The struggling economy has had many businesses under pressure. The franchising sector is no different despite continued strong performance with the Franchising Association of South Africa (FASA), saying it anticipates increased activity in the sector.
Franchising – by the numbers
According to FASA, franchising is one of the biggest contributors to the South African economy. The industry contributes 12.5% to the country’s GDP and is worth an estimated R456 billion.
There are 627 franchisors in South Africa; 39,119 franchise stores, which are operated mostly by the franchisees.
The study also reports that 72% of these franchisees reported an optimistic outlook about the future in the face of economic challenges.
No smooth sailing either
However, the sector won’t be without its pains. FNB Business’s Head of Franchising, Morne Cronje, said in a report that while the franchise systems are often considered less risky by entrepreneurs because they are based on a proven model that can be successfully replicated, no franchise is immune to tough economic conditions.
Cronje’s Big 6 Threats
Cronje highlights 6 of the biggest challenges he says franchise owners should take into consideration during these tough times. Including: shrinking disposable income; increasing competition (market share); rising costs; falling staff morale; bad debts and the need to continually adapt to consumer needs
Two franchise management groups as well as a franchise brand share with SME South Africa how they are tackling these industry threats and we also find out what executive director of FASA,Vera Valasis, has to say about the validity of these threats and what every franchise should do to become successful.
The three franchise brands are:
Health and beauty franchise management group, Imbalie Beauty which markets and distributes its own and independent health and beauty brands and has three main salon brands namely Placecol Skin Care Clinic, Dream Nails Beauty and Perfect 10 Nail & Body Studio;
Purified bottled water franchise, Oasis Water which provides water solutions to corporates and government departments as well as offering office water coolers and on-site bulk water solutions. Oasis Water also distributes products such as ready to drink juices and fruit juice concentrate, Oasis Ozone Energy drink, Dando coffee beans and Rooibos Ice Tea as well as a variety of Montagu and Empire Dried Fruit and Nuts;
1. HOW WE ARE DEALING WITH – SHRINKING DISPOSABLE INCOME
‘Refine product offering’ – Create value for money offerings. This situation also assists in defining which products are core and which are niche or nice-to-have products. – Naas du Preez, group director of Oasis Water
‘Give customers what they want and they will spend’ – I don’t think that there’s a shrinking disposable income in the market that most of our brands are targeting. I do think that there is a lot more choice for customers and so people can decide to exercise that right and go elsewhere if they find that your brand doesn’t give them what they want or live up to their expectations. There’s also an emergence of the middle class in SA and our brands, in particular Newscafe, is one that appeals to that young professionals, young middle class and we’re finding that there is the capacity to spend. – Alan van der Westhuizen, executive manager of new business sales at Fournews
‘Quality and excellent service offering is key’ – Continuously offer high quality brands at great value to consumers. As a franchisor ensure that service offering is excellent. The South African shopper is brand conscious which is in favour of the franchising industry. – Esna Colyn, chief executive officer of Imbalie Beauty Limited
‘Make your customers feel important’ – I am not sure why this is a threat – when times are tough consumers don’t stop spending – in my opinion the spending continues but it is just different. Consumers may be more discerning when it comes to value for money, quality and cost. It is even more imperative to ensure service is top notch together with quality and a market related price which these days, goes without saying. Consumers will not return if they manage to purchase an item at rock bottom price but the quality of the product is bad and they received no or very little service from the seller/franchisee/brand.
