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FRANCHISEES IN DEMAND AS OUTLOOK REMAINS POSITIVE - SURVEY

by Simon Lord,
last updated 16/04/2014

Finding the right franchisees, staff and locations are the biggest concerns for franchising in 2014, but confidence is still high.

The availability of franchises continues to be one of the major issues facing franchisors according to the latest Franchising Confidence Index.

Overall confidence remained high after the record levels reported in January, with a very positive outlook for general business conditions (net 63 percent) and sales levels per franchisee (net 66 percent), and solid prospects for franchisee profitability (net 50 percent).

However, franchisor growth (net 41 percent) decreased 21 percent from the massive high of the previous quarter. Franchisors on balance held a neutral to negative view on the availability of suitable franchisees (negative 3 percent) and locations ( net 7 percent), availability of suitable staff (negative net 19 percent), and operating costs per franchisee (negative net 6 percent). Service Providers (who generally have a broader view of the franchise sector than individual franchisors) were generally more positive, as they have been for the last 15 months, although concern about rising operating costs caused them to be more cautious about franchisee profitability levels (see table).

Franchising Confidence Index survey April 2014 - Results Summary Table

Different prospects for different industries

It is apparent from comments quoted in the survey that expectations in the franchise sector differ widely from industry to industry. ‘Many respondents noted that they were experiencing improvements in demand, with positive expectations for the next 12 months,’ reports Dr Callum Floyd of Franchize Consultants, which organises the Franchising Confidence Index survey. ‘While not all companies identified their sectors, positive Franchisors included the automotive sector and companies operating in construction and related services (eg. landscape supplies). However, retail food reported a highly competitive market with increasing costs and a shortage of staff, with other sectors also expecting costs to increase.’

And Service Providers sounded some notes of caution, such as: ‘Many businesses are starting to look to a better future but some are still struggling. It depends on the industry sector that you are in. It is a variable speed economy,’ and ‘Costs will increase - interest charges and staff. It is an election year so some risk that end of third and start of 4th quarter will be flat.’

The shortage of franchisees

The rise in business confidence and sales expectations can be expected to increase interest in franchise opportunities during 2014. There is already some evidence of that, with visitor numbers to the Franchise New Zealand website and requests for magazine copies having increased substantially this year.

The time lag between the rise of business confidence and the rise of buyer confidence, as well as caution over interest rates, is, however, continuing to make franchise recruitment a challenge for many franchisors. Those which can demonstrate good results, good cashflow and good returns are generally faring better.

As the survey notes, availability of finance is also an issue for many. Franchises which have established relationships with finance providers and are able to offer an attractive package of funding options can expect to see more interest.

The shortage of new franchisees is tempting many franchisors to consider multi-unit franchising – granting additional units to existing franchisees. While this makes growth easier in the short term, it can also create additional problems if the franchise model or the franchisee is not suited to multi-unit operation. As Westpac’s Dean Madsen comments on page 9 of the latest issue of Franchise New Zealand, ‘I’d suggest it works a lot better in a highly-developed system like McDonald’s, where it’s a proven route, than it would in a lot of other franchises. Until a franchise has really strong, well-proven systems in place, it’s a real challenge to have multi-unit franchisees. That’s probably why we’ve really only seen multi-unit operators here in the big international brands like McDonald’s, Subway and Domino’s so far.’

Conclusion

As Dr Floyd notes in his Franchising Confidence Index report, ‘Franchisors continue to maintain an optimistic outlook for general business conditions, sales levels per franchisee, and franchisor growth prospects. We were also encouraged to record an increase in positivity for franchisee profitability, arguably a franchise system’s most important key performance indicator… (But) the challenges for franchisors and franchisees remain. In order to achieve a mutually rewarding result, both parties (ie. franchisors and franchisees) need to operate and execute excellent businesses. No sector offers a “free lunch.”’

The data and analysis presented represents the views of 32 Franchisors and 13 Service Providers collected between Monday 7 and Friday 11 April 2014. Read the full report here.

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