Staff, franchise buyers and funding could limit growth

With global uncertainty over issues such as Brexit, elections in Europe and New Zealand, Trump’s presidency and tensions over North Korea and the South China seas, it’s hardly surprising that business confidence in general has taken a bit of a knock since the highs of January.

According to the latest Franchising Confidence Index, however, franchisors remain positive in their outlook for general business conditions with a net 20 percent expecting improvements. Service Providers were also positive despite a drop from January levels.

‘Whilst the numbers show a decline, both franchisor and service provider comments remain quietly positive,’ comments Dr Callum Floyd of Franchize Consultants, which conducts the quarterly survey.

While the outlook for franchisor growth and franchisee profitability remains positive, the three traditional barriers to growth remain for many franchises:

- access to finance
- access to suitable franchisees
- access to growth

Franchisor and Service Provider sentiment toward access to financing appears to be tightening with franchisors dropping from net negative 8% to net negative 15%. Service Providers dropped in net sentiment from a positive net 18% to 0% this quarter. Access to financing is crucial for franchisors, as franchisees invariably require bank funding. Sustained reductions in perceived access to financing are of concern to the franchise community.

It is worth noting that, in recent years, some banks have reduced their commiment to franchising by disbanding their specialist franchising divisions. Westpac is the only bank to retain a dedicated franchise team across multiple locations nationwide.

Comments

Franchisors were asked for qualitative responses on how things were looking in their sector. Responses were mixed, partly according to sector, with some reporting demand and profitability growth while others were concerned about competition, staffing, finance and a general tightening of demand.

● Our sector of retailing books and gifts remains competitive and for that reason we believe conditions are likely to remain neutral.

● Difficult time of change and business model in our sectors. Some franchisees can adapt, some can’t. Information technology.

● Very competitive market place.

● Immigration is still a driver for retail but only in the cities. The provinces are static or going backwards.

● Costs are tightening and so we are having to think of more efficient and effective ways to ensure franchisees return the same or better profitability.

● We are seeing more franchise enquiries lately with interest coming from people looking at lifestyle option being their own boss. Our market is currently strong with good sales.

● Things are mostly positive, with a small level of growth predicted. Our franchisees businesses are growing and profitable.

● Costs are tightening and so we are having to think of more efficient and effective ways to ensure franchisees return the same or better profitability.

● We are seeing more franchise enquiries lately with interest coming from people looking at lifestyle option being their own boss. Our market is currently strong with good sales.

Service Providers were generally cautiously positive, with some indicating potential slowing growth.

● Positive growth, growing economy. Money is cheap. Morale is good.

● Franchisor growth rate will likely slow down from the growth achieved during the past 2 years owing to construction lead time delaying the availability of new suitable locations, perceived tightening in bank lending and an increase in wage expectations following a sustained period of low wage inflation. Growth is still supported by availability of staff and improving availability of suitable potential franchisees.

● Franchisees in many industries (but not all) are very profitable at the moment -the best in a long time. General conditions may tighten somewhat in the next 12 months, after a good cycle.

Summary

‘Overall, there is a positive based sentiment toward the future,’ says Dr Floyd. ‘However, there are concerns in some areas and there is some concern the economic future is becoming less certain. Franchize Consultants’ view is that now, particularly when there is some buoyancy, is a time to evaluate franchise system structure and performance for future improvement needs and opportunities.’

The data and analysis presented represents the views of 40 Franchisors and 17 Service Providers collected between Monday 3 April and Friday 7 April 2017.

Read the full report here.

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