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FRANCHISES NOT IMMUNE AS QUAKE HITS CONFIDENCE

by Simon Lord,
last updated 13/05/2011

Business confidence has been badly hit following the Christchurch earthquake, and the franchise sector is no exception.

The latest Franchising Confidence Index survey has found franchisor’s sentiment towards business conditions has generally deteriorated, dropping into negative territory (net -3%) for the first time since the survey began in April last year. This mirrors such general measures as the National Bank Business Outlook Survey (net 8.7%), the BNZ Confidence Survey (net -22%) and the NZIER survey (net -11%).

Interestingly, however, specialist franchise service providers (including banks, consultants, accountants and lawyers) were more optimistic than franchisors about general business conditions for the next 12 months, with a net 35% positive about improving conditions. In fact, service providers were considerably more positive than franchisors on three key measures:

  • general business conditions
  • access to financing
  • access to suitable franchisees

Given that the service providers see a wider spread of businesses than individual franchisors, that may well be good news for franchising in general.

RESULTS SUMMARY TABLE

FCI Summary Table April 2011

 

However, expectations for franchisees are less encouraging, particularly relating to franchisee profitability. While expectations for franchisee sales levels have stabilised (net 33%), franchisors expectations for operating costs (net -38%) and profitability (net – 3%) both deteriorated from the previous quarter. Franchisor expectations for franchisee profitability are now negative on balance for the first time since the survey began.

Christchurch

There is no doubt that Christchurch earthquake has had a significant impact both upon business confidence and upon many individual franchise systems. Dr Callum Floyd of Franchize Consultants (NZ) Ltd which carries out the survey, comments:

‘It is clear the February 22 quake and subsequent aftershocks have proved particularly damaging and have affected franchising and business confidence. There have been many franchisee store or unit closures (whether temporary or permanent) and there is an over-riding feeling of uncertainty.’

‘Both franchisees and franchisors have been impacted. Many franchisees face various issues right across their business, such as problems relating to income, essential services, insurance, work-in-progress, suppliers, locations and finance. For franchisors, there are issues with royalty payments, increased support costs, advanced supplies, growth plans and finance. For some franchise systems, the Christchurch earthquakes have heightened viability concerns for both franchisees and their franchisor.’

This is evident in some of the comments from franchisors responding to the survey:

‘We lost 1 franchise store and could not replace at the same occupancy costs. Rentals have been artificially inflated. We are closing a second store which is near a suburb badly affected and which has been depopulated. We do not anticipate business getting back to normal in the following 2 years at least. This is our second biggest city and will therefore have a significant impact on the overall business’

‘Currently our Christchurch store is sitting in a 40ft container. We don't expect to be trading in Christchurch for at least 6-9 months. We also would not want to re-open until the city location is ready and in a position to trade at a profitable level.’

In contrast, says Dr Floyd, ‘Some affected franchisors (though few in numbers) have noted increased demand following the earthquakes, often due to competitive closures (whether permanent or temporary) or changes to purchasing patterns and/or business strategy (e.g. increased demand for virtual office services).’ One franchisor reported, ‘We have six stores in the Christchurch area and have been very fortunate to have none greatly affected by the earthquake. Revenues in those six stores are actually higher than expected due to high demand for products/services when the city was shut down.”

Service providers also point to the uncertainty provided following February 22, including uncertainly to franchisor businesses, what it means for the government budget and interest in what the government will do, if anything, to support/stimulate business beyond Christchurch.

Looking Ahead

It is difficult to know how much of the negativity in this quarter's survey will dissipate as the country gets used to the post-earthquake environment.  Certainly, franchisors are broadly reporting a mixed outlook for the next twelve months with the majority noting either negative or middling demand growth. Some, however, do note growth and in some instances strong growth. But overall there is a cautionary outlook and it is not expected the Rugby World Cup will provide more than a short-term injection.

‘Franchisors also touch on consumer discretionary spending pressures, such as increased food and fuel costs, and note consumers taking more care and being more risk averse,’ reports Dr Floyd. ‘Pricing pressures are also evident due to competition and/or customers expecting more from their money. Finally, financing continues to remain a stated growth challenge for some.’

‘Service provider views largely echoed those of franchisors. In particular most expect sales to remain challenging during the next 12 months with improvements to follow. While there was a common perception of more optimistic and promising signs evident prior to the February earthquake, now there is a common belief business conditions will be difficult; sales growth will be low and, coupled with increasing input costs, profits will be meagre to challenging,' Dr Floyd concluded.

Read the full survey

See the January 2011 survey results

See the October 2010 survey results.

See the July 2010 survey results.

See the April 2010 survey results.

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