Franchise Sector In South Africa Continues To Grow – Survey Results

The FASA’s 2016 survey was undertaken among franchisors and franchisees in order to assess the contribution by the franchise sector to the South African economy in terms of GDP, business establishment, creation of employment and the identification of key franchise practices. 

The survey shows that the fast foods and restaurant sector remained static at 24% (as did the building, office and home services sector at 11%), retailing grew from 12% to 16% and business-to-business services grew from 7% to 11%. Sectors that showed a slight drop included the automotive products and services sector, which dropped from 9% to 7%. Other sectors showed insignificant changes of 1% either way. Researchers also noted how franchising businesses are evolving.

With an increase of 132 franchise systems from 625 to 757 (21% growth), an increase of franchise outlets from 31 050 to 35 111 (13% growth) and with turnover increasing by 6% from R465, 27 to R493, 19 billion rand, the survey reflects both the successes and challenges facing this vibrant sector, according to FASA’s Chairman, Naas du Preez.

“Despite the downturn in the economy, the franchise industry continues to grow – although not quite at the same pace seen in previous years. The marked increase (21%) in the number of franchise systems and outlets (13%) could well be attributed to the inordinate number of new and international brands that have established themselves in South Africa over the past two years. This has not come with a concomitant increase in turnover (6%) however, which could be attributed to the lack of growth in the South African economy.” 

The slow-down in turnover is supported by the fact that it appears to be taking a little longer for a business to break even, but the potential for growth remains strong with franchisors exhibiting an extremely high level of optimism and many are intending to expand their franchise system. “What is without question says Du Preez, is the tenacity of the sector, which refuses to remain static and shows great entrepreneurial spirit, contributing a healthy 11.6% to the country’s GDP.”

According to Vera Valasis, Executive Director of FASA, the survey, once again, has shown that franchising is one of the soundest business formats, structured to withstand economic challenges. “Despite the hard trading times over the past seven years, franchising has held its own year-on-year in every respect – from showing long-term sustainability to showing a high level of optimism for the future.”

What the franchise survey clearly shows is the franchise sector’s ability to identify the challenges and adapt to those changes. In this year’s survey, the poor economy, cash restraints and competitiveness were of greater concern to those surveyed. But, at the same time, they identified the importance of having the right franchisees and staff in place to retain and capture customers.

Sanlam, who sponsor the FASA Franchise Surveys, is able to track, through the survey, whether franchisors are incorporating financial planning as part of the franchise implementation process. According to Kobus Engelbrecht, Marketing Head, Sanlam Business Market, “it is encouraging to see that many franchisors have an eye to securing the future with one in three protecting the future of their franchises by incorporating financial planning and 70% having made provisions in case of ill health or frailty. What is of concern, however, is that the survey noted a marked decrease in addressing staff benefits.”

HIGHLIGHTS OF THE FASA FRANCHISE SURVEY

  • At an exchange rate of R12.15 to the dollar (US), South Africa’s GDP for June 2015 was R3 727.5 billion Rand.
  • The estimated turnover for the franchise market is R493,19 billion, which is 11,6% of the South African GDP. This includes the fast food and restaurant turnover but excludes that of the petroleum sector, where the turnover is pinned at R19,44 billion for the convenience stores and R200,72 billion for the forecourts.
  • South Africa has over 757 franchised systems, just over 35 111 franchise outlets and 17 franchise business sectors. In 2016, there were a claimed 35 111 stores, most of which are owned by the franchisees (90%). This is an increase of 6% in the number of stores since 2014.
  • According to the 2016 Franchise Directory, the largest franchise system is the Fast Foods and Restaurant category (27%). The Retail sector at 15% is the next biggest. Building, Office, Home Services (12%) and Childcare, Education and Training (11%) follow. Business to Business Services, Automotive Products and Services occupy 15% of the franchise market (8% and 7% respectively). The other categories are 5% and smaller.
  • Most franchisors (92%) are optimistic about future growth in their businesses. This is consistent with findings from previous years.
  • One in four franchisors estimate that it takes up to 6 months before a new franchisee breaks even and a further 47% mentioned that it could take up to a year.
  • In 2016, 71% of the franchisors interviewed claimed that they had opened a total of 2,646 businesses, 26% of which were fast food and restaurants and 21% of which were in retailing. An estimated 612 businesses were closed down, resulting in a net gain in the number of stores of 2,035.
  • In addition, one in two franchisors plan to expand outside of South African boundaries, mostly to neighbouring countries. Intentions to expand outside African borders are very limited.
  • Thirty percent of the franchisors interviewed claimed to have stores outside of South Africa. Most of these stores are to be found in the neighbouring countries of Namibia and Botswana and were most likely to be fast food outlets/restaurants or in the automotive sector.
  • Only fifteen franchisors within the sample claimed to be represented outside of Africa.
  • The fact that four out of five franchisors have been in business for more than six years (54% have been in operation for longer than 10 years) is testament to the sustainability of these businesses.
  • The last year has seen an increasing number of franchisors feel that their businesses were at an Ambitious(expanding and taking a risk) or Mature (control and profit) stage. The Success stage (achieving and nourishing) has remained consistent with that of a year ago. The number of businesses classifying themselves as being in the Turbulent phase (adjusting and changing) has doubled, perhaps at the expense of the Stable (establishing and maintaining) and Establishment (return on investment and status) stages.
  • Fifty-seven percent of franchisors have business units/stores in shopping centres/malls and 54% have them situated in high streets, where most passing trade occurs. A quarter of the franchises are operated from a home base, while 17% are found in industrial areas.
  • The main challenge facing franchisors remains finding the right person – in terms of finding the right franchisee with the right skills sets and the right staff. Other critical issues are the lack of adherence to standards by franchisees and high rentals.
  • The average amount of working capital required when buying a franchise is estimated to be R634k. This amount rises well above the average for a retailing business (R961k), a fast food/restaurant (R839k) and an automotive business (R823k).
  • For the upfront franchise fee, the average amount is R248k, with the amounts ranging from R530k for a fast food or restaurant outlet to R43k for a construction outlet.
  • The average management services fee was calculated at 5, 7% of turnover. This figure rises to 10,8% for in the health, beauty and body culture business and drops to 3,6% in the construction sector.
  • Marketing and advertising levies would cost a franchisee, on average, 2,3% of turnover, with the figure rising to 3,8% in the real estate sector and dropping to 1,1% in the health, beauty and body culture sector.
  • In the 2015 survey, the employee count was pegged at 329 245, with fifty-seven percent of these employees black, 28% white, 8% coloured and 7% Indian. Current (2016) employment in the petroleum sector stands at 76 500 and 10 000 for retail and wholesale respectively.
  • When it comes to business ownership, the percentage ownership by Previously Disadvantaged Individuals (PDI) is 18% and by women it is 26%. The sector with the highest incidence of female ownership is the Childcare, Education and Training sector.