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Lean, mean and growing - Franchises are fired up for the expansion

February 15, 2019

Fitness concepts are among the fastest-growing franchise categories

 

14,000 - the number of franchise businesses that were projected to have opened during 2018

 

Franchise businesses are eagerly filling small-shop space across the U.S. "The franchise sector is definitely very hot right now," said Joshua Weinkranz, president of the Northern region at Kimco Realty Corp.  "The growth in franchise concepts over the last couple of years is greater than it's been in a long time, at least from the shopping center perspective."

 

Projections say that nearly 14,000 franchise businesses will have opened in the U.S. by year-end 2018, across all categories, according to the Franchise Business Economic Outlook, published by the International Franchise Association and IHS Markit Economics.  The report credits the strong economy plus a boost from tax reforms and a favorable regulatory environment for franchise expansion.  Steady annual growth between 1.6 and 1.8 percent was forecast to accelerate to about 1.9 percent for year-end 2018 - to bring the total number of U.S. franchise businesses to upwards of 759,200.

 

"There is a lot of money flowing into franchising these days, and that is one of the things that is really driving the growth," said Mark Siebert, CEO and senior franchise consultant at iFranchise Group, which provides consulting and development services to franchisers.  On one side there has been increased private equity ownership of franchise companies: "These firms are focused on growth, they are well capitalized, they bring good management, and they are very intent on performing well," said Siebert.  On the other side, he says there is liquidity available to franchisees looking to buy a new franchise business or to expand their locations.

 

Specific to the retail sector, some of the leading categories hungry for growth are the food, fitness, health and beauty, health care, and financial services segments.  According to the IFA report, personal services are the fastest-growing segment of the industry, boasting an annual growth rate of 3 percent this year past, followed by quick-service restaurants (at 2.1 percent) and full-service table restaurants (1.8 percent).  Franchising has traditionally been a way to scale up growth for a brand, and broader cultural trends often tend to be reflected in fast-growing concepts.

 

So it is no surprise to see a flurry of activity focused on the fitness craze - whether traditional muscle and boxing gyms or boutique fitness studios that offer cycling, yoga, and similar trendy activities.  "You name it, and there is a fitness franchise concept for every little subset in the fitness category, and they are in massive growth mode right now," said Weinkranz.

 

One of the most popular franchise fitness brands is Orangetheory.  It has ranked consistently among the top 10 fastest-growing franchise brands in various business publications, and it also made this year's Inc. 5000 list of fastest-growing private companies: The company was No. 667, with three year revenue growth at 750 percent.  This is the fifth time Orangetheory has made the list.

 

The fitness boom comes at an opportune time, because landlords have changed their view of fitness tenants.  Even five years ago, landlords believed fitness customers jammed up parking while shunning adjacent retail, Weinkranz notes.  "Today that is clearly not the case," he said.  Fitness concepts do drive traffic to centers, they tend to attract people with higher incomes and those people do tend to cross-shop, he asserts.

 

Restaurants remain a source of growth for landlords.  Fast-food concepts have dominated the franchise industry since the 1950's, when brothers Richard and Maurice McDonald first began franchising their burger chain.  Quick-service and fast casual restaurants are still a staple for franchise growth.  But these days, the legacy brands have a lot more competition from a variety of growing specialized concepts, such as gourmet burgers, artisan pizza, and fresh and healthy fare.

 

"By far and away, we have found [food-and-beverage] to be the leading category for us, from a sheer activity and transaction perspective," said Todd Caruso, a CBRE senior managing director in charge of representation of retail landlords in the Americas.  Food-and-beverage tenants represent some 20 percent of all retail leasing transactions for CBRE.  The reasons for this growth include a shift in demographics among Millennials, who eat out more than other group, and the time constraints of increasingly busy people, Caruso says.

 

750,000 - the total number of franchise businesses that are now operating across the U.S.

 

Another up-and-coming growth sector is health care services.  Some of these concepts relevent to retail centers are dental, optical, and urgent-care clinics, such as Comfort Dental, Doctors Express and My Eyelab.  "Health care is a sector that is a little bit more difficult to franchise, but it is a market that has been under-franchised traditionally," said Siebert.  "As companies have initial success in that marketplace, I think the success they have had is driving others in that marketplace to get into franchising."

 

Franchise concepts are great for landlords for a variety of reasons, Weinkranz says.  They lease small-shop space, they carry a recognized brand name, and they typically advertise heavily, locally or nationally.  Franchise concepts typically provide some type of service not available online, and this helps drive shopping center traffic.  They are predominantly locally owned and operated, too, and they are in tune with the local market and customer base, says Weinkranz.

 

Landlords need to be discerning as they do deals with franchise concepts, though, especially with regard to categories that have become increasingly crowded.  The current fitness craze notwithstanding, there are concepts that are in vogue today, while others appear to be fading, Caruso points out.

 

"In a category like fitness, the landlord wants to make sure that the format is relevant to their trade area and that it is a top-three player in that category or in that format," said Caruso.

 

One of the common complaints among franchise groups these days is that it is difficult to find quality real estate.  The expansion boom has heightened the competition for real estae, and so franchise operators are often striving for the same types of real estate, whether a free-standing pad site, and end cap or an in-line space.

 

For landlords, the challenge involves choosing the tenants with which to do deals from among such a variety of concepts and brands.  One of the things landlords should look at is where a particular franchise is in its own life cycle.  SOme concepts are sustainable, while others have a shorter cycle - perhaps hot today and ice cold tomorrow, Weinkranz says.  "When we can, we try to avoid some of the ones that we feel are late in their cycle." he said, "or which are maybe a little too much of a fad for our centers."

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