Retail Industry Profile
The retail franchise industry includes businesses that sell goods or services to consumers. While the most familiar business model for this industry is a brick-and-mortar store, the category includes many types of franchise opportunities. Retail franchises can be operated in home offices, at customer sites or exclusively online. The limitless options in this segment allow franchisees to pursue franchises that appeal to the general population or those serving narrowly defined niches. As a result, franchisees can choose from many levels of financial commitment, as well as options for absentee ownership.
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Industry experts identify several demographics as having the most impact on the success of new opportunities in the retail industry. Baby boomers, a group in which 35 percent has a household income of $100,000 or more, is one population cohort that successful retailers track and accommodate. This demographic of 75 million people controls 70 percent of all U.S. disposable income, according to a report by U.S. News & World Report. They also account for 55 percent of consumer packaged goods sales, according to Nielsen data.
With baby boomers representing a huge portion of current and future spending power, their interests are likely to influence growth and innovation in the industries they favor. Significant spending by baby boomers includes:
- More than $120 billion on leisure travel, according to AARP
- Purchases of over 50 percent of the new computers and 66 percent of the new cars sold every year, according to Bloomberg Business Week
- $30 billion on pets, accounting for 45 percent of all pet spending, as reported by Fox Business News
- An individual average of $5,604 annually in home improvement expenses, higher than any other group, according to HomeAdvisor
The preferences of millennials also are likely to impact consumer retail development. Regarded as the largest demographic in the United States, their numbers surpassed those of baby boomers in 2015. By 2020, millennials will comprise 33 percent of the U.S. population, according to the U.S. Census. In 2017, purchases by U.S. millennials accounted for $600 billion, according to a study by Accenture. Spending by millennials includes:
- An average of $3,097 annually, or 44 percent of their food dollars, on eating out, according to the Food Institute
- Increased spending on experiences, with 72 percent of millennials reporting they prefer experiences over material things, according to a Harris Group study
- Purchases accounting for 45 percent of sales in the athleisure apparel category, according to retail tracker NPD Group
- More than half of total organic food purchases, according to the Organic Food Association
Industry experts also point to the Hispanic population as a market that impacts success in the retail industry. This demographic accounted for $1.5 trillion in spending on U.S. goods and services in 2015, according to Bloomberg. Research by consumer firm Packed Goods reports that spending by Hispanics accounts for:
- About 40 percent of growth in sales of household equipment such as computers and telephones
- About 25 percent of growth in consumer spending for cars and trucks
- One out of every five dollars of women's fashion footwear sales
- Between 15 and 20 percent of growth in small and large appliances, furniture and audio-video equipment and services
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Forecasts from Kiplinger in 2017 indicated that expected increases in disposable personal income would result in 3.4 percent growth in the retail industry. Despite an outlook for growing consumer confidence and increased retail spending, Kiplinger warned that the retail industry was positioned for increased competition. In many cases, competition was expected from new, smaller and digital players in the retail industry. Analysts cautioned existing retailers that industry newcomers are more likely to have the economics and technology to compete in narrow industry categories, resulting in more fragmentation and specialization.
Though the retail industry has evolved significantly to include customer interaction via multiple channels, Kiplinger advised retailers that adhering to core retail concepts can override the effects of digital advances. The first priority of retailers should be to ensure that they are "providing distinctive, high-quality and trusted products to consumers at the right price," so that the purchase, rather than the method of purchase, is what attracts and satisfies consumers.
With consideration of changing demographics and evolving business models in the retail industry, a significant portion of future retail growth will be tied to the preferences and needs of the most influential retail demographics. Some areas of potential growth include:
- Products and services related to the treatment of chronic conditions such as diabetes and high blood pressure since the U.S. Department of Health & Human Services reports that two-thirds of older adults live with two or more chronic conditions
- Online sales since U.S. online sales are set to reach $523 billion by 2021, up from $335 billion in 2015, according to Forrester Research, Inc.
