By Sasha-Lee de Bod

The recent downgrade status will have a rippling effect on consumers and businesses. According to what we have noticed, the economic conditions are going to get tougher in the months to come and businesses will struggle. Even though smaller companies will struggle to keep afloat there might be buying opportunities for those who want to expand into other sectors.

The current instability of our country will have a less desired effect on global investor confidence thus having a negative impact on mergers and acquisitions.

Financial Projections

South Africa’s current status will have a tremendous effect on businesses, households and consumers. The downgrade will lead to an increase in inflation and interest rates as well as stricter credit access – which will have a direct impact on any business and their margins e.g. franchisees in the current economy are probably paying off their investment from a financial institution or new franchisees who want to invest in your brand will have difficulties accessing the necessary funding. Both these scenarios will require adjusting and monitoring of your financial projections to make sure return on investment will be adequate.

Pricing strategies

Decreasing Rand value will influence the product and service offering especially if items need to be imported and exported – price strategies will need to be investigated.
Expenses are accumulating and staffing might become a big issue at franchisee level.

Outlook for the franchise sector

Due to slow economic growth and an increase in unemployment the status downgrade might have a positive effect on the franchise environment as individuals, entrepreneurs and business owners are looking for opportunities to progress, develop and enhance social development.

The downgrade has been anticipated for quite some time, so franchisors have been keeping it in mind and preparing for the uncertainty that lies ahead. Now that it has finally been announced it might cause any franchisee to want to make drastic changes – this is where the franchisor will need to step in and assist their network by offering additional support

8 Things you can do

1. Take action and plan ahead

  • Your role as the franchisor is to continuously research the market environment and prevailing trends and thus plan accordingly. When you anticipate a change in the internal and external environment you need to take action.
  • We now know the recent downgrade status is going to influence the franchise network and you need to support and take care of your franchisees to make sure they have the necessary tools to survive the tough times ahead
  • You will need to conduct marketing research to find out how the current situation influences your competitors and your franchisee’s customers
  • Keep on innovating and improving the business model – business practices need to be streamlined to simplify operations and the ability to cut expenses, however this should not decrease the quality of a service or product

2. Refresher training will be critical

  • Training can include topics such as how to improve your cashflow, improving profitability, managing employees, how to reduce your vulnerability and increasing sustainability and sales
  • Franchisors need to ensure that franchisees have the right skills to successfully manage the business in difficult times

3. Intensify national marketing initiatives

  • The first expense companies usually cut back on when things are tough is the marketing budget. Contrary to belief, marketing spend should be increased in tough times to get more traction and brand awareness. By emphasising marketing initiatives, the franchisees will have a better chance of increasing turnover and gaining consumer confidence
  • Marketing your franchise opportunity in these tough times will give people the opportunity to start their own business and secure employment for other people.
    Evaluate marketing tactics to ensure effective results

4. Perform financial health checks on your franchisees

  • Analyse the financial position of franchisees to determine their current position and performance of their business. When field service consultants review financial statements, they will be able to analyse financial ratios and see what impact the downgrade has on the current business, this will include sales analysis, inventory and any expenses that are involved in the operations e.g. petrol, interest rates, packaging, etc.
  • Help franchisees reduce their vulnerability in term of operating costs, debt levels, cash flow, etc.
    The franchisor and franchisee should work on a realistic budget

5. Monitor and set targets

  • It is important to select KPI’s and set targets for franchisees in these tough times
  • Progress and results can be monitored and benchmarked to indicate franchisee and network performance – this will allow the franchisor to identify franchisees that are struggling and need intensive help to recover and stay afloat.

6. Adopt risk management strategies

  • Tough times are more likely to expose your franchisees’ businesses to risk and the g areas that can be focused on include:
    • Expanding customer base and not just relying on a small number of customers
    • Negotiate better rates from suppliers or increase nominated supplier list which franchisees can approach
    • Selling on credit should be minimised and stricter policies should be implemented at franchisee level – if possible cash transactions are preferable
    • Research and development for product and service offering to stay relevant
    • Review price strategy and margins – but avoid excessive discounting on the franchisees behalf
    • Develop staffing strategies. It is important to advise franchisees to think long term and avoid any employee layoffs, recruiting new employees when the situation changes will be more expensive and can put the franchise reputation at risk.

7. Motivation is key

  • Make sure you have the right infrastructure and people to get the entire franchise network through tough times
  • Use recognition and awards/rewards for franchisees to keep them motivated, this can be linked to the KPI’s and targets set for franchisees
  • Maintain a positive franchise environment – leverage of the franchise representative council

8. Franchisee recruitment

  • With regards to franchise documentation, it is important to reflect accurate financial projections and ROI for potential franchisees. The franchisor will need to take variables into consideration that might be affected by the downgrade and adapt projections
  • Access to finance will be more difficult for people applying for loans from various institutions. The franchisor will need to discuss options with the institutions and disclose all the necessary information with them. The unencumbered funds required might need to be adapted to ensure that a potential franchisee will be able to afford your franchise.
Franchising Plus