One of the main success factors is for operators to form direct relationships with their clientele base – consumers feel important and welcome in an environment where they are known and their preferences are remembered by the manager/owner. Clem Sunter (business author and futurologist) made a statement at one of the association’s seminars where he said to be successful you either have to be the cheapest or most expensive – service and quality are still imperatives – anyone in between is doomed to fail … food for thought. – Vera Valasis executive director of FASA
2. HOW WE ARE DEALING WITH – INCREASING COMPETITION (MARKET SHARE)
‘Competition can push you to be better’ – While this has a positive economic impact and gives consumers more choice, it significantly increases competition and puts more pressure on the performance of established brands. Having competition should be seen as positive, although frustrating. Competition helps you to focus and to improve the quality of your products and service. Competition will highlight your weaknesses for you. Lastly, they may expand the customer base in your field; hopefully you can capitalize on this with your better product, service and brand. – Naas du Preez
‘Franchisors need to improve support for franchisees’ – I think in essence what happens is that it affects the whole industry in raising the standards and making sure that the brands that are in existence have to deliver better products, better quality and better value. The franchise structure has to be well supported from the franchisor’s side. They have to make sure that the development is done that the marketing is done and that the franchisees are supported properly. There is no doubt that not only more competitors but there’s also more retail outlets being established, more malls. The result is that those have to be filled with some kind of food and beverage offering. We are not at risk yet we just have to make sure that we improve our total offering to the customer and we need to make sure that we give them not only good value for money but also good value for time. – Alan van der Westhuizen
‘Competition equals better service and innovation’ – We have not witnessed international beauty brands in the services industry entering the beauty arena, however local competition from independents have always been very stiff. Competition has always been a good thing, because it does drive franchises to lift their service levels and franchisors to become more innovative. – Esna Colyn
‘Foreign bands can help rejuvenate the industry’ – The age old saying of competition is good comes to mind – international brands sometimes raise the bar and rejuvenate an industry sector. Competition forces established brands to up their game and deliver better, more competitive products. This is not the time for established operators to hit the panic button but rather focus on what they do best and examine opportunities to improve their offering/service/product. – Vera Valasis
3. HOW WE ARE DEALING WITH – RISING COSTS
‘Reconsider how every coin is spent’ – With consumers already struggling due to shrinking disposable income, it is difficult for franchises to pass on these costs to them. These are the realities of the times we live in. Again it forces one to rethink every expense. The aim must be to cut costs to the bone and ride the wave with only the bare costs. – Naas du Preez
‘Pay attention to expenses and stock’ – That’s a very real threat to our business and to our type of business because at the end of the day there’s a price ceiling that one can charge and give good value back to the customer. But for the costs there is no ceiling. So what happens is you just get this diminishing margin and what it’s forcing franchisees to do is to rationalise their operating expenses. It’s forcing them to have to work with fewer staff, it’s forcing them to work in smaller spaces and it’s forcing them to be more competitive with their purchasing – really shop around and get the best prices. And then the last thing that they have to do is they have to pay more attention to the control of their stock and make sure that everything that they buy in is generated into a saleable product. There isn’t really much room or margin for shrinkage or loss or wastage. – Alan van der Westhuizen
‘Discounts can help offset higher costs’ – This is true, however franchisors are ideally positioned to assist franchisees to negotiate better bulk discounts on behalf of their franchisees and to continue to manage overheads and input costs of franchisees in all the areas of their business. – Esna Colyn
‘Increase prices but also offer great deals’ – With consumers already struggling due to shrinking disposable income, it is difficult for franchises to pass on these costs to them. While it is true that direct costs are increasing it is true for anyone in business today, not just the franchise industry. So any business owner would face the same challenges and in general the markets do in fact pass increased costs to the consumer. There is just more pressure on brands to offer ‘a great deal’ which is sometimes achieved through clever marketing, buying power and convenience – these factors may put the franchisee at an advantage as franchisors are usually more nimble when it comes to marketing and supplier negotiations than independent business owners. – Vera Valasis
4. HOW WE ARE DEALING WITH – BAD DEBTS
‘Keep debt as low as possible’ – Cash flow is reality. In order for franchisees to survive, new franchisees have to be geared even less (ie. how it finances its acquisitions and assets). Consolidating debt and avoiding new debt as far as possible should be top of mind. – Naas du Preez
‘Managing cash flow efficiently and avoiding bad debt is priority’ – It’s not really one that we’ve identified as a major problem. You’re right about the cash flow. I think restaurant businesses fail because they don’t manage cash flow properly. We generally work closely with our franchisees to ensure that they try and keep a healthy cash flow, that they don’t run massive accounts that run beyond thirty days and then it becomes a difficult debt to try and service. We try and advise our franchisees to manage those expenses carefully and rationalise them if they can without compromising the business before they get into a situation of bad debt or no cash flow. – Alan van der Westhuizen
