Research shows franchise growth

Business owners may be taking strain amid weaker economic growth, but a new survey shows that the franchising sector in South Africa remains relatively strong — generating R302-billion for the economy last year and employing more than 300 000 people.

The survey, conducted by Research IQ for the Franchise Association of South Africa (Fasa) and released in August, showed that for every one franchised unit that closed last year, another three opened their doors.

The survey also found that almost half of all franchisors have been in operation for more than 12 years.

Another strong indication of the sector’s growth is that it added about 3 700 new franchised units in the last financial year, bringing the total number of franchised stores in South Africa to more than 30 000. Most of these are in Gauteng.

The province has nearly three times as many franchised units as the Western Cape and four times as many as KwaZulu-Natal.

The number of local franchises grew by 21% between 2010 and 2012 to 668 franchises, and 90% of them are developed locally.

Many franchisors have also expanded throughout Africa and to Australia, Europe, the Middle East and the US.

Fast food outlets
Although franchising is active in about 17 business categories in South Africa (compared with more than 70 in the US), the survey found that the sector, once dominated almost exclusively by fast foods and restaurants, is becoming more diverse.

Fast food and restaurants still make up the highest number of franchised units in South Africa – accounting for about quarter or 22% of stores – but a range of other sectors are growing fast.

Retail accounts for 20%; business-to-business services for 10%; building, office and home services for 9%; automotive products and services for 8%; and childcare, education and training for 8%.

Derek Smith, chairman of Fasa, said the growth of franchising in South Africa has been “phenomenal” and “continues to play a leading role in fostering entrepreneurship in small business development and in job creation”.

Researchers found that the 217 franchisors that the survey sampled, had opened 1 205 stores under new franchisees that signed up in the last financial year — compared with just 341 units closed down during this period — a net gain of 884 stores.

This translates to three new stores opened for every one store that franchisors closed. Fast food outlets and restaurants continue to make up the highest number of stores opened. They account for 356 (30%) of new stores opened followed by retailing with 254 new stores.

In contrast just 23% of stores that closed were fast-food outlets, compared with 13% in the childcare, education and training sector, and 10% each in the business-to-business services and the real-estate sector.

Those in the franchising sector often argue that the sector could prove a key driver in growing the small business sector and creating jobs and this latest survey may add weight to their argument.

Just under half (46%) of franchisors sampled reported that they had been in business for more than 12 years, with 75% having been in business for more than six years.

This contrasts with the high failure rate of small businesses, with Minister of Trade and Industry Rob Davies revealing in May that five out of seven small businesses in South Africa close their doors within a year of opening.

Franchisors are also optimistic about future growth, with 88% saying they believed they would see growth. Only 4% predicted a decline and a further 8% were unsure.

When asked what the main challenges were to running a franchise, most franchisors cited finding the right franchisee (20%) with the right skills (20%) and staffing (19%) as their biggest concerns.

The 2012 survey puts the sector’s contribution at 9.7% of gross domestic product (GDP), significantly lower than the 11.8% contribution that the franchise service provider Franchize Directions’ survey reported for 2009/10.

Research IQ’s Margaret Constantarias believes that the difference in GDP contribution by the sector between the 2012 survey and Franchize Direction’s survey might be linked to the different methodologies the two studies used, adding that Statistics SA does not collect specific figures on the franchising sector.

The difference could also be down to the 2009 recession, which may have temporarily raised the sector’s contribution because it remained one of the few well performing sectors during that year.

However, the 2012 survey does point out that franchising’s total share in the finance, real estate and business services; in the wholesale, retail and motor trade; and in catering and accommodation industry sectors (at 28% of R1.06-trillion) remains significantly lower than elsewhere in the world, meaning there is still significant potential for growth in franchising.

Data from the 2010 Franchize Directions survey shows that the percentage of black franchisees has fallen from 33% of all franchisees in 2010 to just 20% of all franchisees in 2012.

These figures were not contained in a Fasa press release on the survey, but Constantarias again pointed out that the difference between 2010 and 2012 figures might be attributed to different sampling methods used.

Commenting on the data about black franchisees making up only a fifth of all franchisees, Fasa executive director Vera Valasis said the central challenge remained access to finance for people who wanted to buy franchised units.

Mojalefa Mohoto, the department of trade and industry’s chief director for small business development, agreed. He pointed out that funding from banks and development finance institutions played a crucial part in increasing the number of black franchisees.

Mohoto said the department was working on a micro-franchising model with six business owners in the Western Cape to develop the concept.

This could include franchising tour operators or solar-water heater installers, for example, and would make franchised stores more affordable as the cost for such units would be under R500 000.

Two investments by the Development Bank of South Africa’s Jobs Fund could help more black entrants to enter the franchising sector.

One of these is a R110-million investment by the fund into Business Partners SA Franchise Warehouse Fund, which will be disbursed over three years. Another is a R17-million commitment to the Hot Dog Café to help new franchisees buy franchised units.

SA Franchise Warehouse Fund co-director Dewald Theron said his fund, which is administered by Business Partners, will allow franchisees to commit 20% of the costs to buy a franchise rather than the 50% one usually has to contribute to buy a franchise.

The fund is aimed at assisting franchisees who qualify for new businesses, but whose own cash or collateral contribution does not meet commercial funding criteria.

Funding would only be available for franchise business systems that have been accredited by SA Franchise Warehouse in terms of the requirements of the fund and Theron said the fund is currently in the process of accrediting franchises.

To qualify for funding, franchisees would have to attend a five-day business seminar and also take a test to ensure their suitability for funding.

The fund is currently accrediting franchises and Theron said he expected the first funding to be available to franchisees by the end of this year.

This feature has been made possible by advertisers. Contents and photographs were sourced independently by the Mail & Guardian’s supplements editorial team.

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