Charlene Smith
South Africa has one of the fastest growing franchise markets in the world and with retrenchments on the increase, interest in the sector is growing.
Deputy Minister of Trade and Industry Phumzile Mlambo-Ngcuka said franchising had proved to be successful in 65 industries in 100 countries around the world and would continue to grow at more than 30% a year over the next few years in South Africa.
As it was particularly important as a job-creation tool and to the development of small, medium and micro enterprises, government had promised its support.
A United States Department of Commerce 10-year study found that the success rate of franchises was 85%, while the failure rate of independent start-ups was 90%. In Australia franchises have been found to have a 200% greater chance of success than independent small businesses.
Eric Parker, founder of Nando’s and head of franchising consultants Parker Gordon Associates, said a range of schemes were being initiated to assist the successful development of franchises.
“Financiers are setting up equity participation funds and there are guarantee schemes in place. The success of a franchised business is largely based on the skills transfer between the franchisor and its franchisees.
“This includes training and start-up support, ongoing business support services, product development and marketing on behalf of the group.”
Elana Koral of Parker Gordon said the South African market was lucrative, with 88% of franchising concepts in 1995/96 being developed locally. But she cautioned those who thought franchising was a get-rich-quick opportunity that many factors, for example site selection, are crucial to the success of the business.
Mlambo-Ngcuka said successful franchises rely on proven concepts and a mentorship that lasts through the franchise agreement.
Government is lending assistance in the form of credit guarantees through banks from Khula (a Department of Trade and Industry company) to a maximum of R1-million, or direct financing in the form of equity and loans by the Independent Development Corporation to the value of more than R200 000.
In addition, another support operation, Ntsika, will establish franchise support centres in conjunction with the Franchise Association of South Africa.
Mlambo-Ngcuka said her department is also looking to facilitate low-cost entry franchises: “These typically require investments of between R20 000 and R50 000 and, depending on the nature of the franchise, usually enjoy a 20% return on investment. This implies a 15% to 25% bottom-line profit, depending on turnover.
“Phenomenal growth is projected in many of these franchises with the investment paid back within six months and growth doubled each year thereafter, depending of course on how parties work to make the franchise succeed.”
However, she said there was not enough regulation to halt fraud and protect franchisees from being “ripped off”. Nonetheless, 75% of South African-based franchise operations are looking to expand into other African countries.
Franchise operators Peter Kramer and Simangele Mngomezulu of GlowGetters, a contract cleaning group, said there are a number of reasons why franchises fail.
These include franchisees “wanting to have the business but not getting involved in detail; a poor attitude toward employees; complacency about the existing size of the business and profitability; and lack of interest in quality, service and customers.”