Finding the right skills to manage the investment – Franchisee selection criteria will become more onerous to ensure that only owner-operators are selected to enter the space that have industry and business experience to ensure that the investment is managed without stress. – Esna Colyn
‘Local businesses are better equipped to weather the storms’ – Again everyone in business faces the same challenges when it comes to higher interest rates. South African business is not to be underestimated as the prime interest rate on 31 August 1998 was 25.5%. Although borrowing money was a serious decision at the time, the franchise industry continued to grow and flourish – South African business is very resilient and has learnt to deal with major challenges and a volatile environment – something many markets have no experience in, i.e. European business. – Vera Valasis
5. HOW WE ARE – ADAPTING TO CONSUMER NEEDS
‘Agility is key’ – First you have to make sure that you do not assume the customers’ need, but know for sure what their needs are, before addressing it. It may be over simplifying, but this happens more often than you think. Secondly, be careful of a knee jerk reaction; make sure to stick to what your core business is – sometimes you must just stick to your plan, and ride out the wave. – Naas du Preez
‘Changing customer needs also present great opportunity’ – From our side we’ve acknowledged that it is a huge opportunity because the customer can get information instantly. They can also share information instantly on things like their experience in your restaurant or your brand. They can encourage people to come or they can discourage people from coming if they’ve had a bad experience. So we do see it as a big opportunity but you’ve got to have dedicated people that manage, particularly from a social media side, communication and on top of it communicate responsibly, communicate quickly and respond to customers because that’s really what it’s all about. We’ve moved into a generation of [people wanting] instant gratification and if you can embrace that then you could definitely benefit from it in any brand. – Alan van der Westhuizen
‘Embrace the change and plan for it’ – Very true, innovation and change should always be part of the strategy in the current changing markets. – Esna Colyn
‘Not all customers are trendy and tech-focused’ – This is an irresponsible statement to make – in my opinion certain sectors on the market have become innovation driven i.e. young, trendy and tech savvy consumers but these consumers are small in terms of the entire market and very niched. There are other vast sectors in the market that are happy with the tried and tested models. However, the trendy consumer’s needs are not to be ignored as they are sometimes a flag in terms of what is to come i.e. digital driven business model, ‘green’ philosophy and so on. Trends are to be closely watched by franchising and adaptations are to be made where suitable. – Vera Valasis
6. HOW WE ARE DEALING WITH – FALLING STAFF MORALE
‘Support staff through the tough times and they will become loyal’ – Job security issues are also heightened during this time as some employees may fear losing their jobs. Relationship is key. In times like these, you can hopefully draw on the emotional capital that have been invested in your staff. Again, stressful times create opportunity. We see our staff as our most important stakeholder. When times are tough, it usually unmask challenges that your staff face in their personal life. Should you be able to journey and assist them through these challenges, you will have loyal staff, beyond their paycheck. – Naas du Preez
‘Leadership that empowers employees’ – As a bigger franchise brand we obviously have a standard best practice and we have an operations manuals for our different brands that would prescribe certain policies and certain ways of motivating staff. But each franchisee is really responsible for the welfare of their respective staff and it’s not about paying the biggest pay cheque because I don’t think that that is the sole motivating factor behind staff’s decision to go an choose a place to work. They often consider extra factors like convenience in terms of being able to get to and from work. They look at the extra benefits they may get working at a particular company like a provident fund or medical aid or a funeral policy. Particularly working in the restaurant industry, making sure that the staff are adequately fed.
I think in general it’s changing the style of leadership, it’s changing from that autocratic ‘boss-and-the-worker’ style of leadership to the ones that have got employees that are part of a team, that are empowered to also make a difference in the business and also make decisions in favour of the business and to make sure that they all pull in the same direction in terms of customer satisfaction. – Alan van der Westhuizen
‘Focus on excellence and training’ – In our industry we only appoint qualified staff and through on-going training and marketing initiatives keep staff morale as high as possible. Due to the fact that we offer excellent training with employees who are then often poached by the competitors. – Esna Colyn
‘Performing employees are valuable when times are good even more so during the bad times’ – If a business is understaffed, and existing employees are stretched it does not necessarily mean they are demotivated, but yes I am sure they would be fearing for their jobs. There is an even bigger responsibility on the owner of the business to train his/her staff to the best of their ability to ensure customer service and product knowledge is at its optimum. Good employees are always valuable to a business whether times are tough or not.
Underperforming employees are the ones that get booted out very quickly. This situation puts more pressure on employees to ensure that they are the best at what they do and their employers have to ensure that he/she employs the best staff the business can afford – but reinvesting in employees is imperative whether times are tough or not – ongoing training makes the difference between well performing employees and superstar employees. Owners don’t have to spend much money training their staff – there are thousands of online training courses on any subject so training costs are no excuse for under trained employees. Trained employees are motivated and energised so ongoing training is a business imperative. – Vera