Surveys show strength of the franchise industry

Two surveys conducted in the franchise industry show it is still going strong despite the challenges of the past few years.

It seems that the sector had more ups than downs as franchisors and franchisees worked together to analyse challenges, find solutions that will not only benefit themselves but their staff, dependents and the consumers they serve.

The Franchise Association of South Africa’s eighth independent survey, sponsored by Absa, was conducted among franchisors after a hiatus of four years to assess the contribution of the franchise sector to the South African economy in terms of gross domestic product (GDP), business establishment, creation of employment and the identification of key franchise practices.

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Key findings about franchise industry

Some of the key findings were that:

• Optimism about the success of their businesses continues to strengthen among franchisors (81% in 2018; 89% in 2019 and 98% in 2023) despite the upheavals from 2020 to 2022 and the expectation that turnover will grow in the next financial year is almost unanimous.
• The time the franchise has been operating showed that three in four franchises fell into the more experienced range of 10+ years, with the average age of the business 21 years, proving the resilience and stability of the franchise sector in South Africa to provide long-term investment opportunities.
• The number of franchise systems dropped from 813 in 2019 to 727 in 2023, clearly due to the disruptions of the past four years which put the break on new concepts coming online and perhaps in the closing of smaller fledgling concepts that could not get off the ground during the pandemic.
• The number of franchise outlets was grossed up, due to the greater franchisor sample, especially of large franchises with 200+ outlets, to represent 68 463 franchises, reflecting the increased number of large franchisors participating in the survey.
• As a result, the increase in the sector’s contribution to the country’s gross domestic product (GDP) rose from 13.9% to 15% of the total South African GDP of R6.66 billion in 2022, indicating that the remaining systems were resilient and strengthened their market position.
• The estimated turnover generated for 2023 was R999 billion, a 36% increase over the 2019 figure of R734 billion, again reflecting the increased number of large franchisors participating in the survey. (This amount does not include revenues from listed companies operating in the franchise market as these listed companies did not participate in the survey.)
• Fluctuation in the number of business units showed the net number of stores opened in 2023 is 2.9, which is the sum of 3.1 stores opened less 1.2 stores closed, with 1.4 stores relocated. The general feeling was that while turnover and revenue growth was sought across the board, store growth was not on the immediate radar for most franchisors during this turbulent time.
• Franchisor ownership demographics showed an interesting trend, with the average percentage of system ownership by previously disadvantaged individuals improving significantly in the last four years from 20% in 2019 to 48% in 2023, with black ownership showing an increase of 10%, almost double what it was previously. Ownership by Indians and coloureds tripled overall (7% to 18% and 2% to 9% respectively). A concomitant decrease was noted among white franchisors (from 80% to 42%), perhaps a reflection of the reticence in this entrepreneurial group to launch new systems amidst continued failed infrastructure.
• Franchisee ownership also changed significantly in the last four years in terms of the franchised outlets, with black ownership at 18%, Indian ownership at 17%, coloured ownership at 8% and white ownership at 57%.
• Female ownership remained steady at 30% in 2023, possibly due to the multiple roles women had to play over the past four years, especially during Covid which may have restricted their entrepreneurial ambitions.
• The franchise industry accounts for an estimated 4.7% of employment in the country, which translates into an estimated 471 233 employees. In 2023, based on figures provided by Stats SA regarding employment in the first quarter of 2023, 51% are black staff; 12% are coloured, 12% are Indian staff and 25% are white.

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Largest and smallest franchises

Franchising in South Africa is made up of a range of around 12 business categories. The retail and automotive products and services categories tend to be the larger franchises at 17% and 10% respectively, while fast foods and QSR’s (at 19%) are more likely to fall into the medium category.

Smaller franchises are more likely to be building, office and home services (12%), business-to-business (7%), childcare, education & training (7%), health and beauty (6%), dine-in restaurants (5%) and real estate (5%), with personal services, construction and related and others making up 2% of franchises.

Fred Makgato, CEO of the Franchise Association of South Africa, says franchising does not get enough credit for its contribution to the economic stability of the country by keeping the wheels of business turning.

“This sector is one of the most dynamic and visible due to its spread throughout the country through well-recognised brands in twelve different sectors but is not recognized enough by government for its entrepreneurial endeavours, offering viable business opportunities, training staff in a range of industries and creating both direct and indirect jobs.”

Measured for the first time this year, 23% of franchises are now operating in townships which opens up a whole new untapped market but government needs to come to the party in terms of supporting and funding small businesses, he says.

The survey also showed that franchisors are optimistic about business growth and expectations that turnover will grow in the next financial year was almost unanimous (from 81% in 2018, to 89% in 2019 to 98% in 2023).

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Challenges franchises face

However, despite the optimistic outlook for the future, the number of franchisors that embarked on a rebranding/revamping/upgrading exercise continues to decline. The survey also identified these challenges in the franchise space:

• The cost involved in operating a franchise system were perceived to be the main challenge facing the interviewed franchisors (60%). Breaking down this response, it was noted that inflation was the major aspect mentioned in this regard (32%), followed by high/expensive rentals (20%) and the slow economy (13%).
• The next most frequently mentioned challenge was related to the franchisees within the system, finding the right franchisees with sufficient capital (15%), with sufficient experience (12%) and not operating according to standards (12%).
• Load shedding and employees posed the next challenges (42% each). Load shedding was considered to have an impact on profitability (26%) and productivity (20%), while aspects related to employees included training (21%), staff turnover and attracting the right staff (12% each) and having to retrench staff (5%).
• The fifth most frequently mentioned challenge was marketing (36%), including marketing the franchise (25%) and the products/services offered (12%).

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Franchises worried about SA’s economic crisis

Almost all respondents, especially those in the food sector, expressed concern that the country was facing a deepening crisis that is impacting all areas of the economy due to the ongoing and escalating load shedding which has a snowball effect on everything from food security to logistics to service delivery, with very little done by the government to mitigate this.

Makgato believes that the only way to avoid an impending disaster in South Africa is for government to deal with load shedding and recognize that it is the businesses that are keeping the economy going.

“On the back of such a strong survey of the franchising sector, that is prepared to safeguard its position as a significant contributor to the country’s economy and is willing to play its part to keep the wheels of business and entrepreneurship turning, we call on government to now do their part in rectifying the debilitating state of the country for the sake of the economy, its citizens and the future of South Africa.”

Some of the respondents’ comments on how they survive, include:

• “Love your customer. Make their life easy. Have happy staff. Just keep people happy.”
• “The key to getting through this is to do a lot of education with all franchisees, keeping them updated, compliant and delivering high standards.”
• “The fact that we were able to recover quite a few key stores quickly is testament to the brand and the dedication of all the staff because everyone’s ‘all hands- on-deck’ working together.”
• “Load shedding has been financially devastating and brands are having to deal more and more with distressed units in their business mode and having to work harder to maintain viable businesses and keep them open across their network.”