New Zealand Franchising Confidence Index | October 2010
Clearly challenges exist within many sectors with competition driving margin erosion and some customers internalising tasks previously outsourced to franchise companies. A number of franchisors also note profit pressure due to rising inputs costs, rents and inflexible landlords.
Access to financing is also raised. Bank lending criteria has changed and one franchisor notes the development of alternative funding sources. Aligned levels of franchisee enquiries are slow, with few qualified enquiries cited, generally – however, two franchisors cited good, strong potential growth prospects.
Franchise service provider comments reflect the uncertain environment. Most note “uncertainty” and expect a slow recovery at best. Comments such as “tougher work to make the same dollar” and “it will be a tough year ahead” show service providers expect challenging times for many franchisors and franchisees to continue.
Franchise challenges cited included tougher bank lending criteria, GST impact short-term (affecting required working capital), increasing struggling franchisees and royalty delinquency rates (i.e. franchisees not paying franchisor royalty income), difficulties maintaining confidence in the franchise system, and workplace competition for prospective franchisees.
On a more positive note, service providers note the potential for further interest in franchising from increased redundancy levels, examples of franchisees de-leveraging and favourable leases renegotiations.
Moving forward there is a recognised need for franchisors to review, streamline and improve their networks, and increase focus on franchisee profitability levels. Externally, it suggested the government provide more focused interest and SME support as per the USA and UK.
Dr Callum Floyd, Director of Franchize Consultants, who undertakes the survey, notes:
“The continued downward trend in sentiment and low levels of expectations for many key franchising variables is of considerable concern to franchisors and franchisees, and should concern the wider economy and government.”
“Franchising is pervasive covering many important sectors of business from grocery to home services, and is a great contributor to job growth, business training, SME compliance (due to good business systems) and GDP. But it requires the right environment including, crucially, access to capital for expansion and confidence.”
“Many well-known (and lesser-known) franchisors and franchisees have been hammered by the economy and continue to trade and battle despite considerable adversity. They do not crave handouts but they are desperate for an environment that fosters positive business growth and development.”
“It’s time government recognised franchising properly for its contribution, and needs.”.
Franchising Confidence Index Background
Franchize Consultants’ Franchising Confidence Index is a quarterly survey of 383 New Zealand franchisors and 115 specialist service providers (e.g. consultants, banks, accountants, lawyers and publishers) to the franchising community.
The Franchising Confidence Index represents confidence in key measures critical to the success of franchising in this country by reporting attitudes toward general business conditions, as well as key franchising growth determinants including access to capital, suitable potential franchisees, staff and locations. The Franchising Confidence Index also covers franchising health attributes and outcomes by exploring franchisee sales, operating costs and profitability, and franchise system growth prospects.
The data and analysis presented represents the views of 43 franchisors and 29 service providers collected between Monday 4 October and Friday 8 October 2010. Findings from both groups are reported separately.
Note, respondents are asked whether they expect conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’