- Child-related products and services as more millennials marry, have children and extend their preferences in this space
- Grab-and-go food purchases, since 29 percent of millennials purchase these items frequently versus 19 percent of others, according to TIME magazine
- Products and services related to convenience, healthy living and social consciousness, all key purchase factors in millennial purchasing decisions
- Products and services that appeal to the Hispanic market since Moran Stanley analysts say that the consumer spending of this group will exceed the shopping totals of millennials by 2020 due to income and population growth
- Products and services that appeal to Asian Americans, another growing demographic, set to have a buying power of $1.1 trillion by 2020, according to the Selig Center for Economic Growth at the University of Georgia
Common Business Models for Retail Franchises
Retail franchises succeed by tailoring their unique products and services to accommodate consumers' needs for accessibility, convenience and personalized experiences. Many retail franchises operate from traditional on-site locations such as brick-and-mortar stores, kiosks or mobile on-site units. With growing consumer preference for immediacy, retail franchises often add options for online or app-driven purchasing. Some retail franchises operate via e-commerce models, in which business is conducted entirely through virtual transactions from home offices.
Retail franchises cover a wide range of segments, with choices that allow you to build upon your experience in specialized fields or enter new industries with franchisor-sponsored training. The options for retail franchises are virtually limitless. Some of the most common types of retail franchise business models include:
- Apparel and Accessories: Franchises such as Apricot Lane Boutique and Pro Image Sports compete in the apparel market that the U.S. Bureau of Labor Statistics says accounts for about 3.5 percent of the average American's annual expenditures.
- Business-Related: Franchises such as Hang up Garment Covers and Signarama provide retail services to commercial customers by fulfilling product needs that range from industry-specific to those that are widely applicable across all businesses.
- Child-Related: Franchises such as Learning Express Toys and Kid to Kid offer services to the U.S. children's market, which includes 74 million individuals under age 18, or 23 percent of the U.S. population.
- Convenience: Franchises such as Circle-K and 7-Eleven appeal to a wide range of audiences, with particular appeal to millennials whose preference for convenience food is higher than other demographics.
- Computer Repair: Franchises such as Experimac and Digital Doc provide smartphone repair and refurbished product sales in the U.S. cellphone recycling market, an industry that IBISWorld valued at $828 million in 2016, with 15.8 percent annual growth between 2011 and 2016.
- E-Commerce: Franchises such as Expedia Cruiseship Centers and My Business Venture are home-based, e-commerce businesses, which represented 11.7 percent of total retail sales in 2016, according to Digital Commerce 360, an e-commerce industry analyst.
- Health Services: Franchises including HealthSource Chiropractic and BeBalanced Hormone Weight Loss Centers are just two of the many franchises that offer services related to chronic conditions, which have a higher incidence of occurrence in the baby boomer population.
- Pet-Related: Franchises including Earthwise Pet Supply and Pet Depot market retail services in the growing pet industry, which recorded revenue valued at $66.75 billion in 2016, a 10.7 percent increase from 2015, according to the American Pet Product Association (APPA).
- Professional Services: Franchises including Honest-1 Auto Care and FireMaster offer expert services in narrow specializations that are virtually recession-proof because of demand.
- Spa Services: Franchises including Body Brite and Massage Envy operate in the spa services industry, which reached annual revenue of $16.3 billion in 2015, a 5 percent increase from 2014, according to the International Spa Association.
- Wellness Products: Franchises including Relax the Back and Miracle-Ear, Inc. market health products that address common chronic conditions affecting the growing baby boomer market as well as the general population.
Since the retail franchise industry includes a wide range of specialties, financial requirements vary widely. You can buy a retail franchise with investments under $20,000. Factors such as location, storage, inventory, specialized equipment and mobile units can affect your costs. Initial costs typically include a franchise entry fee, supplemented by ongoing costs for items such as royalties and advertising.
While costs can add up quickly, you may find financing easier to accomplish with the backing of a franchise. Since your money is supported by a proven business plan, lenders may consider your loan less risky than if you were an independent contractor. In addition, some franchisors may assist in financing your loan or helping to arrange one. Franchisors also may assist in arranging equipment leasing, which can translate into significant savings versus purchasing equipment upon start up.
No matter what type of retail franchise you choose, you'll be less likely to experience losses due to trial and error since you'll be starting out with a road map for success. You'll also save money by purchasing products and equipment with group discounts negotiated by your franchisor. In addition to the cost savings, franchisees can maintain consistency across the franchise by using the same vendors and equipment.
The most significant benefit of owning a retail franchise is the reduced risk of failure. As a franchisee, you'll be investing in a proven business plan based on profitable products and services. You'll also have less competition if your franchise territory is geographically defined, since you won't have to worry about competing with other businesses offering the same products or services in your area.
