Like every other sector across the globe, the franchise sector took a heavy knock from the effects of the prolonged financial crisis and the tightening credit environment. But as the Eurozone and the US recover and their economies begin stabilising, signs of recovery are making themselves felt and things are looking up.
So while some sectors remain under threat, new and exciting opportunities are emerging for franchisors and franchisees alike.
Signs of recovery
Although the franchise sector was more resilient than many other sectors, it nevertheless felt the effects of the drop in consumer spending and a decreased bank appetite for lending.
Andre Rosslee, head of sector solutions at Absa Business Banking, explains that, like most other sectors during the recession, the franchise sector saw turnovers under pressure and margins being squeezed. “Franchisors definitely took a more conservative view on expanding and the roll-out of new stores, and at the same time new retail outlets came to a virtual standstill, limiting the availability for new sites anyway,” he says.
“The South African franchise industry continues to weather current uncertain economic conditions, where low economic growth is seen both locally and internationally,” says Simone Cooper, head of franchising at Standard Bank.
But things are starting to look up. “The industry has seen growth at a slow but gradual pace, and this is expected to continue into 2013,” adds Cooper.
And the recession wasn’t all bad. “Franchisors had to become a lot more involved with their businesses, and any franchisees that weren’t owner-operated had to get hands-on in order to survive. The recession forced people to go back to basics — those that were borderline before the financial crisis were forced to close,” says Nicola Maré, senior consultant for franchisor development at Franchize Directions.
Activity in the sector has picked up, she says, as franchisors start to invest in training, marketing and recruitment again.
Cooper agrees. “Standard Bank has seen an increase in the number of enquiries from prospective franchisees over the past year, and we expect this to continue in the year ahead,” she says.
Exceptions to the rule
The recession saw some exceptions to the rule of flagging spending. “Sorbet is a good example,” says Maré. It experienced excellent growth over that period when one might not have expected it to, given that it’s in the beauty industry where consumer spending might have dropped.
The reason she believes Sorbet did well? “The beauty industry is very fragmented with lots of independent operators. During the recession, consumers were looking for value for money and a brand they could trust, and Sorbet did well out of this.” For the beauty industry in particular, consumer spending also moved more to the maintenance side of beauty as individuals became more prudent with their disposable income.
New trends in franchising
A number of interesting new trends are coming to the fore as the franchise sector starts to pick up after the recession.
“As the industry seeks new ways to grow, a trend is emerging of collaboration between brands and across sectors. This is being driven by the desire to boost margins through high sales volumes,” says Cooper. Examples include collaborations between fuel retailers and food retail brands, and partnerships between non-franchise players such as hospital groups, and franchised restaurants.
Mergers and acquisitions
“We have observed certain bigger brands expressing the desire to acquire smaller brands, and brands joining forces and participating in buying groups,” says Rosslee.
This creates opportunities for smaller, well-run brands with growth potential to be bought out by larger groups. A good example is Famous Brands’ deal with the Tasha’s chain of restaurants.
Social and micro-franchising
Micro-franchising has long held the potential to be a job creation engine, and Maré welcomes the fact that government is showing a greater level of interest in this franchising format. It applies elements of the traditional franchising model to micro-businesses, allowing them to grow through replication, and it provides small entrepreneurs with the tools, training and business model to achieve economic self-reliance.
Maré indicates that government is also investigating social franchising, whereby community services are rolled out using small businesses and a franchise model.
Increased interest from international franchises
Large international franchises are showing significant interest in South Africa as the world increasingly recognises the growth potential on the African continent. Maré cautions however, that master franchise licences for these brands will come with a price-tag and that investment will need to be made in fitting the model to the South African market.
The imminent arrival of Burger King is just one example of international brands wanting to move into South Africa.
Advice from those in the know
“Develop a strong franchisor-franchisee relationship. Without a healthy relationship between the franchisor and franchisee, even a great brand can fail.” – Simone Cooper, Standard Bank
“Take time to investigate the opportunity and don’t just accept everything you are told. Speak to as many franchisees as possible before committing to a specific brand. When buying an existing outlet, have a proper due diligence performed by an independent accountant. Do not gear the business more than 50% and consider the possible impact of future interest rate hikes — the interest rate is low at the moment. Most importantly, be unrelenting in your efforts to manage your costs and cash flow.” – Andre Rosslee, Absa
“Stop thinking that franchising is only about food. There are enormous opportunities for franchising in the service industries and a huge market for entry level franchises.” – Morné Cronje, FNB