Franchising expected to grow substantially in 2013/14

Gerrie van Biljon

The local franchising industry had a fair recession and was relatively stable during the 2008-2010 economic downturn, with recent research revealing that the franchising sector contributed 11.8% towards the economy over this two year period, outperforming some of the country's other dominant sectors. Employment figures in the industry were then estimated to be 480 000 and may well be past the half-million mark by now.

The sector is nowhere close to maturity, with only 17 franchise classification categories of the local economy have a significant presence of franchising, in comparison to the almost 50 franchise classification categories in countries such as Canada.

Solid growth of the industry in years to come is therefore virtually assured. We predict that by 2020, franchising in South Africa will have grown substantially more than the slower economic growth expected from the rest of the economy.

The unchartered sectors of the South African economy show great potential for more franchising, offering a wide scope. Interesting developments are taking place within sectors that have been extensively franchised to date, for example, the restaurant industry. One such trend is the increase of investment, by both franchisees and franchisor, into smaller, more affordable units.

An example of this is fish and chips franchises, which have increased substantially in the last few years. Such franchises tend to be more affordable than the large multi-million rand investments required by the big-name sit-down restaurants. For both the franchisee and the franchisor, the risk is more evenly spread between a number of smaller outlets.

Franchises within the service industry seem to be on the increase, with the childcare, education and training industry growing rapidly, which is positive, as there is an increasing need for these services. With franchisors tending to cap the royalties payable on the revenue generated by these smaller outlets, they can be very profitable for franchisees.

A fast growth of smaller units in years to come is predicted, driven by the fact that financing available for buying franchises has decreased as the economy struggled over the last few years. However, the rejection rate of franchise finance applications has not increased as much as that of independent, stand-alone businesses.

Another significant player on the franchising scene is the South African shopping mall and high-street landlord, especially when it comes to retail franchises. The recession has not led to a significant reduction in rentals, criticised by some as being out of balance in South Africa. Big landlords have shown that they are prepared to stomach increased vacancies in their centres rather than come down with their rentals. However, there has been some softening of rental escalations, which have come down from the almost traditional 10% per year.

Like all other business financiers, Business Partners sees good franchising concepts as a relatively safer business model than independent businesses and take it into consideration when considering applications to finance franchises.