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FRANCHISING STARTS 2019 WITH HINT OF OPTIMISM

by Simon Lord,
last updated 03/02/2019

1 February 2019 – Business confidence seems to be creeping back after several quarters of pessimism, and franchising is no exception. The latest Franchising Confidence Index shows improvement in sentiment over the previous quarter towards general business conditions, access to suitable franchisees, operating costs per franchisee and franchisor growth prospects. There are still challenges, but opportunities too.

The Franchising Confidence Index is conducted quarterly by Franchize Consultants and measures net sentiment among Franchisors and specialist Service Providers to the franchise sector on a variety of topics. Franchisor outlook for general business conditions was still slightly negative at net 3%, but was up from net negative 22% in October 2018. Service Providers sentiment rose substantially to net 19%, up from net negative 23% in October 2018 and returning to levels not seen since October 2017 (net 13%), prior to the change in government which seemed to spook the business sector overall.

‘The Franchisor outlook for January 2019, whilst still lower in some areas than that of January 2018, is showing the tide may well be starting to turn,’ says Dr Callum Floyd of Franchize Consultants. ‘Access to suitable franchisees saw a positive shift to net negative 24%, up from a net negative 28 %, with sales per franchise net 26% (compared to net 28%) and franchisor growth prospects net 21% (compared to net 23%) showing similar results, albeit they have been up and down during the year.  Service Providers indicated they were more positive across 50% of the categories when compared with sentiment from January 2018.’

Notable improvements in sentiment came in the areas of:

Franchisor growth prospects
Franchisors: +23% (up from +7%)
Service Providers: +19% (up from -27%)

Access to suitable franchisees
Franchisors: -24% (up from -48%)
Service Providers: 0% (up from -15%)

Access to financing
Franchisors: -18% (up from -30% - an all-time low)
Service Providers: -6% (down from 0%)

Locations and staff continue to be a concern. On Access to suitable locations, Franchisors were slightly more subdued this quarter at a net negative 3%, down from net 13%. Service Providers dropped from a net 8% to 0%. Similarly, Franchisors indicated that Access to suitable staff remains a key challenge with no change at net negative 31%. Service Providers were at a net negative 38% (down from net negative 31%).

In the important areas of sales and profitability, there was movement in both directions. Franchisor sentiment toward future Sales levels per franchisee dipped slightly to a positive net 26% (from net 30%), with Service Providers showing a strong increase at net 44% (up from net 15%).  Franchisee operating costs have been seen as the greatest challenge for some time. Whilst still challenging, there is improved sentiment from both with Franchisors at net negative 56% up from net negative 70%, and Service Provider sentiment at net negative 25% up from net negative 56%

Franchisors continue to report decreasing sentiment regarding Franchisee profitability levels at a net negative 12%, down from net negative 4% and the lowest point to date. However, Service Providers were much more positive improving to a net +19% from a net negative 31%.

Comments

The feedback received from franchisors was, as you might expect, mixed, with most still expecting some challenges ahead. On the positive side were great demand, strong sales and steady growth. On the challenging side, comments referred to immigration challenges, tightening demand, new competition, increasing operating costs (eg. wages, rent, and other) and pricing pressure, slowing/reducing demand, legislative compliance, retail sentiment, projected house price declines/uncertainty, and the difficulty of finding suitable franchisees and staff.

Franchisors

– Immigration changes may impact franchise sales.

– We have invested quite a lot of money to develop our staff and with this investment we see a much better growth.

– Finding suitable franchisees continues to be the major issue

– Minimum wage increases and regional fuel tax have driven up costs which some customers unwilling to accept. Steady otherwise.

– Opportunities still good but will require good execution of franchisee sales capability and service levels. 

– We have half the stores up and half the stores down so similar to last year.

Service Providers

– Although the usual challenges remain, there will still be room for growth for those franchisors who provide stand-out leadership and services to their franchisees.

– Sales performance are pretty solid, albeit not growing much

– Still some opportunity particularly in the regions.  Ability to find suitable sites and franchisees may tighten up.

– Reasonably optimistic. A lot of the gloomy predictions about Trump and trade have failed to materialise, although there will be some uncertainties - as always.

– Very positive indeed

– Period of consolidation rather than much change, for better or worse.

Greatest Challenges

For the eighth year running franchisors were asked what they perceived to be the greatest challenge to franchising development in the year ahead.

9 of the 27 responding franchisors identified finding the right/suitable/great franchisees as the top challenge to their development. This has consistently been the biggest challenge since the start of the Franchising Confidence Index: this year, immigration rules were cited as a contributing factor by a minority, as was the strength of the economy – encompassing ‘full employment’ and a resultant reduced likelihood someone would leave well-paid employment to buy a franchise.

The next greatest identified theme was finding the right/skilled staff to fit the business, with eight responses. Finding staff was predominantly mentioned from a franchisee growth standpoint - but also support office staff, in one instance. ‘Immigration rules,’ ‘full employment’ and the ‘availability of labour’ were cited as contributing factors. 

Here’s how the challenges for franchisors have changed since 2012.

Greatest Challenges to Franchise Development

Greatest Opportunities

Franchisors and Service Providers were also asked what they perceived to be the greatest opportunity related to franchising development in the year ahead.

Key themes included use of technology, better selling to established customers, growth through existing franchisees, continued strong demand (in certain sectors), potential improvements to labour, franchisee and site availability, franchise business optimisation, commercial developments with new locations, brand/marketing investment, focus on processes and systems, new products, and potential recession (leading to improved franchisee recruitment and labour availability).

Conclusion

‘Franchising is not alone in lacking strong confidence toward future business conditions, as earlier comparisons to key New Zealand general business surveys have indicated,’ says Callum. ‘Key will be ensuring that this backdrop of somewhat dour sentiment does not dampen positive steps, innovation and investments directed toward continually improving franchise system performance and associated franchisor and franchisee returns.’

The data and analysis presented represents the views of 34 franchisors and 16 Service Providers collected between Monday 14th January and Friday 25th January 2019.

The full report can be read here.

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