Franchising outlook - challenges to face and sectors to watch

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Franchises need to continue to plan, innovate and adapt to changing market conditions to ensure that they stay abreast of the changing business environment.

“The splendour of franchising is that you are in business for yourself but not by yourself, however, one has to let go of the myth that franchising brings instant success. It is a safer type of business because it is part of an established brand: the risk nevertheless is not necessarily lower,” says Morne Cronje, head of franchising at FNB Business.

What to monitor in franchising sector

• A slowing economy creates opportunities and we will see new niche concepts entering the market. We will also see existing concepts refocusing on their core business making sure their franchise network is profitable. Franchisors looking to expand their network will tend to grant a second or multiple units to existing franchisees that have proven that they can make a success of their franchise, than taking a risk with a new franchisee.

• Segments that are performing in franchising - South Africa is increasingly becoming the destination of global franchise concepts, especially in the food chain franchisors. Many global brands are expanding into South Africa. This increased competition is very good news for the sector. Competition will create more market awareness, improved service, quality and price.

• The automotive sector is an interesting sector to observe with new car sales remaining depressed as cash-strapped consumers continue to opt to keep their cars; as a result, the pre-owned car sales market is on the increase. We are also most likely to see growth in concepts that sell tyres; spare parts, batteries and non-structural vehicle repairs as consumers look to stretch their rand.

• We have also noticed growth in hardware franchises, which we link to a growing DIY culture in the country.

Challenges

As with any other business, the ultimate litmus test for a business is cash flow – so the age-old business advice remains, manage your money proactively.

You need to consider seriously the effect that interest rates will have on the cost of running the business. In most cases, a franchisee needs to put up a 50% unencumber owners capital investment, the other 50% is normally financed, its repayment will be impacted by the interest rate as it will be linked to the prime lending rate – ensure that this has been accounted for.

An important consideration in franchising is the proposed minimum rates of wages that government is moving to put in as law. It will no doubt affect budgets and will have a direct impact on cash flow.

Franchisees should be actively involved in their businesses; franchising must be treated like an active investment. The franchisee must be 100% dedicated to the business – do not leave it to managers to run the business. If you as the franchisee are invested in the franchise, you can ensure that costs are managed; cash flow is managed; and most importantly, you can plan ahead.

Cronje emphasises that the days of buying into the right brand and expecting automatic success are long gone. “We need to raise the profile of the industry and ensure economic growth in the country for decades to come and the best way to achieve this is to always plan ahead in a competitive landscape.”