Issued by FASA
From negotiating rental relief with landlords and royalty fees with franchisors to asking for relaxed loan repayments with banks, franchise operators continue their battle to survive the Covid-19 lockdown as trade starts under Level 3 for some franchise sectors but crippling restrictions remain for other sectors.
In the midst of all this disruption, a surprise announcement by government’s Department of Trade & Competition (dtic) is calling for comments on the discussion document relating to the publication of the Franchise Association of South Africa (FASA) Industry Code “the Code” to be submitted to them via email to SSasayi@thedtic.gov.za before the 15th July 2020.
Government Calls for Comments on Industry Code
Welcoming the move after years of lobbying, Vera Valasis, Executive Director of FASA has called on all stakeholders in the franchise industry to take time to read the proposed Franchise Code and respond with their comments and concerns. “Especially in these trying Covid-19 times, the stability, protection and recovery of the franchise industry will be crucial to the survival of our sector and its future growth.”
For many years, FASA has been calling for the sector to be regulated and worked to develop a world class alternative dispute resolution process forming part of the Industry Code (“Code”) that the Franchise Association has used as a guide to ethical business practices since its inception forty years ago. The draft Code was accepted by the Consumer Protection Commission and was subsequently published for comment in the Government Gazette.
According to Eugene Honey of Adams & Adams, FASA’s legal advisor and heading the team responsible for lobbying government, the Consumer Protection Commission subsequently indicated that they were happy with the draft Code document, but indicated that they would prefer for FASA’s Code of Ethics and Business Practice Guidelines to, in some way, also be incorporated into the Code.
“One of the main objectives of FASA is to develop and support ethical franchising. As a result, FASA were only too happy to oblige. What followed was a process of updating, developing and refining the new Code by adding to what was essentially a robust mediation process, additional provisions aimed at imposing on franchisees and franchisors a code of conduct aimed at regulating behaviour within the Franchise Industry and providing for certain matters not dealt with by the CPA.”
Franchise Sector Too Valuable to Crash
Franchising is often seen as a safe business model, as operators buy into an established brand with support from franchisors. About 26% of franchise operators, which make up the largest portion of the industry, are in the fast foods and restaurants, followed by direct marketing at 18%. Leisure and entertainment, construction, personal services, and telecommunications make the smallest segment at 5% and lower, according to research by FASA.
“The longer the lockdown measures are applied across the board, the deeper the loss will be,” says Vera Valasis, Executive Director of FASA. “With eighty percent of respondents to a survey conducted by the association believed that they will not be able to continue to maintain their business beyond July, unless they can be allowed to trade normally, the future of the franchise sector which contributes almost 14% to the country’s GDP is in the balance.”
“Some sectors have weathered the COVID-19 storm much better than others but more importantly it seems business owners who managed to re-open their doors at the first opportunity stand a better chance at long-term survival, even while trading with only limited lines or products and a limited staff complement.”
According to Vera Valasis, it is important that assistance is given to franchisees so that they in turn can keep employees on the payroll and ride the storm in order to grow when the pandemic passes.
“Having a franchisor whose franchisees can rely on becomes even more critical during these times of crisis. Thankfully most franchisors have taken strong leadership steps and have kept their franchised systems informed as and when developments and information is published by the government about the lock-down regulations, financial aid and other funds that can be accessed for financial assistance. They are also the ones that will institute whatever measures are necessary to ensure the safety of their staff and customers.”
Whilst most franchise sectors can now open for business under Level 3 – from Retail to Auto services; from Building, Office & Home Services to Business-to-Business – other sectors such as Childcare, Education and Training grapple with how to boost their online services whilst planning to return to physical teaching with social distancing.
Restaurants Fight Back
Whilst fast food outlets have stepped up their delivery services and can now offer on-site take-out, many are still not generating large enough turnovers to cover costs. Sit-down restaurants remain the hardest hit as they remain closed under Level 3. The government’s judgment that restaurants have the highest potential for the risk of transmission is misplaced, argue lobby groups, especially when compared to allowing groups to gather for other reasons – such as for church services under Level 3.
According to Vera Valasis, who participates in a weekly zoom exchange with her counterparts at the World Franchise Association, restaurant protocols and best practices are being implemented very successfully internationally and would be done locally to include physical distancing, masks and screening that address these risks. “There is the very real risk that large casual dining restaurants may disappear as many owners, if they survive the crisis, would go forward on a much smaller and nimbler basis which is easier to scale down and control according to demand and developing trends. Decisions are also being made about running a so-called ‘dark kitchen’ operation permanently which would seem to be more profitable with less frustration, difficulties and possibly less costs.”
Hair, Beauty & Body Culture Hardest Hit
The continued closure of the Beauty, Hair & Body Culture industry is having a devastating impact on the industry, the salon owners, their employees and dependents, according to Linda Sinclair, Chief Executive-designate for the Sorbet Group. In their appeal proposal to the government, their initial estimate shows that as much as 40% of salons could face closure if not allowed to open under Level 3 and any further extension beyond this date could see the entire industry face potential bankruptcy. The formal hair and beauty industry prides itself in already applying strict hygiene standards and would be in a position to support the social distancing requirements for trade by managing and restricting the number of customers that are in store at any given time.
With so many trained technicians and therapists in the health and grooming sector laid off, many have resorted to offering their services to their regular clients privately (and against the Covid-19 guidelines) to perform procedures and provide services – in many instances earning more than just the commission or basic salary/commission they were used to. This would mean that established salon owners would have to re-train new technicians when they do re-open – another cost that the industry can ill afford.
“So many business owners have come to the realisation that they can run a large part of the business online or virtually, says Vera Valasis “from advertising for potential franchisees, for example, to interviewing potential new franchisees via a digital platform. Site selection could be done on the same basis and those large training facilities may become obsolete as training would most certainly be taken online fully, with the end result being a need for much smaller offices.”
“Commercial landlords may find it tough going when existing office lease renewals come up for renewal. Large regional malls have seen a large drop off of shoppers as there appears to be a developing trend where consumers prefer to frequent their smaller neighbourhood or suburban strip malls. Some customers remain COVID-19 paranoid and feel safer in a smaller local shopping environment where shopping could be done in a short space of time – that is even if they still do shop in person rather than shopping online.”
Interventions such as the R1 billon Sukuma Relief Programme, backed by the Rupert family, and a government-funded SMME relief fund, have reported an overwhelming response from business owners impacted by the pandemic.
Valasis said one of the reasons some of the members of the association did not qualify for emergency funding was non-compliance with Broad Based Black Economic Empowerment (B-BBEE) requirements. The issue of empowerment criteria in the distribution of Covid-19 relief funds has ended up in the courts, with Solidarity and AfriForum launching a legal challenge specifically against the department of tourism. Using B-BBEE scores as a qualifying criterion for relief funding for companies impacted by the lockdown is both unfair and unconstitutional.
“It is also sad to see that even the top commercial banks, who, over the last fifty years that franchising has been a driver of economic growth have benefitted from this business sector, have become even more risk averse when in fact they should be playing their part in assisting struggling businesses get back on their feet.”
While there are so many uncertainties about the survival of loved ones, job losses, financial survival of businesses, duration of the lockdown, the impact of an economy on its knees and many other issues, there is no doubt that the franchise industry will survive this crisis and also, would have learnt from it as well but trading conditions as we know it will change perhaps unrecognisably in the future.
Never underestimate a tough and resilient franchise industry full of talented and highly motivated people who excel during times of extreme stress and undue pressure and who over the years, showed that their innovative thinking and an unrelenting desire for success will help kick-start the South African economy and get the wheels of job creation and consumerism steaming ahead.