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CONFIDENCE STRONG BUT IT'S STILL A BUYERS' MARKET FOR FRANCHISEES

by Simon Lord,
last updated 27/04/2016

21 April 2016 – The latest Franchising Confidence Index found strong franchisor confidence levels for general business conditions, franchisor growth prospects, franchisee sales levels and franchisee profitability.

The 25th quarterly survey carried out by Franchize Consultants continued the positive mood in franchising, although slightly less so than in January 2016.

Franchisors were still on balance quite positive about general business conditions (net 33 percent), the same as the previous quarter. Service Providers reported similar sentiments at a net 37 percent, but down from January (net 53 percent).

Franchisor sentiment for franchisor growth prospects decreased from a net 56 percent in January to a still strong 45 percent here. Service Providers’ perceptions were held at a net 47 percent.

Franchisor perceptions of franchisee sales levels decreased from a very positive net 53 percent to a still strong but reduced 39 percent. Service Providers were particularly negative, falling from a similar starting position of 53 percent in January, to a net negative 21 percent now in April.

Both Franchisor and Service Provider groups see the outlook for franchisee operating costs as more positive, albeit Franchisor views improve from a net negative -19 percent to only just positive 3 percent, and Service Providers move from 20 to 26 percent.

Overall, the outlook for franchisee profitability levels remains positive. While Franchisor perceptions reduced from a high net 44 percent to 21 percent, Service Providers were increasingly optimistic, improving from a net 33 percent in January to 47 percent here in April.

The findings reflect increased confidence in the small business sector generally over the past year, as reported in the MYOB Business Monitor.

Opportunities there for the taking

Recruitment continues to be a concern for many franchisors, with sentiment toward access to financing decreasing from 30 percent to 21 percent. Service Providers shared the concern, perceptions falling from a positive 53 percent in January to 37 percent now.

And it’s still a buyers’ market, with good franchisees hard to find: Franchisor sentiment toward access to suitable franchisees deteriorated from a net 0 percent to -6 percent although Service Providers remained more positive at a slightly improved 21 percent.

Good news, bad news depending on sector

Franchisors were asked for qualitative responses on how things were looking in their sector.

Positive comments included stable operations, regional strength, specific sector strength (eg. building, food & beverage), improved franchisee enquiries, positive impacts from house price inflation, and an abatement of price sensitivity (sector unknown).

By contrast, less-positive responses (often individual) related to weakness in Auckland, difficulties finding qualified staff and franchisees, increased lease and operating costs, and sector-competitive intensity.

Positive outlook but quality varies

Dr Callum Floyd of Franchize Consultants says the latest survey continues to demonstrate a generally positive outlook overall. ‘However, many measures softened this quarter including, importantly, franchisors' outlook for franchisee sales levels, franchisee profitability, and, franchisor growth prospects.

‘Franchisor and Service Provider comments confirm, overall, the level of sentiment recorded. However, challenges clearly remain – particularly in competitive sectors, but also relating to areas like finding staff and franchisees, and operating costs.

‘Franchise systems cover a huge diversity of industry sectors and often vary in strategy, structure, management and performance – even within sectors. In turn, we believe this helps explain why some responses in common sectors do vary.’

As the managing director of Franchize Consultants, which has over 25 years of franchising and licensing experience, Dr Floyd also warns: ‘Some Service Providers also point to potential differences in the quality of franchise system leadership and performance, including some poor-performing franchisors and franchisee failures.

‘Not all franchise systems were created properly, and not all franchise systems are equally managed. Those establishing a franchise system must, in the simplest sense, ensure the right franchise structure is developed, select the right franchisees, and provide the right on-going management and leadership.’

The data and analysis presented in the Franchising Confidence Index represents the views of 33 franchisors and 19 Service Providers collected between Monday 11thApril and Sunday 17th April 2016. Read the full report.*The figures indicate ‘net’ confidence. Net’ confidence is the difference between those reporting ‘better’ and ‘worse’

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