commercial &Residential Services

8%

Lodging4%

Personal Services14%

Quick ServiceRestaurants

20%

Real Estate12%

Retail Food8%

Retail Products &Services

13%

Table/Full Service

Restaurants5%

Establishments Distribution by Sector2013

December 2012 Forecast

Automotive2% Business Services

11%

Commercial &Residential Service s

4%

Lodging9%

Personal Services8%

Quick ServiceRestaurants

37%

Real Estate4%

Retail Food6%

Retail Products &Services

6%

Table/Full ServiceRestaurants

13%

Employment Distribution by Sector2013

December 2012 Forecast


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Franchise Productivity by Business Line, 2007-2013: December 2012 ForecastForecast

Estimates (Dec 2012)(Dollars per worker) 2007 2008 2009 2010 2011 2012 2013Automotive 166,120 181,720 178,197 193,404 204,557 207,571 209,421

Percent change 9.4% -1.9% 8.5% 5.8% 1.5% 0.9%Business Services 129,668 140,397 144,563 151,710 155,461 157,577 159,573

Percent change 8.3% 3.0% 4.9% 2.5% 1.4% 1.3%

Commercial & Residential Services 126,786 135,461 134,835 138,416 141,419 145,869 149,700

Percent change 6.8% -0.5% 2.7% 2.2% 3.1% 2.6%

Lodging 96,285 97,543 93,477 100,190 105,273 109,330 112,905

Percent change 1.3% -4.2% 7.2% 5.1% 3.9% 3.3%


Percent change -0.5% 1.5% 3.8% 3.6% 1.5% 1.0%

Quick Service Restaurants 57,009 58,707 60,044 62,245 63,388 65,093 66,976

Percent change 3.0% 2.3% 3.7% 1.8% 2.7% 2.9%

Real Estate 162,432 154,972 151,469 145,293 147,032 156,997 163,616

Percent change -4.6% -2.3% -4.1% 1.2% 6.8% 4.2%

Retail Food 67,241 71,730 68,074 72,879 76,984 77,362 78,886

Percent change 6.7% -5.1% 7.1% 5.6% 0.5% 2.0%


Percent change 1.3% 2.0% 6.1% 5.0% 3.4% 2.5%

Table/Full Service Restaurants 48,736 49,042 49,414 51,183 53,040 55,470 56,707

Percent change 0.6% 0.8% 3.6% 3.6% 4.6% 2.2%

Total 84,384 86,721 86,416 89,809 92,475 94,965 97,116


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APPENDIX

Composition of Franchise Business Lines

1. Automotive: Includes motor-vehicle parts and supply stores, tire dealers, automotive equipment

rental and leasing, and automotive repair and maintenance.

2. Commercial and Residential Services: Includes building, developing, and general contracting; heavyconstruction; special trade contractors; facilities support services; services to buildings and dwellings;and waste management and remediation services.

3. Quick Service Restaurants: Includes limited-service eating places, cafeterias, fast-food restaurants,beverage bars, ice cream parlors, pizza-delivery establishments, carryout sandwich shops, and carryoutservice shops with on-premises baking of donuts, cookies, and bagels.

4. Table/Full Service Restaurants: E stablishments primarily engaged in providing food services to

patrons who order and are served while seated (i.e., waiter/waitress services) and pay after eating

5. Retail Food: Includes food and beverage stores; convenience stores; food-service contractors;caterers; retail bakeries; and beer, wine, and liquor stores; as well as gas stations with conveniencestores.

6. Lodging: Includes hotels, motels, and other accommodations.

7. Real Estate: Includes lessors of buildings, self-storage units, and other real estate; real estate agentsand brokers; and property management and other related activities.

8. Retail Products and Services: Includes furniture and home furnishings stores, electronics andappliance stores, building-material and garden-equipment and supplies dealers, health and personal-care stores, clothing and general merchandise stores, florists and gift stores, consumer-goods rentals,photographic services, and book and music stores.

9. Business Services: Includes printing, business transportation, warehousing and storage, data-processing services, insurance agencies and brokerages, office administrative services, employmentservices, investigation and security services, tax-preparation and payroll services, and heavy equipmentleasing.

10. Personal Services: Includes educational services, health care, entertainment and recreation,

personal and laundry services, veterinary services, loan brokers, credit intermediation and relatedactivities, and personal transportation.


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IHS Global Insight Page 23

Methodology

The statistics in this report were derived from various published sources as well as IHS Global Insightpropriety databases. The primary source for the report was the 2007 Economic Census FranchiseReport. This report provides U.S. estimates of establishments, employment, and annual payroll and

output from business with paid employees by detailed sector for 2007. Data were aggregated to the 10Business Format Lines.

The 2007 Economic Census only covers businesses with paid employees; the data were integrated withother data sources to include franchise businesses without paid employees. Other data sources were:

The 2007 Survey of Business Owners The U.S. Census Bureau publishes the 2007 Survey ofBusiness Owners (SBO). From this data source we were able to determine the number offranchised businesses for businesses without paid employees .

2007 Nonemployer Statistics The U.S. Census Bureau publishes the 2007 NonemployerStatistics (NES). NES includes the number establishments and total annual receipts by industryof businesses without paid employees that are subject to federal income tax. Most often,nonemployers are self-employed individuals. IHS Global Insight determined the total number ofbusinesses without paid employees and combined it with the SBO data to derive franchisebusinesses without paid employees and the number of independent contractors working out offranchised establishments owned by others.

IHS Global Insights Business Market Insights (BMI) This is a database that is based on theCensus Bureau's County Business Patterns . It contains information on establishments,employees, and sales at the country level at six-digit North American Industry ClassificationSystem (NAICS). The data were integrated with the SBO to determine the number of businesseswith paid employees in NAICS 55, which was not included in the 2007 Economic CensusFranchise Report.

To develop our estimates and forecasts, we reviewed and replicated previous studies done by PWC,which had made estimates of franchise businesses for 2007-2010. Our estimates were largely inagreement with theirs. We present our revised estimates, which are based on our work with the 2007Economic Census and more up-to-date data from the Survey of Business Owners and NonemployerStatistics.

We also acquired and reviewed data from Dun & Bradstreet on the number of franchise businesses atyear-end 2009, 2010 and 2011. These data did not cover all franchise establishments, but in some cases

could be used to assess recent growth in the number of franchise establishments.

IHS Global Insight estimated econometric models to create forecasts for establishments, employment,and output of each of the 10 business lines. The models include both macroeconomic (creditavailability) and industry-specific variables, using a nested modeling approach (i.e., franchiseestablishment formation affects employment requirements, which further influences output forecasts).

Documents

Franchise Business Outlook 12-17-2012