Confidence concerns continue for franchisors

The October version of the latest quarterly Franchising Confidence Index surveyed both Franchisors and specialist Service Providers to the franchise sector, as usual. Franchisors’ sentiment towards general business conditions dropped from net negative 9% to net negative 22%, after lifting very slightly last quarter; Service Providers’ sentiment showed a mirror effect dipping to net negative 23% from a net negative 7%. The ANZ Business survey of general business confidence is currently at net negative 38% in comparison to a net negative 39% in June. Similarly, the NZIER business survey, released in early October, recorded a net negative 28% compared to a net negative 19% in July. 

Franchisor sentiment towards operating costs and operating costs per franchisee were most negative and moved most compared to the previous quarter. Of note, sentiment towards sales levels per franchisee was relatively stable and positive on balance.

Franchisor sentiment toward franchisor growth prospects remained in positive numbers at a net 7% - albeit reduced from the net 18% in July. Franchisor sentiment toward access to suitable franchisees remained challenging - at a net negative 48% down from net negative 36%. Service Providers sentiment indicated a softening in this area improving to a net negative 15% from net negative 21%.

This quarter’s Franchisors and Service Provider sentiment towards accessing suitable locations saw a decided improvement at a net 13%, up from net 0% for Franchisors. Service Providers’ sentiment was similar at a net 8% up from net negative 7%

Franchisors and Service Provider sentiment toward the availability of suitable staff saw some buoyancy despite comments of continued concern. In several key sectors, immigrants on suitable work visas make up a considerable part of the labour market and it’s worth noting that, while the pace of net immigration continues to slow, annual work visa numbers continue to set new record highs according to the latest figures from Statistics New Zealand.

Franchisor and Service Provider sentiment towards franchisee sales levels, whilst fluctuating, has remained the most consistently positive area over the past 12 months. Overall sentiment remains positive, despite Franchisor expectations declining very slightly from net 33% to net 30%, and Services Providers improving from net 7% to net 15%. However, franchisee operating costs continue to create concern, currently at a net negative 70% down from net negative 42%.  Service Providers show equal concern in sentiment at net negative 54%  down slightly from July’s net negative 50%.

Finally, Franchisors’ sentiment towards franchisee profitability levels, which are a strong indicator of the economic climate, have remained relatively stable over the past five quarters, at a net negative 4% after a previous increase to net 3%. Service Providers sentiment remains stable although at a lower level of net negative 31%, down from net negative 29%.

Comments from franchisors reflected concerns about legislative and regulatory changes, the availability of staff and franchisees (especially for new locations), minimum wage rates and increases in fuel/delivery costs. As one Service Provider noted, ‘A good time to get updates and system improvements addressed.’

Comment

According to Dr Callum Floyd of Franchize Consultants, ‘While sentiment towards general business conditions has taken a slightly larger hit this quarter, there are indications in comments that some industries are seeing growth. Franchisor's sentiment toward their own growth prospects, whilst lower, remained positive on balance.

‘Overall, we believe that whether the challenges are more perceived than real (or not), franchisor and franchisee businesses would be diligent to prepare for a tougher business environment. That means ensuring franchise system foundations, processes and management are sound – at a franchisor and franchisee level. Typically, we note both sides have a multitude of improvement opportunities. We caution that now is a time to understand both shortcomings and opportunities, and to prioritise those areas together that can enable growth and sustainability.’

The data and analysis presented represents the views of 27 Franchisors and 13 Service Providers collected between Monday 15 October and Friday 19 October 2018.

See the full report and a brief presentation.

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