In franchising you are in business for yourself but not by yourself. It’s a well-known saying that is borne out by results of the most recent survey of South African franchises, undertaken by Research IQ for the Franchise Association of South Africa (FASA) and released in August 2013.
The report showed that for every franchised business that closed in 2012, another three opened their doors.
Franchising contributes close to 10% of the country’s GDP and despite pressure on consumer spending, it is predicted that the sector will continue to grow.
Related: FASA’s new face
In addition to generating good returns, it is also a sector in which job creation can thrive, employing approximately 500 000 people. That’s according to ‘Franchise Factor 2012’ research conducted by Franchize Directions for Standard Bank.
A separate survey conducted by the Franchise Association of South Africa (FASA) found that the sector generated a turnover of R302 billion with an estimated
3 700 new franchises added to the South African economy in 2012.
“Despite the economic downturn franchising continues to be a dominant business format as far as SME development is concerned. Across the globe small business is recognized as the safety net of any economy and franchising is proving to be quite resilient even in this economic climate,” says Chairman of FASA, Ian Jacobsberg, commenting on the figures.
According to FASA, franchising has grown to become one of the most important business sectors with more than 668 franchise systems and 30 000 franchised outlets in over 17 business sectors.
South Africans generally associate franchising with accessible, quick-service restaurant brands, but franchising is active across the sub-divisions of the entire retail sector – from the delivery of personal services to convenience stores, grocery outlets, clothing and even the delivery of professional services such as optometry, according to Ethel Nyembe, Head of Small Enterprise, Enterprise Development and Franchising.
“International retail franchise operations are increasingly entering the market,” she says.
“Leading brands from Europe, the USA and Australia are now available in major centres. Their interest has been spurred by the growth in retail spending in South Africa that has averaged between 3% and 5% per year over the last decade.”
Nyembe notes that the growth is phenomenal when compared to other international markets, stating that there is no doubt that South Africa, as well as the emerging markets in Africa, will continue to attract attention into 2015 and beyond.
Expansion into rural areas
Retail franchises are opening up locations in more rural areas such as parts of the Northern Cape, following major infrastructure development. Cooper maintains that local commercial growth and the increasing spending power of people in these areas are drawcards for franchise operators.
In addition, major retail franchises are regarded as key anchor tenants for newly opened shopping centres and malls seeking to attract local consumers.
“The growth will be fuelled by several factors,” says Nyembe. “These include the ongoing growth in the black middle class, technology which sees rapid changes in electronic consumer goods and spurs demand for them, and increasing acceptance of 'green' products.”
A strong sector
Almost half (46%) of the franchisors sampled reported that they had been in business for more than 12 years, with 75% having been in business for more than six years.
Compare these figures to the high failure rate of small businesses, five out of seven small businesses close their doors within one year of opening, according to Minister of Trade and Industry. Rob Davies – and it’s clear that franchising offers strong opportunities for success.
Related: Starting a business without funding
In addition, 88% of those surveyed believed they would see growth in the future, with only 4% predicting a decline. This optimism most likely results from the fact that the business format of franchising allows for diversification of risk, the sharing of benefits, enhanced structures and the propensity to innovate and adapt to meet customer needs, making it far more of “sure bet” than many other business ventures.
When asked what the main challenges were to running a franchise, finding ‘the right people’ was the biggest issue, with franchisors citing 'finding the right franchisee' (20%), 'skills required' (20%) and 'staffing' (19%) as their most pressing concerns.
External costs beyond the franchisor's control was the second biggest challenge, which relates directly to accessing finance and the rising costs in rentals, electricity and fuel - 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.
Diversification of the sector
Fast food and restaurants once dominated the franchising industry, but there are now many more sectors that have successfully established themselves in the marketplace. Coming in at second place behind fast food and restaurants, which remains the highest at 22%, is retail with 20%.
Other business categories that are showing growth are: Business to business (at 10%), building, office and home services (at 9%), and automotive products and services (at 8%) have proved popular in the economic downturn, as consumers turn to home improvements or car repairing rather than buying new.
Related: Buying a franchise business
Childcare, education and training (at 8%) is another area that has been buoyant and continues to grow as people focus on improving their skills and preparing their children for the future.
Where opportunity lies
Industry figures show that franchising’s total share in sectors including the finance, real estate and business services, the motor trade, and catering and accommodation, which amounts to 28% and is significantly lower than elsewhere in the world, meaning there is still significant potential for growth in these areas.
The 2013 FASA Franchise Survey, by Research IQ
Press release issued by Simone Cooper, Head of Franchising and Enterprise Development, Standard Bank
Franchise Association of South Africa