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Melissa Ontong - Franchising Plus

By Melissa Ontong

We all sigh a collective disgruntled sigh when we hear on a Thursday afternoon that prime lending rate has been increased by the South African Reserve Bank. But what is the impact of this on you as a franchisor?

Mainly you have your own cash flow to consider because increased lending rates equates to increased loan repayments on any interest bearing debt your franchise company may have.

Franchisors will also need to be cognisant of the fact that their franchisees’ cashflow will similarly be negatively impacted by having to service larger loan repayments on establishment costs or revamps that have been financed. Here the franchisor should try to assist by negotiating the best prices on franchise setup costs items, such as machinery and equipment required to setup or revamp an outlet (the cheaper the capital requirements, the lesser the interest bearing loan that may be required). Another economic factor is the deterioration of the Rand. Franchisors should review set-up costs frequently as this may have an impact on the price of imported equipment. Franchisees could discover that the set-up cost anticipated becomes much higher and this may put additional pressure on a new franchisee.
Franchisors should assist franchisees to try save up funds wherever possible for upcoming revamps. The more money a franchisee has saved up, the less interest bearing debt they will require in order to cover the costs of a revamp for their outlet.

Increased interest rates may have a negative impact on franchisee recruitment as potential franchisees may be deterred from opening a new business by potentially higher loan repayments.

Newly established franchisors will battle to secure financing for franchisees due to the issue of risk pricing. Franchisors that don’t have well proven concepts and brands are seen as more risky by financial institutions and therefore franchisee loans are priced at higher interest rates to mitigate any perceived risk. One way of mitigating risk is to enter into a buy-back agreement with the bank, but not all franchisors can afford to do this.

Another important factor for franchisors to consider is that waning household disposable income may lead to lower franchisee turnover, which of course should cause great concern to the franchisor. The challenge would be for franchisors to come up with a clever value offering which satisfies the consumer and keeps a healthy balance of growing turnover and profitability for franchisees. For example a common trend is to have a loss-leader product which is not profitable for the business to sell, however it drives traffic into the franchised outlet and ultimately drives sales of other products. Such is the case where a bakery café offers bottomless coffee, however more often than not a customer go for the coffee but have a croissant with that coffee.

Franchisors should be watching the broad economic environment and tweak their business models where needed. Site selection in retail is more important than ever, mediocre locations in a difficult trading environment would hinder any franchisee from trading successfully.