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FRANCHISING CONFIDENCE DROPS IN JULY

by Simon Lord,
last updated 28/07/2015

28 July 2015 - Franchize Consultants’ Franchising Confidence Index reflects other reports by showing less optimism this quarter

The onset of winter, the effects of lower dairy payouts and trading conditions in China and Australia have all led to a drop in general business confidence recently despite forecasts of ongoing growth. The franchise sector is no exception, and this is reflected in a less optimistic outlook from the franchisors and franchise professionals who responded to Franchize Consultants’ quarterly Franchising Confidence Index.

While Franchisors remain positive in their outlook for general business conditions (net 14 percent), sales levels per franchisee (32 percent) and franchisor growth prospects (35 percent), they held a negative view on the availability of suitable staff (negative net 6 percent), and operating costs per franchisee (net 16 percent).

Sentiment toward franchisee profitability, arguably a franchise system’s key health and growth driver, remains positive although it decreased from a net 41 percent to 19 percent.

The net 14 percent positivity experienced by franchisors is slightly higher than that of other business confidence surveys involving general business, including ANZ Business Outlook, which is now in the red (negative net 2 percent in June) and NZIER (5 percent in June).

The availability of suitable franchisees is a continuing concern, dipping into negative territory again at minus 8 percent. Anecdotally, as we report in the latest issue of Franchise New Zealand magazine, franchisors say it is easier to find franchisees in Auckland (where immigration is strongest) than around the regions. It remains to be seen whether the recently-announced incentives to encourage migrants to settle outside Auckland have any effect.

Franchising Confidence Index July 2015: Summary Table

Mostly positive comments

Interestingly, the franchisors who offered qualitative responses on how things were looking in their sector responded with mostly positive comments. These included franchisors in the building and construction industry, related services and cleaning services. Some typical comments were:

‘Cleaning Services: things solid but customers always very price focused. Potential for further Regional growth.’

Very similar to last year but as my franchise network matures I expect a better result in their profitability levels.’

Bulk landscape and garden supplies. Becoming more competitive in our sector, but we expect to see 10 percent growth this year store on store.’

Construction. Auckland continues to be strong, Christchurch slowing markedly. Regions being affected by diary payout.’

‘Generally better. Health and well-being is still important to the population even in difficult times”

Service Providers also offered some considered sentiments, such as:

‘Too much emphasis on dairy sector will affect sentiment in the rest of the economy, although this should be offset by lower interest rates and in some cases lower kiwi [dollar].’

Population growth should lead to improved availability of staff and franchisees. Very low financing costs & increasing housing equity should improve access to finance.’

However, one respondent warned of the need to make sensible choices when choosing sites:

‘In Auckland, I think we will see increased operating costs and reduced profits for franchisees coming off the back of the property market with vacant retail locations being snapped up pretty quickly of late and landlords increasing rents at rent reviews which, in our experience for retail, seem to either be at fixed annual increases of around 4 percent and others deferring to market reviews at the 2-yearly mark. I think we may see some franchisees getting unstuck in the coming years with crushing rental overheads (in Auckland) and that will in turn lead to increased supply of retail locations.’

Advice for franchisors

Dr Callum Floyd, managing director of Franchize Consultants, suggests that, ‘Franchisors should be including challenged scenarios within their forward planning, including forecasts on sustainability. At the same time, all viable initiatives should be considered and undertaken to ensure a solid franchise structure and system is in place, key franchising processes are optimised, and support staff and franchisee capability and execution is continually developed.’

The data and analysis presented represents the views of 37 franchisors and 10 Service Providers collected between Monday 13th and Friday 24th July 2015. Read the full report.

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