No end in sight for growth of SA franchising
It is not so much the resilience of the South African franchise sector during recent hard times that animates Xolani Meva, national business development manager at Business Partners Limited. What really gets him excited is the enormous potential for growth still to come.
It is well known that the local franchising industry has had a good recession. Meva quotes figures from recent research that shows 11% annual growth in the franchising sector not even two years after the financial crisis. Employment figures in the industry then was measured at 480 000. Meva is of the view that it may well be past the half-million mark by now.
But Meva says the real statistics to watch are those that point to the fact that South African franchising is nowhere close to maturity: only 17 franchise classification categories of the local economy have a significant presence of franchising, compared to close to 50 franchise classification categories in countries like Canada.
Solid growth of the industry in years to come is therefore virtually assured. Meva reckons that by 2020, franchising in South Africa could have grown drastically, in terms of the number of outlets of already existing and new franchise concepts and the number of people employed.
Asked about which unchartered sectors of the South African economy show great potential for more franchising, Meva says the scope is very wide, but he points to Canada which has about 46 franchise classification categories. The difference between the franchised sectors in Canada compared to the franchised sectors in South Africa can possibly represent opportunities for local entrepreneurs. In comparing the two countries the obvious differences lie in areas like, furniture/upholstery repair, wine making, consumer buying services, accounting/tax services, etc.
Interesting developments are also taking place inside those sectors that have been extensively franchised, e.g. restaurants. One such trend is increasing investment by both franchisees and franchisors into smaller, more affordable units.
Meva points to the example of fish & chips franchises, which have increased substantially in the last few years. Such franchises tend to be more affordable than the large multi-million rand investments required by the big-name sit-down restaurants. For both the franchisee and the franchisor, the risk is more easily spread between a number of smaller outlets.
With franchisors tending to cap the royalties payable on the revenue generated by these smaller outlets, they can be very profitable for franchisees. Meva predicts fast growth of smaller units in years to come.
The move towards smaller units is probably also driven by the fact that financing available for buying franchises has decreased as the economy struggled over the last few years. However, Meva says that rejection rate of franchise finance applications has not increased as much as that of independent, stand-alone businesses.
Like all other business financiers, Business Partners Limited sees good franchising concepts as a relatively safer business model than independent businesses, and take it into consideration when considering applications to finance franchises.
Business Partners Limited does not have a dedicated franchise fund, and neither does it make wholesale financing available to franchise groups. Rather, it evaluates each application on its own merits according to the usual guidelines of viability analysis and the entrepreneurial strength of the applicant. Roughly between 10 and 15% of Business Partner’s loans are linked to franchising.
Meva says the full effects of the Consumer Protection Act, which introduced new rules for the franchising industry some two years ago, are yet to be felt. His impression is that the South African public is still learning about the law, which protects franchisees as “consumers” against unscrupulous franchisors, and at the same time governs the conduct of franchisees themselves towards their own clients.
“You don’t get the feeling that people who are coming in (to the franchise industry) are overflowing with knowledge in terms of what their rights are,” says Meva. The new consumer protection system put in place by the law still needs to produce its first test cases to show how effective it is in protecting franchisees.
What is certain is that the system has put more of a paperwork burden on franchisors, especially when it comes to disclosing the latest information about their franchise group to their franchise applicants. This has had the unintended consequence of increased costs, and may have slowed down slightly the process of buying a franchise.
A significant player on the franchising scene is the South African shopping-mall and high-street landlord, especially when it comes to retail franchises. Meva says the recession has not led to a significant reduction in rentals, criticised by some as being out of balance in South Africa. Big landlords have shown that they are prepared to stomach increased vacancies in their centres rather than come down with their rentals.
However, Meva says he has seen some softening of rental escalations, which have come down from the almost traditional 10% per year.