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FRANCHISING STARTS 2012 WITH
IMPROVED CONFIDENCE

by Simon Lord,
last updated 02/05/2012

The Franchize Consultants’ January 2012 Franchising Confidence Index finds a rebound in franchisor confidence, following the substantial deterioration in October 2011 (the pre-election period). However, considerable uncertainty remains. Notable improvements in franchisor sentiment are recorded for general business conditions, access to financing and franchisor growth prospects. Meanwhile operating costs per franchisee are perceived to remain challenged, and franchisors’ outlook for franchisee profitability falls to the lowest level (net negative 8%) on record.

Interestingly, however, franchisor sentiment in late January appears more positive than that reported by general business in the December reports of the NZIER (-3%), BNZ (3.20%) and National Bank business confidence surveys. Franchisor (net 34%) and service provider (net 37%) outlook for franchisor growth prospects also bounced back from their October low, although it remains to be seen whether this really is the start of recovery or whether the downward trend will continue. Encouragingly, the outlook for financing has improved but recruitment is expected to remain challenged overall. For those prepared to invest in themselves, though, this could be a good time to buy a franchise – providing they choose wisely.

An analysis of 33 written responses from franchisors revealed contrasting views for the year ahead. 19 indicated a positive outlook, 12 negative, and 3 as middling or the same. Positively, almost half (16) reported current and/or expected sales growth. Of these, a number indicated strong levels of sales growth, particularly those involved with pet care, but also selected domestic and/or commercial service companies. The following responses were indicative:

  • ‘We are achieving growth across all sectors of the business.’
  • ‘I expect huge growth over the next 12 months and beyond. The next 10 years will see a big change in this industry as it becomes more professional and more responsive to customer expectations’

Only two franchisors stated good franchise recruitment sales, which perhaps emphasises the opportunities available for new franchisees.

For those more challenged seven reported flat, patchy, plain difficult or just uncertain trading conditions. Notably, five of the seven identified themselves as retail and three complained of margin, profit, cost containment and/or landlord issues. As one commented:

‘Market remains flat at best. Provincial towns are worse off than the centres. Little can be done to improve sales without sacrificing margin. Cost containment remains a priority but retail rents are still proving to be difficult with intractable landlords’

See our article on property leasing here.

Service providers to the franchise sector identified several specific challenges outside the general economic malaise, including employees wanting more (after a period of low wage inflation), changing consumer behaviour reducing discretionary spending, increased competition, continued franchisee margin and profitability pressure, slow franchisee recruitment, and failures of poorly prepared franchise systems. By contrast, positive mentions included new outlet and system concept growth, perceptions of stabilising input costs with low inflation, improved access to quality sites, franchisees and access to finance.

Conclusions

Franchisor sentiment, like general business confidence, has been on a roller coaster ride since Franchize Consultants launched the Franchising Confidence Index in April 2010. The current survey is the eighth survey in a series monitored quarterly in January, April, July and October.

Dr Callum Floyd of Franchize Consultants concludes, ‘The current rebound in sentiment is welcomed, but we cannot help but think perceptions for the next quarter could easily return to more challenging territory. The sentiment recorded in many responses shows some optimism. However optimism appears largely reserved due to economic concerns emanating mainly from Europe. Those factors impact real drivers of franchise system growth and performance. Franchisors are clearly finding trading tough and difficult, and retail appears particularly challenged.'

Franchising Confidence Index February 2012

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