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FRANCHISE CONFIDENCE GOES ON GROWING

by Simon Lord,
last updated 28/10/2016

20 October 2016 - The franchise sector is increasingly positive about the outlook for the next 12 months, especially for franchisees, with 54 percent of franchisors expecting improved profitability for franchisees and a further 40 percent expecting them to maintain current levels.

click images to enlarge

Franchisor Expectations - looking good (October 2016)

Franchisor Expectations - looking good (October 2016)

The overall picture for the past two years

The overall picture for the past two years

The October 2016 Franchising Confidence Index from Franchize Consultants demonstrates positive expectations in many areas, particularly franchisor growth prospects, franchisee sales levels and franchisee profitability. There was also positive sentiment in relation to access to finance, predominantly from franchisors, reversing some of the large drop in the July survey.

Franchisors were substantially more positive in their outlook for general business conditions (net 40 percent), up from a net 26 percent the previous quarter (see graph right – click to enlarge). Service Providers, by contrast, reduced slightly from a net 50 percent in July to a net 42 percent positive.

The net 40 percent positivity in outlook for general business conditions among franchisors was still quite markedly higher than that of other research involving general business, although they also saw similar increases from the previous quarter. The ANZ Business Outlook increased to a net 28 percent in September (up from 20 percent in July) and NZIER business survey improved from net 19 percent in July to a net 26 percent in October.

Dr Callum Floyd of Franchize Consultants comments, ‘Our experience over more than six years (27 quarters) indicates franchisors are often more positive toward future general business conditions compared to datasets involving other organisational forms. This quarter is no different; however the increases in net positive sentiment quarter-to-quarter are very similar. The main thing is the positive feeling about franchisee sales levels and profit expectations. Both are up, not at the highest in six years but very high.’

Franchisor sentiment for franchisor growth prospects continued to gain momentum at net 57 percent compared with a net 46 percent in July.  Service Providers’ perceptions also showed a slight increase in this area at a net 53 percent, up from net 50 percent.

Growth depends on finding suitable franchisees, however, and this continues to concern many. Franchisor sentiment toward access to suitable franchisees was up just 1 percent to net 12 percent. Service Providers were far more positive with an increase of net 16 percent to net 21 percent.  This means business buyers have more choice and franchisors will therefore need to work harder to attract good people.

For those who do buy a franchise, the news is good with 69 percent of franchisors expecting sales levels per franchisee to increase, while operating costs are expected to improve or remain the same by 85 percent. As a result, 94 percent expect franchisee profitability levels to improve (54 percent) or remain the same (40 percent). Service Providers were more cautious after the July high.

Key comments

As usual, the survey asked both franchisors and franchisees for comments.

Franchisors’ responses included positive comments about increased sales revenue against previous periods, growth in both physical retail and especially businesses benefiting from e-retail. By contrast, less positive responses (often individual) included references to a very competitive market, pricing pressure, increasing overheads, demands of landlords making locations difficult to obtain, and a lack of good franchisees.

  • Finding good franchisees is my biggest challenge!
  • Very competitive in the franchise sales space, plenty of new work
  • We are experiencing very strong like-for-like sales growth this calendar year. Banks do seem to be tightening up lending, especially with the new responsible banking protocol now in place
  • Very stable and positive
  • Excellent
  • Retail - Improving steadily
  • The hospitality sector is highly competitive. One of the biggest new challenges is landlord attitude towards brands in the main cities and a drive for non-branded business making it harder to secure some sites. This is likely to increase the competition for sites amongst branded offers.

Service providers were also generally positive, although cautious as usual:

  • Generally quite stable and positive. Skilled labour still difficult to obtain. Expect to see upwards pressure on wages within the next 24 months
  • Seems very positive at the moment for both franchisors and franchisees
  • A stable business environment which is good for franchisees and franchisors
  • Hard to see much change ahead up or down. The economy seems stable but politics, offshore in particular, not so much.
  • Generally good, although competition for good franchise candidates is still very strong. An area of concern is a number of Australian franchisors looking to enter New Zealand often without doing adequate research and preparation into the local market. The resulting failures will impact upon local franchisees and damage franchising's reputation.

The Franchising Confidence Index is produced by Franchize Consultants (NZ) Ltd. The data and analysis presented represents the views of 35 Franchisors and 19 Service Providers collected between Tuesday 11 October and Monday 17 October 2016. See the full report here.

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