All franchisors and entrepreneurs need to be agile, adaptive, and resilient in the current economic environment to survive and thrive.
Nedbank hosted a panel discussion aired on CNBC Africa on franchising, focusing on the evolution of the franchising industry. Conducted by Godfrey Mutizwa Chief Editor CNBC Africa, the panellists included industry experts such as, Trudi van Niekerk, CEO of Nando’s International Franchising, Eric Parker, Consultant and Partner of Franchising Plus, Mark Harper and Sbonelo Mbatha, Co-founders of Petro Connect and Prithivan Pillay Head of Client Value Propositioning from Nedbank Business Banking.
Focusing on the discussion that is top of mind in the franchise industry, we include finding franchisees, franchise financing, adaption and advancements needed to deal with the fallout of Covid-19.
Franchise statistics that you need to take note of:
Franchising in South Africa has grown and evolved throughout the years. Currently, there are approximately 550 franchised brands and over 30 000 outlets. Even though the most common franchise opportunities are perceived as fast food, there are numerous viable and successful opportunities available across various industries.
Franchising in South Africa is behind the rest of the world,
- only 12% of retail sales go through a franchise mechanism, whereas
- Australia accounts for 25%
- and America between 49-50%
Franchising success rate (before COVID-19) was approximately 80% with an average failure rate of 20%
The current economy has forced many individuals to seek alternative employment opportunities due to retrenchment and limited employment opportunities available in the market.
Franchising has become an enticing option for so many individuals wanting to start and managing their own business without the risks of starting their own independent business. Franchising presents an opportunity to join a like-minded, supportive community that stays in touch with the changing needs of the market.
Franchising has time and time again proven itself as the best possible protection as a business format to any economic crises.
While no opportunity in life is guaranteed, franchising mitigates risks to some extent and offers the following advantages for franchisees:
- Buy-in to a proven business model
- Brand recognition
- Training, coaching and development
- Ongoing support
- Negotiation muscle e.g. suppliers, landlords, finance, etc.
- Marketing power
- Other franchisees’ experience
- Codes of conduct e.g. the operations and procedures manual
- Rapid network expansion
- Minimise risk by expanding through third-party (franchisee) capital
- Franchisee will outperform a manager by approximately 30%
- Dedicated owner operator with skin in the game
- Easier to manage e.g. strategic role not an operational role
- Group benefits in terms of procurement and increased marketing budget
Evolve and adapt your franchise model in the current economy
For those who purchase a great franchise, it will be life-changing, for those who purchase the wrong franchise, it will be life-destroying, therefore make sure your franchise model is life-changing.
A successful business model before the Covid-19 pandemic may no longer be relevant, is your model and brand agile and can it successfully adapt and evolve in the current environment?
In the current environment it is advisable to consider:
- Determine what measures have been or need to be put in place to assist franchisees
- Identify the challenges and opportunities arising from the pandemic
- Communicate what your views are and what changes have or need to be implemented due to Covid-19
- What are the new opportunities you can implement in your franchise as a result of Covid-19? Is your franchise model going to still be a success?
- Negotiate costs with all stakeholders e.g. landlords, suppliers, etc.
- The level of support in your system that is provided for your franchisees
Technology is on the forefront of franchising
Adopting and embracing technology has revolutionised the franchise industry over the decades. This has changed the way the franchise industry operates, which facilitates ease of doing business and streamlining administration tasks.
Technology presents opportunities within the franchise sector itself, such as through food delivery applications.
Creativity in the franchise industry
- Given additional support to franchisees in times of need.
- Negotiated terms with landlords and suppliers.
- Offered royalty-free periods.
- Adapting the concept to be relevant to the market and current environment e.g. in the food industry we have been seeing container concepts, menu innovation and menu items that travel well for delivery.
Selecting franchisees and expanding a franchise network
Times are tough, but franchisors should not be tempted to take on prospective franchisees that are not suitable for the brand or that do not meet the requirements. Accepting prospective franchisee capital to purely assist with your own cash flow in the short term will result in more pressing issues in the long term, it is crucial to align with partners who fit the brand requirements and culture.
In order to adapt, evolve, and build a more agile and successful model for the future, franchisors apply what they have learnt along the way with their successes and failures.
What is the capital required for a franchise opportunity
One needs to understand the amount of capital required to invest in a franchise opportunity. The barrier to entry for franchising might be perceived as high to a franchisee due to the 50% own capital contribution required but the own contribution is critical for the franchisee to make a success and to survive in the current environment and to ensure that they meet their ongoing obligations and to repay the outstanding bank loan. Franchisors want franchisees to succeed and they need to set them up for success, therefore they cannot compromise on the own capital requirement as it will be to the franchisee’s detriment.
Financial institutions have different sustainable funding models to ensure transformation within South Africa.
Capital restraints can be overcome by corporate brands implementing a franchise opportunity where they involve staff members through a joint venture partnership where the franchisee generally owns 49% of the franchise and the franchisor owns 51%.
What to look out for/consider when embarking on a franchising journey
- Not everyone will make a good franchisee – some people are too entrepreneurial. If you are a new franchisor your opportunities may require more entrepreneurial franchisees compared to those of an older/more established franchise system.
- Educate prospective franchisees about franchising, the industry/sector you operate in and your franchise model– for them to gain knowledge and insights before they commit to your franchise opportunity.
- When selecting franchisees, it is critical to determine how their personality and culture will fit in with your franchise brand.
- Skin in the game is essential and to understand the need for proper funding – it is not only enough to meet the bank’s criteria but to ensure franchisees have reserves to rely on in the event of adverse market developments.
- The partnership between the franchisor and franchisee – choose the right partner!
- The prospective franchisee ideally requires a background and knowledge about running a business
- Prospective franchisees need to have the necessary skills set, passion and interest for your sector and franchise model.
- Always ensure that you are an ethical and compliant franchisor by having all the requirements, support structures and documentation in place.
- Running any business is hard work, a franchisee will need to be committed and put in the hours of work to make a success of any venture. Franchisors require owner-operators, not investors.
- From a number perspective, understand numbers and what capital is required for the opportunity initially and on an ongoing basis and communicate it to franchisees.