Being associated with a successful franchise brand also means that your new business will have a solid reputation before you open your doors. As a franchisee, you're offering customers a consistent product or experience with the backing of the established franchise organization. Even if potential customers aren't familiar with your franchise, your position as a franchisee conveys credibility.
The opportunity to own a retail franchise may be optimal for entrepreneurs with little business education or expertise. Without knowledge in systems involving marketing, product pricing, profit margins or customer analytics, the competitive retail industry offers little room for error. Overbuying the wrong product or underestimating popular services can jeopardize profits and disappoint customers. Instead, entrepreneurs who purchase a retail franchise can take advantage of established systems, benefits of scale and franchise marketing programs.
You'll also benefit because owning a franchise is a partnership with your franchisor. For your part, you help expand the parent franchise by increasing market coverage, extending name recognition and maintaining the integrity of the franchise brand so its reputation appeals to new franchisees and customers. In return, the franchisor provides the support you need to remain competitive and profitable.
Your corporate franchise team has the experience and expertise to help you make decisions and execute the franchise business plan. You'll have the benefit of advisors and experts who can help you:
- Select the best physical location
- Fulfill zoning, licensing and insurance requirements
- Build or renovate your location
- Hire, train and retain employees
- Identify best marketing practices
- Navigate franchise-specific challenges
Making gains against competitors in the retail industry means staying on top of changing consumer preferences and social trends. However, as a franchisee, you're committed to running your business according to the terms of your franchise agreement, which may not allow much room for creativity or improvisation. It will be up to you to keep current with new products and services offered by your franchisor so that you can take advantage of industry trends that work within the structure of your franchise.
However, even with the backing of a franchise, you'll have to deal with challenges common to all retailers. One of the most significant considerations for owners of retail franchises is employee retention. In 2016, hourly retail employees had a turnover rate of 66 percent, according to research by the Hay Group division of Korn Ferry, a global consulting firm. The most common reason employees gave for moving on was their pursuit of better opportunities or promotions.
According to researchers, retail businesses can decrease turnover by offering a clear career path to all employees. Training employees in industry trends, such as online order fulfillment, also can help workers feel valuable to the success of the organization. Researchers estimated that it could cost retailers about six months' salary, estimated at an average of $3,000, to replace every hourly employee that leaves, so making the effort to increase employee retention may be challenging, but is well worth it.
Like all businesses, retail franchises have many challenges that can threaten profits, reduce customer satisfaction and affect the overall health of the business. Since retail franchises cover many individual types of goods and services, some considerations are industry-specific. It's important to research the industry in which your retail franchise competes to understand the unique challenges that you may encounter and how your franchise can help you overcome issues such as:
- Attracting a steady stream of customers in franchises that operate on one-time transactions
- Promoting referrals and repeat business within the structure of the franchise
- Ensuring your franchise maintains relevance in its industry
- Guaranteeing customers receive consistent quality and value
- Increasing your online presence with positive reviews and recommendations
Characteristics for Success: Who Should Consider a Retail Franchise?
The retail industry has many options for franchisees who enjoy the dynamic environment of the retail industry. As a franchisee, you'll have an optimal experience if you're prepared for the unique demands and challenges of this industry. Having the following strengths and skills can help you find enjoyment and success in your retail franchise:
- You understand the business of retail. You'll need a basic understanding of principles related to purchasing, inventory and distribution to ensure your business is operating at peak performance.
- You have knowledge of your franchise industry. As an expert in the specifics of your good or service, you'll be more convincing in making a pitch to potential customers.
- You're willing to stay current on consumer preferences. Successful retailers must keep informed of the most popular trends and newest innovations in their field to maintain consumer interest.
- You enjoy working with people. Since most retail franchises require one-on-one contact with customers, whether in person or online, having keen interpersonal communication skills can facilitate profitable transactions.
- You recognize the importance of balancing supply and demand. Retail franchises that keep in-demand inventory available and staffing ready to perform popular services prevent customers from seeking out competitors to meet their needs.
- You can retain valuable employees. Employee turnover in the retail industry can be high, but you can keep trained employees by making them feel valued and connected to the success of the franchise.
- You understand the value of running a business where "the customer is always right." By keeping an eye on customer satisfaction, you'll increase repeat business and referrals in an industry in which competition can be fierce.
Industry Snapshot*:Minimum Cash Required: $ 15,000
Average Cash Required: $ 97,500
*Based on currently active listings at FranchiseOpportunities.com