by Simon Lord & Nathan Bonney
last updated 16/09/2020
by Simon Lord & Nathan Bonney
last updated 16/09/2020
What do the expected recession and redundancies mean for franchising? Simon Lord and Nathan Bonney share some insights
Over the last 10 years or so, New Zealand has had a strongly-performing economy with low unemployment. Although many franchises have grown well as a result, the economy had a negative effect upon franchisee recruitment in some sectors. Increasing property prices made it attractive for people to invest in property rather than in themselves.
Add the fact that business confidence has been surprisingly low since the last election, meaning that people in well-paying jobs have been reluctant to make the jump into self-employment, and you can see why surveys have consistently ranked ‘availability of good franchisees’ as the number one challenge for most franchisors. Lower immigration levels haven’t helped, either.
Well, now all that looks set to change. Traditionally, franchising has always performed rather well during recessions.
For good franchisors, recessions offer a chance to expand: new locations become available; old competitors suffer; and there is a larger market of potential franchisees and staff as people are moved out of declining industries.
For well-supported franchisees, being part of a franchise group offers benefits that an independent business can’t: buying power; branding; support; new product or service development; and many other factors – not least, the ability to share ideas and opportunities with fellow franchisees. Truly, there is strength in numbers.
And while large companies struggle to reduce overheads and reorganise, or overseas companies leave the market altogether, the flat and localised management structure which most franchises enjoy means that they are well-placed to grow.
Back to the future
The recession following the 2008 Global Financial Crisis was unusual in New Zealand because unemployment did not increase as much as had been the case in previous recessions. The next few years look more likely to follow the normal post-recession pattern, with more growth opportunities and more financial stimulus following the inevitable initial pain.
Tragically, some franchisees (and many independents) will not have sufficient financial reserves to survive an extended downturn and their businesses will close or be resold. This means that there will be a number of otherwise viable franchised businesses which come on the market and represent good opportunities for those in a position to buy. Buyers will also have a choice of new opportunities and new sites.
The fact that most economists are currently tipping property values to avoid a major plunge in values, or to suffer only a temporary dip, means that people with property will still have equity against which to borrow. In addition, record low interest rates make it possible to borrow more than might otherwise have been the case (although they would be wise to build in a safety margin for rates to increase in the future).
Who’s going to buy?
So who’s going to buy, and where is the biggest growth going to come from? Well, redundancy is going to be a key factor. While it will affect people across all wage groups, investment levels and industries, a lot of jobs are going initially from the retail, hospitality and tourism sectors. These are people used to working long and sometimes unsocial hours, as business owners do. They also have people and communication skills, which has often been a challenge in franchise recruitment in recent years.
Some won’t have a lot of savings, so home-based and mobile franchises and lower-investment opportunities will appeal. At the same time, there are others – pilots, managers, logistics experts – who will want white-collar or business-to-business franchises.
Another driver will be two-job families afraid of redundancy who want to diversify risk by one being self-employed in, say, the childcare, leisure or education field. Following your passion can be very rewarding in many ways, but anything involving compliance issues is difficult and costly to do as an independent – making a well-developed franchise much more attractive.
And franchisors face a new challenge in the form of a group who have rarely entered their orbit before as potential franchisees – millennials. It’s only eight years since a demographics professor told a Franchise Association conference that our ageing population meant that millennials would never be short of a job. Now they are, and owning their own business is one of the options.
Wherever they come from, it’s important to recognise that this will be Plan B for many people. They might have dreamed of buying a business before but not expected it to happen, or not intended it to happen right now. As a result, they may have good skills but no business experience, which makes a franchise very attractive.
Crossing the border
Immigration may have come to a halt for now, but the number of New Zealanders returning from overseas is increasing again. They will bring valuable skills and experience in many fields, but the lack of suitable jobs (or similar salaries) here may force them to look at business opportunities. Some of those who return will undoubtedly head back to complete their OE when things settle down again, but many will realise, ‘We don’t know how lucky we are’ and decide to stay.
New Zealand’s reputation as a ‘safe haven’ is sky high right now, so when the borders open again we can expect immigration to rise again. Just how immigration policy will be developed remains to be seen, but it can be assumed that migrants with investment capital will be high on the list. In order to meet visa requirements, they will probably have to show how they will create jobs, so larger-investment franchises such as accommodation and hospitality will be more attractive.
Already in the market
There are two other sources of franchise growth. The first is conversion franchising, where existing independent business operators join a franchise in order to take advantage of the brand, buying power and systems they need to help them meet new challenges. That can bring franchisors good new sites and good new people – although training them can have its challenges!
And existing franchisees may see the opportunity to become multi-unit operators. Good franchisees may already have the skills to turn around an under-performing or under-funded outlet, or see the opportunity in a new location. Beware though – multi-unit doesn’t suit all business models or all franchisees.
Appealing to buyers
With lots of potential franchise buyers in the market at last, the challenge for franchisors is to attract, recruit and train the right people to build successful and sustainable businesses of their own.
In terms of making the opportunity more attractive to potential franchisees (and their advisors), some areas to consider are:
- Reducing ingoings. Fit-outs, equipment and training all need to be designed to offer better value for money.
- Lowering initial fees. While ongoing fees may need to be kept at the existing level to fund support services (which will be more in demand than ever), is it possible to lower or spread out initial fees? It might reduce the contribution to costs from franchise recruitment, but if it helps bring the right people on board for the long term, it might be an investment worth making.
- Alternative funding options. Where good potential franchisees are struggling to come up with the necessary equity, what other options might be available? Joint ventures and various lease-to-own schemes have been used by many franchisors, while vendor capital (where the outgoing franchisee leaves some money in the business for an agreed period) is also possible with resales. Such options do have to be carefully considered with specialist franchise advisors, though, as any form of finance reduces the profitability of the business.
- Work or income guarantees. Offering some form of guarantee can provide potential franchisees with some certainty when they first move into self-employment. However, such schemes can lead to friction if the terms are not clearly understood by all parties (see page 16).
- Paid training schemes. Rather than a guarantee, some franchises provide paid training periods which help the franchisee cover the gap between leaving employment and the time their business starts to generate income.
- Developing additional revenue streams. The pandemic period accelerated the acceptance of online shopping. Some franchises have developed online sales platforms that reduce overheads and share revenue with franchisees who deliver the product or service in their area.
Ready for the rush
For all the above reasons, we are already seeing a big increase in enquiries for franchises in certain sectors, and that seems likely to continue and grow in the coming months.
Franchisors therefore need to be prepared to handle greater numbers of enquiries than they have been used to in recent years, and to have the systems and processes in place that both help them identify good prospects, and ensure that all candidates receive accurate information in a timely fashion to help them make informed decisions. Good record-keeping and management of the recruitment ‘funnel’ is also vital for legal reasons.
While good recruitment processes will identify the right people, they will need to be matched by excellent training and support programmes to help new franchisees get up to speed and profitability as quickly as possible – whatever their background.
It will be the franchise systems that adapt best which will emerge from this period stronger than ever with a pool of committed, talented, well-resourced franchisees.
This article was first published in Franchise New Zealand magazine Year 29 Issue 2. Access the free digital magazine here.
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