Franchising Outlook More Positive

Franchising Outlook More Positive, But Concerns Remain

Wednesday 7 April 2010 - The inaugural quarterly survey of New Zealand franchising confidence finds a net positive outlook toward business conditions, franchisor growth prospects, and many key contributors to franchise system growth. However, there are some worrying signs. In particular, franchisors and service providers share concerns around access to financing, franchisee operating costs and franchisee profitability.

Franchisors are positive about forthcoming general business conditions (net 39%). This compares with both the March BNZ Confidence Survey (net 43%) and National Bank Business Outlook Survey (net 43%). Franchising services providers are slightly less positive about business conditions for franchisors generally (net 34%).
Franchisors are very positive about forthcoming growth prospects for their organisations (net 63%), compared with service providers perspective for franchisors generally (net 32%).
A worrying net 5% of franchisors expect access to financing to deteriorate over the coming year. Service providers are marginally more optimistic (net 8% positive). This finding is problematic given access to capital has been widely regarded as a key concern and constraint to franchising growth for some time.
Franchisors are, on balance, positive about forthcoming access to suitable franchisees (net 17%) and staff (net 29%) – two important growth drivers . Service providers are also more buoyant regarding franchisee and staff recruitment with a net 28% and 40%, respectively.
Franchisors (net 53%) and service providers (net 48%) are particularly positive about finding good locations – where applicable.
Franchisors are, encouragingly, very positive about prospects for sales levels per franchisee (net 59%). Service providers were slightly less buoyant for franchisee sales levels generally (net 28%).
Worryingly franchisors (net -2%), and service providers (net -52%) in particular, expect franchisee operating costs to be higher over the next 12 months.
Comparatively, franchisors are more positive about franchisee profitability, with a net 41% expecting franchisee profitability to improve – presumably in relation to stronger expected sales. On balance (with a net -12%), service providers expect further deterioration in franchisee profits over the coming year.
Franchisors and service providers are generally cautious about demand growth, expecting a slow return to previous levels. Demand comments are sector dependent, with some business activities like children services, education, health & wellness and home insulation experiencing strong growth. Many other business sectors continue to experience soft demand and difficulties trading. However, general sentiment for future (i.e., next 12 months) business conditions, franchisee sales levels, and franchisor growth are more positive, as reported.

The current environment is providing some franchisors with certain advantages, including cheaper rent, cheaper advertising rates and special one-off purchasing opportunities. However, franchisees face increased operating costs generally and, unable to increase prices, this is expected to place further pressure on already challenging franchisee profitability levels.
Access to capital remains a key concern for many – with some very strong comments provided. Bank finance remains tight – lending criteria are tougher – placing pressure on refinancing, franchise re-sales and Greenfield development. Access to finance is a key driver of franchising activity and it is therefore crucial for the sector that conditions improve.

Some franchisors generally note difficulties finding suitable franchisees. Apart from issues relating to financing, lack of prospective franchisee confidence in the economy appears to be an important factor contributing to problems in this area. Some franchisors, however, are noticing improvements in franchisee recruitment and have started 2010 strongly. Overall, franchisors do expect this area to get marginally better over the next 12 months. To date, redundancies, as a source of prospective franchisees, have not materialised as expected. There is likely to be strong competition for good franchisee candidates.

Overall, conditions remain tough for franchisors and franchisees alike. Those franchise networks that are small, poorly structured and/or managed will continue to find trading exceptionally difficult. Some franchisors are taking active steps toward reviewing and improving their network structure, management and health.

Franchising Confidence Index Background
Franchize Consultants’ Franchising Confidence Index is a quarterly survey of 300 New Zealand franchisors and 90 specialist service providers (e.g., consultants, banks, accountants, lawyers and publishers) to the franchising community.

The Franchising Confidence Index represents confidence in key measures critical to the success of franchising in this country by reporting attitudes toward general business conditions, as well as key franchising growth determinants including access to capital, suitable potential franchisees, staff and locations. The Franchising Confidence Index also covers franchising health attributes and outcomes by exploring franchisee sales, operating costs and profitability, and franchise system growth prospects.

The data and analysis presented represents the views of 40 franchisors and 24 service providers collected between Monday 29 March and Thursday 1 April 2010. Findings from both groups are reported separately.

Note, respondents are asked whether they expect conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’

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