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FRANCHISING LOOKING FORWARD TO
GOOD YEAR AHEAD

by Simon Lord,
last updated 12/02/2015

12 February 2015 - The latest Franchising Confidence Index finds franchisors and franchise specialists confident about prospects for 2015, but finding good franchisees is still the biggest challenge

A new report finds that franchising in New Zealand is looking forward to a good 2015, but growth is likely to be restricted for some franchises by a shortage of suitable franchisees. Although business confidence is strong, outlook for franchisee profitability is positive and finance is readily available, new business owners are slow in coming forward. That means more competition for suitable candidates, and business buyers can look forward to increased choice.

According to the January 2015 Franchising Confidence Index survey, franchisors are feeling positive about general business conditions (net 69 percent), sales levels per franchisee (net 62 percent) and franchisor growth (net 57 percent). By contrast, franchisors on balance held a negative view on the availability of suitable staff (negative 18 percent), and operating costs per franchisee (negative 3 percent). Franchise recruitment is a concern (see below), with availability registering at just net 17 percent (an improvement over the negative 17 percent recorded in October 2014 but still low).

The good news is that franchisee profitability, arguably a franchise system’s key growth driver increased from 17 percent to 38 percent, as reported by responding franchisors. Service providers also were more positive in their sentiment this quarter, reporting a similar figure at 40 percent.

The outlook for general business conditions is a key measure for this research because it enables it to be compared with many other general business confidence surveys. Franchisors were very positive (net 69 percent), up from 50 percent in the last quarter. The majority of responding Service Providers also indicated substantial positivity for general business conditions (net 94 percent).

The authors note that the high net 69 percent positivity experienced by franchisors tops that of other research involving general business, including ANZ Business Outlook (30 percent in December) and NZIER (21 percent in January) business confidence surveys. See end for summary table.

Greatest challenge to franchising development in 2015

For the fourth year running, franchisors were asked what they perceived to be the greatest challenge to franchising development in the year ahead. The following chart plots the frequency of key comment themes.

Challenges to franchise growth in 2015

As demonstrated, finding franchisees was identified as the top challenge by franchisors in the forthcoming year. Related to this, there were frequent mention of competitive forces, not just for end-user sales, but also franchisor competition for franchisees. However, access to finance was no longer seen as a problem as banks are keen to fund suitable candidates.

This year, finding and retaining quality staff, for both franchisee and franchisor, also featured highly. ‘This appeared to be in response to system growth which is a good business and economic sign,’ comments Dr Callum Floyd of Franchize Consultants, which carries out the quarterly survey.

‘Challenges associated with the level of franchisee investment and on-going cost containment were also at the fore this year, with multiple mentions. This clearly points to a unit-level business model issue or challenge – with the goal of keeping the franchise format’s potential return on investment attractive.’

Competitive forces were also highlighted with three franchisors specifically noting competition from other franchisors (and independent businesses), remodelling requirements to keep up with competition, and aggressive competition. ‘In a market with an increasing number of franchisors, and some sectors becoming more saturated with franchising companies, we would expect this challenge to increase,’ Dr Floyd says.

Finding suitable locations was the fifth-greatest challenge identified, with only two responses.

A variety of other challenges to franchising development were identified covering a range of areas, such as the economy impacting investor confidence, access to funding, business model challenges, consumer sentiment, managing an increasing workload (due to growth) and keeping up with IT system developments.

Previous year comparisons

Comparisons with previous years’ challenges point to market improvements and increased business confidence. Like each previous year, finding suitable franchisees was identified as the number one challenge. Finding suitable staff this year is the second greatest challenge noted, up from fourth in 2014. Interestingly, finding suitable staff was only mentioned once in 2013, and not at all in 2012.

Other key differences include increased mention of addressing the franchisee business model (in terms of initial investment and cost containment) and competitive forces.

Previous years concerns relating to economic factors, franchisee complacency, access to finance, investor confidence, were hardly mentioned this year.

Conclusion

Overall, Franchize Consultants’ Franchising Confidence Index for January 2015 demonstrated an increase of the levels of optimism recorded in the previous quarter.

‘Franchisors continue to maintain a positive outlook for general business conditions and sales levels per franchisee, with franchisor growth prospects also showing an increase,’ says Dr Floyd. ‘We were also encouraged to record a continued positive outlook for franchisee profitability, arguably a franchise system’s most important key performance indicator.

‘Key franchisor-identified challenges for growth in 2015 included the availability of suitable staff, operating costs, finding suitable franchisees and a competitive environment.’

The sentiment contained within the results indicate that in 2015 both Franchisors and Service Providers expect a strong and positive year for franchising in New Zealand.

Results Summary Table

 The figures indicate ‘net’ confidence. Net’ confidence is the difference between those reporting ‘better’ and ‘worse’.

Franchising Confidence Index January 2015 - Summary Table

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