Franchise sector bigger than mining

Franchise sector bigger than mining

Johannesburg – The growth of franchising in South Africa has been phenomenal, according to the Franchise Association of South Africa (Fasa).

Its research shows that this business format continues to play a leading role in fostering entrepreneurship in small business development and in job creation.

The results from the latest Fasa franchise survey show that just under one in two (46%) of franchisors have been in business for more than 12 years and 75% have been in business for more than six years.

Fasa was establishing in 1979 and oversees franchise development in a third world environment, but by first world standards.

“Today South Africa stands proudly alongside leading countries in the Americas, Europe and Australasia as a pioneer in ethical and successful franchise development,” said Fasa chairperson Derek Smith.

“The past five years of recession have been unprecedented in Fasa’s 34-year history. Whilst we have followed the global franchise trend in having survived far better than independent businesses, we realise that the rules of the game have changed.”

With franchising becoming more accountable as it is covered by the Consumer Protection Act, Fasa has embarked on an industry survey that gives an overview of the current state of franchising and will form the basis of more extensive surveys going forward.

According to Kobus Engelbrecht, head of marketing of Sanlam’s Business Market, the group believes the SME sector is critical to South Africa’s economic growth.

“In this context, franchising, with its lower risk profile, its entrepreneurial energy and business format that offers both skills transfer and job creation potential is an important business option for future growth,” he said.

Key findings on franchising

* In South Africa, the 2012 combined turnover figure for the finance, real estate and business services and the wholesale, retail and motor trade, catering and accommodation industry came to R1 062bn.

The franchise industry is estimated to have contributed 28% of this turnover, significantly lower than elsewhere in the world.

This highlights the significant potential for growth.

* In 2012, franchising grew in South Africa at an estimated rate of 21% and many franchises expanded throughout Africa and to Australia, Europe, the Middle East or the United States.

* As of February 2013, South Africa’s gross domestic product (GDP) was R2 051 299m.

Franchising comprises an estimated 9.7% of South Africa’s GDP and is a substantial contributor to the economy, exceeding that of most other sectors including mining (at 4.0%), the retail and wholesale sectors (at 3.6%), finance and real estate (at 3.3%), construction (2.5%), manufacturing (2.4%) and agriculture (2.3%).

* Franchising is estimated to have added about 3 700 new franchise businesses to the South African economy in the last financial year.

* Franchising in South Africa has generated a turnover of R302bn, and employs more than 300 000 people.

* Approximately 90% of franchises in South Africa are developed locally.

* South Africa has 668 franchised systems, just over 30 000 franchise outlets and 17 franchise business sectors.

The majority of operations are in Gauteng, nearly three times as many as are found in the Western Cape and more than four times as many as are in KwaZulu-Natal.

Here are some highlights of the survey:

Sharing the pie

With franchising active in around 17 business categories in South Africa compared to over 70 in the United States, what is interesting is the ever-changing landscape of franchise business categories.

Once dominated almost exclusively by fast foods and restaurants, there is now a range of sectors that have successfully established themselves in the market place.

Although fast food and restaurants remains the biggest category at 22%, with retail second at 20% giving a combined 42% share of the franchise market, the growth of other business categories is encouraging.

Sectors such as business to business (at 10%), building, office and home services (at 9%), automotive products and services (at 8%) have proved themselves invaluable in the economic downturn as consumers turn to home improvements or car repairing rather than buying new.

Childcare, education and training (at 8%) is another area that has proved resilient and continues to grow as people focus on improving their skills and preparing their children for the future.

Franchises opened and closed

When asked how many new franchisees were signed up in the last financial year, the sample of franchisors reported a total of 1 205 businesses within their last financial year.

Once again, fast food outlets and restaurants dominate with 30% (356 stores) of the businesses opened being fast food outlets and restaurants, followed by retailing opening 254 stores.

In contrast 341 franchise businesses were closed down during the franchisors’ last financial year.

About 23% of these were fast food outlets, 13% in the childcare, education and training sector and 10% each were business to business services and real estate franchises.

If the new stores are offset against the stores closed down, the net gain is 884 stores.

Challenges

When asked what the main challenges were to running a franchise, the “people factor” took top priority with respondents citing “finding the right franchisee” (20%), “skills required” (20%) and “staffing” (19%) as their most pressing challenges.

The second biggest challenge was external costs beyond the franchisor’s control, which relates directly to accessing finance and rising rental, electricity and fuel costs.

These are all factors that have had a huge impact on any business’ bottom line.

Coming in as well were the “internal costs” that fall under the franchisor’s control, which include maintaining standards and managing costs.

According to Vera Valasis, Fasa’s executive director, these findings accurately reflect the current trading environment.

“Franchisors recognise that, in order to manage both the ‘external’ and ‘internal’ cost challenges that face doing business in the current economic climate, they need the best of the best in their franchisees – hence their concern with finding the right franchisees, with the right skills,” she said.

Optimism

The often used phrase that franchising is “being in business for yourself, but not by yourself” is borne out by the optimism that franchisors surveyed showed when asked whether they expected a growth or decline in turnover in the next year.

Eighty-eight percent believed they would see growth, with only 4% predicting a decline and 8% not wanting to commit.

This is testament to the business format of franchising that allows for diversification of risk, the sharing of benefits, enhanced structures and the propensity to innovate and adapt to meet customer needs.

- Fin24

SA Business Index

South African Business Index (SABI), which is an independent national networking and business alliance organization, was formed in order to fill a significant gap identified in the networking and communication sector of the business market.

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