Franchise survey shows that franchising is a sound business format

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The annual study is undertaken among franchisors in order to assess the contribution by the franchise sector to the South African economy in terms of GDP, business establishment, creation of employment and the identification of key franchise practices.

With an increase of 132 franchise systems from 625 to 757 (21% growth), an increase of franchise outlets from 31,050 to 35,111 (13% growth) and with turnover increasing by 6% from R465, 27 to R493, R19bn, the survey reflects both the successes and challenges facing this vibrant sector, according to FASA’s chairman, Naas du Preez of Oasis Water.

“Despite the downturn in the economy, the franchise industry continues to grow – although not quite at the same pace seen in previous years. The marked increase (21%) in the number of franchise systems and outlets (13%) could well be attributed to the inordinate number of new and international brands that have established themselves in South Africa over the past two years. This has not come with a concomitant increase in turnover (6%) however, which could be attributed to the lack of growth in the South African economy.”

The slow-down in turnover is supported by the fact that it appears to be taking a little longer for a business to break even, but the potential for growth remains strong with franchisors exhibiting an extremely high level of optimism and many are intending to expand their franchise system. “What is without question,” says Du Preez, “is the tenacity of the sector, which refuses to remain static and shows great entrepreneurial spirit, contributing a healthy 11.6% to the country’s GDP.”

According to Vera Valasis, executive director of FASA, the survey, once again, has shown that franchising is one of the soundest business formats, structured to withstand economic challenges. “Despite the hard trading times over the past seven years, franchising has held its own year-on-year in every respect – from showing long-term sustainability to showing a high level of optimism for the future.”

What the franchise survey clearly shows is the franchise sector’s ability to identify the challenges and adapt to those changes. In this year’s survey, the poor economy, cash restraints and competitiveness were of greater concern to those surveyed. But, at the same time, they identified the importance of having the right franchisees and staff in place to retain and capture customers.

Sanlam is able to track, through the survey, whether franchisors are incorporating financial planning as part of the franchise implementation process.

According to Kobus Engelbrecht, marketing head at Sanlam Business Market, “It is encouraging to see that many franchisors have an eye to securing the future with one in three protecting the future of their franchises by incorporating financial planning and 70% having made provisions in case of ill health or frailty. What is of concern, however, is that the survey noted a marked decrease in addressing staff benefits.”

Highlights of the survey

• At an exchange rate of R12.15 to the dollar (US), South Africa’s GDP for June 2015 was R3,727.5bn.

• The estimated turnover for the franchise market is R493,19bn, which is 11,6% of the South African GDP. This includes the fast food and restaurant turnover but excludes that of the petroleum sector, where the turnover is pinned at R19,44bn for the convenience stores and R200,72bn for the forecourts.

• South Africa has over 757 franchised systems, just over 35,111 franchise outlets and 17 franchise business sectors. In 2016, there were a claimed 35,111 stores, most of which are owned by the franchisees (90%). This is an increase of 6% in the number of stores since 2014.

• According to the 2016 Franchise Directory, the largest franchise system is the Fast Foods and Restaurant category (27%). The retail sector at 15% is the next biggest. Building, Office, Home Services (12%) and Childcare, Education and Training (11%) follow. Business to Business Services, Automotive Products and Services occupy 15% of the franchise market (8% and 7% respectively). The other categories are 5% and smaller.

• Retailing has the largest claimed turnover of R4,176m, followed by Automotive Products & Services at R2,591m. All other franchise categories generate an annual turnover of less than R1bn with Personal Services, Real Estate Services and Leisure & Entertainment being the smallest. Note that only 30% of franchisors interviewed were prepared to disclose total turnover figures.

• The fact that four out of five franchisors have been in business for more than six years (54% have been in operation for longer than 10 years) is testament to the sustainability of these businesses.

• Most franchisors (92%) are optimistic about future growth in their businesses. This is consistent with findings from previous years. All franchisor respondents in the categories of Construction & Related, Entertainment & Leisure and Health, Beauty & Body Culture expect their businesses to grow within the next year.

• One in four franchisors estimate that it takes up to 6 months before a new franchisee breaks even and a further 47% mentioned that it could take up to a year.

• The last year has seen an increasing number of franchisors feel that their businesses were at an Ambitious (expanding and taking a risk) or Mature (control and profit) stage. The Success stage (achieving and nourishing) has remained consistent with that of a year ago. The number of businesses classifying themselves as being in the Turbulent phase (adjusting and changing) has doubled, perhaps at the expense of the Stable (establishing and maintaining) and Establishment (return on investment and status) stages.

• In 2016, 71% of the franchisors interviewed claimed that they had opened a total of 2,646 businesses, 26% of which were fast food and restaurants and 21% of which were in retailing. An estimated 612 businesses were closed down, resulting in a net gain in the number of stores of 2,035.

• In total, 15% of the sample relocated one or more stores in the previous financial year. In grossing these numbers up to represent the total franchise industry, there were 245 stores in total that have been relocated, most of which were Building, Office & Home Services (21%), Fast Food & Restaurant (18%) and Retailing (16%). Twelve percent were Personal Services and 10% each were Business-to-Business and Real Estate stores.

• Fifty-seven percent of franchisors have business units/stores in shopping centres/malls and 54% have them situated in high streets, where most passing trade occurs. A quarter of the franchises are operated from a home base, while 17% are found in industrial areas.

• In terms of presence in particular provinces, the large majority of franchise systems have a presence in Gauteng, 63% are found in the Western Cape and 56% in Kwa-Zulu Natal.

• In addition, one in two franchisors plan to expand outside of South African boundaries, mostly to neighbouring countries. Intentions to expand outside African borders are very limited and were most likely to be fast food outlets/restaurants or in the automotive sector.

• The main challenge facing franchisors remains finding the right person – in terms of finding the right franchisee with the right skills sets and the right staff. Other critical issues are the lack of adherence to standards by franchisees and high rentals.

• The average amount of working capital required when buying a franchise is estimated to be R634k. This amount rises well above the average for a retailing business (R961k), a fast food / restaurant (R839k) and an automotive business (R823k).

• For the upfront franchise fee, the average amount is R248k, with the amounts ranging from R530k for a fast food or restaurant outlet to R43k for a construction outlet.

• The average management services fee was calculated at 5, 7% of turnover. This figure rises to 10,8% for in the health, beauty and body culture business and drops to 3,6% in the construction sector.

• Marketing and advertising levies would cost a franchisee, on average, 2,3% of turnover, with the figure rising to 3,8% in the real estate sector and dropping to 1,1% in the health, beauty and body culture sector.

• In the 2015 survey, the employee count was pegged at 329 245, with fifty-seven percent of these employees black, 28% white, 8% coloured and 7% Indian.

• When it comes to business ownership, the percentage ownership by Previously Disadvantaged Individuals (PDI) is 18%. In 2015, 36% of franchises claimed to have no PDI ownership, while in 2016, the figure grew to 53%.

• Ownership by Previously Disadvantaged Individuals extended to 47% of the franchisors interviewed this year, 51% had zero percent ownership and 2% did not know.

• The percentage ownership by women is at 26%. The sector with the highest incidence of female ownership is the Childcare, Education and Training sector.