Your 2018 Franchise Industry Update is Here – Find Out how the Industry is Performing

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Open sign business

South Africa’s poor economy is impacting every sector – and now we learn that even franchise owners are feeling the pitch, despite the franchising sector being well known for its resilience. This is according to the responses of South African franchisees in this year’s franchise survey by the Franchise Association of South Africa (FASA), released last week.

Let’s find out how the industry performed – Here are the winners, losers, and important numbers from this year’s survey.

Franchisee satisfaction survey highlights:

Sector resilience

With most independent businesses having a 90% failure rate in the first two years of being in business, the average number of years franchisees are in business has remained consistent at 10 years – with 36% in business for more than 10 years and 67% for more than 5 years.

Challenges

Franchisees experience five main challenges; i.e. the poor economy, creating good customer relationships, offering consistent good service, finding the right staff and growing the customer base.

Working capital requirements

The median initial working capital required is R263 158 (R397 727). Forty-five percent of the sample were unable to give this number.

Performance of franchisees

  • Forty percent of the franchisees interviewed were not able or prepared to give the annual turnover of their business. Among those who did give a figure, there was no significant difference from last year’s median (R1 733 333 vs. R1 928 571).
  • Franchisees remain optimistic about the future of their businesses, with 78% expecting to see growth in the coming year.
  • The median nett profit for the last financial year was given as 10,4% (9,5%).
  • Within the first year of operations, it is expected that 47% (46%) of new franchises will break even.

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Ownership breakdown

  • Ownership of more than one franchised business rests at 76% (79%) of the franchisees interviewed, with the majority owning the same brand of franchise. The average number of same brand outlets owned is 2,1 (1,7). 7% (2%) of franchisees own an outlet of a different brand.
  • The majority of these franchised businesses are wholly owned by white business people (80% vs. 86% a year ago). 16% of the businesses are wholly owned by black business people and a further 4% are partly owned. This is a significant improvement in the last year (13% and 1%).

Locations

  • Shopping centres/malls (41%) and high streets (25%) remain the most popular positions in which franchised businesses are located. The number of businesses positioned in high streets has decreased substantially, back to 2016 levels.
  • Just on a third of the franchisees interviewed claimed to own the property on which their business is situated and an additional one in three did not know or refused to give the amount of the upfront deposit paid. The balance of the franchisees interviewed claimed that they paid an average upfront deposit of R60 669 or 2,4 months rental.
  • Other than those who owned their own premises or were not able to give an amount, the remaining franchisees put forward an average rental per square foot and an average annual percentage escalation of rentals somewhat higher than a year ago (R238 vs. R167 and 8,9% vs. 8,5%).
  • Lack of knowledge about the ideal rent to turnover as a percentage of sales and the difference between sales growth and the escalation of rate of rental was high (between 75% and 82%). These percentages were estimated to be 13,5% and 12,6% respectively by those franchisees who were able to give an answer.
  • The size of the business premises ranged from less than 100 square metre to over 1 000 square metres, averaging out at 348 square metres.

Franchisor relationships

  • Eighty-four percent (84%) of franchisees rated their relationship with the franchisor as very good or good which is a significant improvement in ratings in the last year.
  • Reasons for a good working relationship include the franchisor being helpful and supportive. A poor relationship with the franchisor is characterised by a lack of support from the franchisor and the need for better advertising/marketing.

Brand satisfaction

  • With the litmus test being whether an existing franchisee would recommend buying a franchise of the same brand to prospective franchisees, this has significantly increased from 45% to 54%, seemingly moving up from those who were previously lukewarm about recommending such a purchase.
  • Reasons for recommending their franchise brand to others include the helpfulness and support received from their franchisors to it being a trusted, well-established brand with a good reputation. They also thought it a good business, yielding high returns.
  • Interestingly, seventy-two percent (72%) of the franchisees interviewed were very or extremely likely to consider the purchase of another store in the same network, a significant drop from last year’s percentage of 80%, while the number who would be unlikely to buy another store in the same network has doubled from 9 to 19%. This is probably due to the unfavourable and trying trading environment.

Economic outlook

Franchisees remain optimistic about the future of their businesses, with 78% expecting to see growth in the coming year.

Franchisor survey highlights

The challenges

  • The main challenges facing franchisors are related to finding the right franchisees (an increasing need) and staff with the necessary skills sets. Other key challenges include finance for franchisees, finding the right location for outlets, finding franchisees with sufficient capital and high rentals.
  • Other lesser issues are aspects such as franchisees not meeting the standards of the business, staff training, lack of business/industry experience and the marketing of both the business and its products and services.

Franchisee perspective

There is a significant increase in the number of franchisors that expect a new franchisee to take longer than a year to break even within the first year of operations, with a corresponding decrease in those who believe they will break even within the first year of operations.

Branding

Roughly one in five franchises have rebranded or changed the image of their franchise within the last year, which is twice as many as the year before.

Financial view

  • One in three franchisors claimed that their annual turnover exceeded R20 million.
  • The estimated turnover generated for the previous financial year was R721 billion.
  • An estimated turnover of R721 billion for the franchising industry is equivalent to 15,7% of the total South African GDP, which is an increase on last year’s figure of 13,3%.
  • The number of franchise owners claiming to have some form of continuity planning remains consistent with 2017 findings at 28%, with surety protection, the financing of buy and sell agreements and financing for the replacement of key people.
  • Selling intentions within the next 12 months are negligible.

International brands

The number of international brands in South Africa has more than doubled in the last year – from 12% to 27%.

Beyond SA

  • 39% of franchisors claimed to have businesses in Africa, outside South African borders. This is equivalent of 1 775 stores in the franchise population. Most of these business units are found in the neighbouring countries of Namibia and Botswana, with growth noted in Mozambique, Kenya and Zambia.
  • 12% of franchisors claim to have business outside African borders. This is equivalent to 1 036 stores in the franchise population.
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Lebohang Thulo
Lebohang Thulo
Lebohang Thulo is the editor of SME South Africa. She enjoys keeping up with the country’s exciting and fast developing entrepreneurship ecosystem. You can find her at @lelele3