The Market

last updated 23/10/2019


Confidence down – better to come?

last updated 23/10/2019


24 October 2019 – Things will look worse before they look better, says an economist, but the latest survey suggests franchisors are not yet convinced

At a recent Franchise Association breakfast, Westpac senior economist Michael Gordon said that the economy ‘will look worse before it gets better’ and warned franchisors that ‘talk about downturns will intensify and you can expect alarmist headlines until March 2020.’ He pointed out that there is lots of economic stimulus already in place – it will just take its time to work through. Lower interest rates, he suggested, don’t encourage businesses to borrow but do affect asset values and willingness to spend. This means the upturn will be consumer-led.

Nick Fletcher of MYOB added that their own survey suggested that the hospitality sector was expecting revenue to increase over the next 12 months.

This message appears to have been lost on many respondents to the latest Franchising Confidence Index survey, which saw dips in confidence over several areas measured compared to the increases it recorded in the July quarter. In fact, franchisor sentiment towards general business conditions dipped to its lowest-ever level at net negative 32%, reflecting similar gloomy outlooks from the ANZ Business Outlook (negative 54%) and NZIER (negative 35%) surveys.

However, sentiment from franchise-specialist Service Providers (such as bankers, lawyers, accountants, consultants and brokers, who perhaps see the wider picture) was boosted at net 21%, up from a previous net 0% in July.

Other areas also fell, with franchisor growth prospects, access to financing, access to suitable franchisees, franchisee sales and profitability levels falling most among franchisors. Service Providers were also net negative for availability of suitable staff operating costs per franchisee and franchisee profitability levels, although all three areas showed improvement from July.

Availability of suitable locations, suitable staff and operating costs per franchisee remain positive while softening from the last quarter.

Comments

As always, franchisors and service providers were asked for qualitative responses. Comments received indicate the recent changes to some laws are making an impact on small businesses now.

  • Minimum wage increases are hurting - creating difficulty as price increases not being accepted by market. Compliance costs significant - potential to drive out lower quality suppliers, so not necessarily a bad thing.
  • The biggest issue we are facing is access to good staff, it's becoming very difficult to find and recruit good staff.
  • New immigration laws are making franchisee and employee recruitment close to impossible.

(It may be worth noting that Michael Gordon commented that job advert numbers are currently slowing, suggesting it should become less hard to find workers, while wage growth would affect people’s willingness to spend – Ed.)

  • The downturn has been quite sudden. Costs are up mainly because of wages and we have had to compensate by reducing hours. Prices are also under pressure because of the weak NZ$.
  • Sadly, it's election year coming up which means that the Opposition will be talking everything down in a bid to get elected and business confidence will probably not pick up. Election years always dampen franchise recruitment prospects.
  • Home services – plenty of work available but recruitment remains the biggest challenge.
  • Tough market conditions but should see slight improvement over the next year. Good operators will continue to perform well.

Conclusions

The quarterly Franchising Confidence Index is conducted by Franchize Consultants.

The October Index indicates growing challenges for franchisors and franchisees alike,’ says Dr Callum Floyd, the company’s managing director. ‘Key features were challenges with demand, new regulation and policy decisions, competition, rentals and finding both franchisees and staff. Some companies noted growth but were constrained by recruitment and concerned with margin compression.

‘The operating environment and associated outlook is clearly tough – and many businesses have been further impacted by e-commerce and changes with digital technology generally.

‘While the sentiment levels may be in line with other New Zealand business surveys, we suggest franchisors should, if not already, be seriously considering taking any opportunity to review and improve their franchise business model, associated franchise structure and management. Clearly, changes that can improve the outlook for franchisee and franchisor value creation and long-term sustainability are needed.’

About the Index

The Franchising Confidence Index has been conducted regularly since 2009 to measure areas critical to the success of franchising in this country. The full report can be read here.

The data and analysis presented represents the views of 24 franchisors and 14 Service Providers collected between Monday 14 October and Monday 21 October.

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