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Franchise sector turnover reaches $20 billion

November 12, 2012

Franchise sector turnover reaches $20 billion

The contribution of the franchising sector to New Zealand’s economy has been measured for the first time in nearly a decade. A new report estimates the sector has annual turnover of between $19.4 billion and $21 billion, and employs 101,800 people.

Franchising New Zealand 2012, a survey conducted by Massey University in collaboration with the Griffith Business School in Brisbane, found the sector has shown resilience during difficult economic times, but there is scope for the industry to innovate.

Massey University’s Dr Susan Flint-Hartle says, on the whole, franchise businesses have been able to increase their levels of turnover, although there have been marginal decreases in size and profitability since the last survey in 2010.

“That is a reflection of the economy – the effect of a very high dollar, rising commodity prices, and the ongoing impact of the global financial crisis and the Canterbury earthquakes,” she says.

“Franchise businesses are a microcosm of the SME sector as a whole, which has reduced by nearly two per cent over the past two years. But around $20 billion in turnover is still a significant contribution to the New Zealand economy. Franchising remains a very effective way of growing a business and offers many people a chance for supported self-employment so we cannot underestimate the role it plays.”

While the past two years has seen a net growth in the number of franchise systems in New Zealand, there has been a marginal decrease in the number of franchisee units within those systems, especially in the retail sector. Over half of survey respondents reported increased sales, but a quarter also said their overall profit margins had declined.

“It’s an extremely competitive environment at the moment, and 60 per cent of franchisors said they were forced to spend more on marketing to attract dwindling levels of business,” Dr Flint-Hartle says. “Although 80 per cent said their franchisees were operating profitably, that still leaves a significant number of strugglers.”

Dr Flint-Hartle also identifies a number of areas where franchisors could develop their businesses, including better selection criteria for franchisee recruitment, moving into online sales, social media marketing, and sustainable business practices.

“Franchisors are always complaining that their major issue is getting good people as franchisees, but they don’t always appoint suitable people with at least some proven business skills and management experience,” she says. “They choose people for their passion, or their integrity, which is understandable, but it doesn’t always translate into running a business successfully. Franchisors bear some responsibility in this important area.”

Dr Flint-Hartle suggests that in many cases franchisees are chosen for their ability to conform, while franchisors could do well to encourage and provide opportunities for businesses and individuals to innovate.

“For example, only one-third of businesses sell product and services online, and the use of social media is not as developed and sophisticated as it could be – it's an issue of cost and know-how and we are slipping behind Australia in this respect,” she says.

“There is also little evidence that franchise companies have increased the sustainability of their operations since our last report. At a time when businesses are really competing for custom, I would think sustainable practices could provide a valuable competitive advantage in attracting customers.”

The New Zealand franchise sector – key statistics:

• New Zealand has 446 franchise brands, 88 per cent of which are home-grown systems.
• Since the 2010 survey, around 27 franchise systems have gone out of business, but there has been a net growth of 23 franchisors.
• There are an estimated 22,400 franchisee businesses operating in New Zealand, making up five per cent of the country’s small and medium-sized businesses.
• The total number of franchisee businesses has contracted slightly (down from an estimated 23,600 in 2010).
• The annual turnover of the franchise sector is estimated to be between $19.4 and $21 billion.
• Over the past two years, the total number of people employed in the franchise sector has increased from 80,400 to 101,800, but almost 10 per cent less are now employed in full-time positions.
• 23 per cent of franchisors have entered international markets, predominantly in Australia.

Franchising New Zealand 2012 is the second report in a biennial series aimed at providing a longitudinal perspective of the development and impact of the sector. Data for the report was collected in July and August 2012.

The principal sponsor of the survey is the Franchise Association of New Zealand, with additional sponsorship from Westpac, The Franchise Coach and Hayes Knight Accountants.

A copy of the full report will be available for download from Tuesday November 13 at: http://economics-finance.massey.ac.nz/Franchise/FNZ2012.pdf

ENDS

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