New Zealand Franchising Sentiment Slides Further. Capital Constraints and Franchisee Concerns Remain.

Franchize Consultants’ October 2010 quarter Franchising Confidence Index finds positive but falling sentiment across many key franchising indicators, including general business conditions, access to financing, suitable franchisees and locations. Meanwhile, franchisee sales levels and operating costs, and franchisor growth prospects are forecast to improve, while availability of suitable staff and franchisee profitability levels are expected to remain unchanged.
Click here for a copy of the full report.

• Franchisors remain generally positive about forthcoming general business conditions (net 28%). This represents a gradual decline from April (net 39%) and July (net 32%), respectively. Overall, franchisor sentiment exceeds general business sentiment as measured by the BNZ Confidence Survey (net 18% in October), National Bank Business Outlook Survey (14% in September) and the NZIER (-9% in September). Meanwhile, service provider sentiment for general business conditions (for franchisors generally) plummeted to net 7%, from 62% in July.

• Franchisors are still generally positive about forthcoming growth prospects for their organisations (net 56%), compared with service providers perspective for franchisors generally (net 17%).

• An increasing, and worrying, net -19% of franchisors expect access to financing to deteriorate over the coming year. This compares with -5% and -6% in April and July, respectively. Service providers are marginally more optimistic (net 7% positive) for franchisors generally. These findings demonstrate access to finance (a key growth constraint) continues to trouble development within the franchise sector.

• Franchisors see tougher access to suitable franchisees in the year ahead (net -5%), down from 14% in July. Meanwhile, perceived access to suitable staff holds at net 16%. Comparatively, service providers see a more positive outlook for franchisee and staff recruitment with a net 31% and 45%, respectively.

• Franchisors (net 30%, down from 34% in July) and service providers (net 52%, up from 31% in July) share a generally positive outlook for finding good locations – where applicable.

• Encouragingly, franchisor sentiment for franchisee sales levels climbed to net 48% (from 36% in July), and the outlook for operating costs improved dramatically – with a net 51% (compared to -29% in July) expecting improvements over the next 12 months. Meanwhile, a net 16% of franchisors expect franchisee profitability levels to be better (same as July, but down from 41% in April).

• Comparatively, service providers were far less optimistic in their outlook for franchisees, generally. A net 7% (27% in July) expected deterioration in franchisees sales levels. 41% (compared to 46% in July) expected deterioration in operating costs. Finally, a net 24% expected franchisee profitability levels to deteriorate. Overall, while franchisors expect improvements in sales and growth, both groups clearly see tough times ahead for franchisees generally.

Franchisors were asked ‘how things are looking in their sector,’ and service providers ‘how things are looking for franchisors and franchisees (generally).’ Franchisor comments indicate huge variations in current and expected sales activity. Indeed comments range from “still very grim” to “solid and looking promising.” On balance sales were challenging, but expected to improve – with some franchise systems more positive than others.

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.’