Signs of stability, steady growth in franchising sector

Christo-Botes-webNothing can seem to get the franchising industry down in South Africa – certainly not the sluggish economic growth of the last few years, says Christo Botes, executive director of Business Partners.

Now standing at 11% of GDP, it has become a well regulated sector that cannot be ignored. Botes quotes statistics that show signs of stability in its very core. No fewer than 46% of all franchisors in South Africa are older than 12 years and a whopping 75% is older than six years.

Apart from stability, the figures show continuing growth. In the financial year ending 2013, South Africa had 668 franchise concepts, up by 21% since 2010.

The sector has also seen a net gain of at least 884 franchise outlets, with 1205 new ones opening up, against 341 that have closed down in the same period. This brings the total number of franchise branches in South Africa to more than 30 000.

All indications are that the growth of the industry is by no means close to tapering off. Botes points to the fact that franchises have been developed in 17 different business categories, whereas a country like the United States, which is arguably on the forefront of franchising, no fewer than 70 business categories contain franchises.

Construction franchises have just recently emerged in South Africa, and another relatively new field for franchise concepts, education, has surged to 8% of the franchise sector. This growth is part of private sector’s much needed response to the education crises in South Africa, says Botes, and ranges from franchise concepts for childcare through to colleges that position themselves somewhere between schools and Further Education and Training colleges.

Many of the new franchises were hard to imagine a few years ago, but seem a natural franchise concept once they get going, making one wonder why they hadn’t started earlier. One of those that caught Botes’s eye is Sign-a-rama, which produces anything from PVC banners, decals, and illuminated signs.

Although many of the ideas for new types of franchises may come from more developed markets overseas, research shows that 90% of franchise concepts are still home-grown, notwithstanding the entry of high-profile international players such as Burger King.

The original industry to pioneer franchising in South Africa, the food sector, remains the largest chunk of local franchising at 22% of the market, and surprisingly, remains the fastest growing sub-sector. This is despite the fact that the fast-food and restaurant industry took a significant knock when consumer spending dived after 2008.

Botes says the statistics show that the food industry cannot yet be described as over-traded by franchises, as the percentage of food franchises among those that have closed down is very close to its market share, at 23%.

Ironically, despite the growth of the franchising sector, the financing of franchises has fallen as a percentage of Business Partner’s loan book. Botes explains that it is probably due to the banks increasing their lending to franchises, and certainly not because Business Partners is stepping away from the sector.

The banks act as first-tier financiers to the franchise industry, which is considered slightly less risky than independent businesses. Because Business Partners, as an entrepreneurial risk financier, continues with its robust lending activities to non-franchise businesses, the ratio of loans to franchise businesses tend to fall in Business Partners’ loan book.

An indicator of Business Partners’ enthusiasm for franchising and commitment to empowerment was the recent launch of its Franchise Fund, aimed at giving previously disadvantaged entrepreneurs access to franchising. Many financiers as well as franchisors insist that new franchisees put down at least 50% of the start-up costs of a franchise to guard against the risk of being over-burdened by debt. This has made it increasingly difficult for under-resourced entrepreneurs to gain a foothold in the sector.

The fund of more than R100m will aim to get at least 125 first-time, previously disadvantaged franchisees started. Business Partners will finance 50% of their start-up costs, the Government’s Jobs Fund 40%, and the entrepreneurs themselves will only have to come up with 10% of the start-up capital.

Only reputable franchise systems that are fully registered with the Franchise Association of South Africa will be considered for the Business Partners Franchise Fund.

It is estimated that apart from empowering dozens of entrepreneurs to stand on their own feet, the fund will create at least 700 jobs – a small but significant contribution to the 300 000 South Africans already employed in the dynamic sector.