Can the thief erase and clear my iPhone before "Find My iPhone" has a chance to detect its location? I have lost my iPhone5 and had a sick feeling that the phone has been erased and cleared before Find my IPhone has even had the chance to detect it. Is this possible?
Yes. Sadly, a thief might steal 10 phones and discard the ones that are locked hoping that some are not protected with Find My Friends like yours was.

The phone can only report location if it has a viable network connection, so it is entirely possible it was taken to (or placed in) an area with no cell coverage and no WiFi coverage and/or simply turned off.

However, if the thief or anyone else does erase the phone, the iOS 7 activation lock will eventually report back to you since the device will need a viable network connection to become active again once it's been erased so you might keep that device in your iCloud list even for 6 months or longer in case the thief is patient and hopes to resell it at some point down the road.