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Strong growth ahead in 2015, predicts the IFA, but threats are looming

While the economic forecast is strong, headwinds caused by the NRLB's joint employer ruling, minimum wage hikes and ACA implementation could curtail QSR franchise growth in 2015.

January 8, 2015

The International Franchise Association is predicting strong franchising growth in 2015 – particularly for quick service restaurants – but says a recent ruling by the National Labor Relations Board considering a franchisor a "joint employer" alongside its franchisees could have a chilling effect on growth.

"Last month, the National Labor Relations Board moved to upend decades of law and practice by issuing a complaint against McDonald's, saying that it should be considered a 'joint employer' with its franchisees. The entire business model of franchising is endangered by this ill-conceived complaint," said IFA President & CEO Steve Caldeira in a press release. "Hundreds of thousands of franchisees must now operate not knowing whether they should believe what their contracts clearly state -- that they are in charge of their own work place practices, including setting wages and hours -- or that the corporations from which they license their trademarks are also responsible for those things. The ruling could put the brakes on what looks like a banner year of accelerated growth and job creation in the franchise sector."

Quick-service restaurants represent 20 percent of all franchise establishments, and account for 38 percent of franchise employment, larger than all other franchise categories.

The IFA Economics Report projects QSR growth to lead franchise growth in 2015. The IFA is anticipating QSR employment growth of 3.2 percent in 2015, outpacing all franchise employment growth's anticipated 2.9-percent growth rate. IFA is also predicting QSR sales to grow at a rate of 5.7 percent.

Strong employment and wage growth will drive QSR franchise growth, as consumers look for meal options, having  less time on their hands due to work/commute schedules but more money in their pockets.

Franchisees, however, are worried that the joint-employer ruling, minimum-wage increases and implementation of the Affordable Care Act could put a damper on growth.

The IFA says a recent survey of its members shows that 97 percent of respondents believe that the joint-employer ruling – which Caldeira dubbed "The Nightmare Before Christmas" -- would have a negative impact on their business if it takes effect, with 82 percent saying the impact would be "significant."

The survey also reveals concern about minimum-wage increases, with more than 85 percent of respondents ndicating that recent efforts by some cities and states to increase the minimum wage will negatively impact their business. In addition, more than two-thirds of franchisors and 85 percent of franchisees reported that their businesses have already been "negatively impacted" by the Affordable Care Act.

"The business model for franchising is under assault," said Matthew Patinkin, a franchise owner of Auntie Anne's Pretzel shops. "First, the complaint by the general counsel at the National Labor Relations Board leaves franchise business owners like me uncertain and very concerned about the future. The complaint targets McDonald's, but all other franchises are also at risk. I'm also concerned that Obamacare has changed the definition of full time to 30 hours per week. This is an irrational requirement of the Affordable Care Act, and will cause small-business owners like me to reduce the hours of some of our workers. Rather than helping employees, this change will make life more difficult and more costly for lots of hardworking families."

Narrow margins make it difficult for restaurant franchisees to absorb new costs, and changes brought on by the ACA and minimum-wage rulings could force some operators to shut down, said Patinkin.

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