[Opinion Piece] Franchising – a recession proof small business model
The risks for new business owners increase daily, but an existing model is gaining momentum and support in the economy. With the petrol price rise on April 5th, the petrol price increased by 36c a litre, pushing the petrol price to over R14 per litre. This fuelled by the weakening rand contributes to increase food prices and other input costs. Add that to the slow GDP growth as well as the increasing cost of labour and the risks for new business owners starts increasing dramatically.
While the risks may be high, there are business models that entrepreneurs can consider. “Franchising as an example offers prospective entrepreneurs a tried and trusted model that provides the concept, support and infrastructure that new businesses need,” says Cash Converters managing director Richard Mukheibir.
Mukheibir believes that the current economic outlook is like “the wings behind us”. In his franchise model, instead of holding back, he believes that this is the opportunity to double the business in size over the next year.
“Our retail presence is becoming stronger; we completed 2 million transactions last year and expect this figure to grow by at least a third this year,” he says, adding that 50% of the retail turnover is still the higher priced better value items such as electronics.
Mukheibir is referring to not only the purchase of used goods that are retailed in the stores, which offer the seller access to quick cash and the buyer to a reasonably priced product. “It’s access to cash,” he says.
“At the moment we have about 70-odd stores, but if you think about it there are about 50 million in people in South Africa of which about 19 million are credit users. Approximately 47% of these has a credit impaired record and that’s where services that we offer help”.
The current business model is changing to include financial services products. “We are a retailer that provides financial services,” he says adding that a third of the top line activity is still within the retail offering but that the financial service products are growing faster. “We are migrating in that path,” says Mukheibir.
Currently the item surety offering is proving successful. It has a 75-85% redeem rate. “This product ensures that a consumer never gets into a debt spiral, the loan simply gets extinguished,” he says, adding that the payday advance service is also gaining ground with the customers.
What makes these products so successful is that it’s a quick process for a customer to gain access to cash. In the case of a payday advance he says that it takes 30 minutes for a new customer and 10 minutes for a repeat customers. “About 85% of our customers are repeat customers,” he says.
Mukheibir maintains that the appeal for potential franchisees is “Our franchise model usually provides a return on investment in the a 3-year period,” this success is based on a franchisee who has an “eye on the business all the time.”
Franchising can bring skills home.
But, Mukheibir is not the only positive voice on the franchising model. According to Angel Jones, CEO and founder of Homecoming Revolution, an organisation that is determined to bring skills back to South Africa, franchising is an option that she promotes.
“In our expo in London,” which recently took place, “88 of the agents in the expo were franchising brokers.” Jones adds that for every entrepreneur that returns to South Africa at least 3 jobs are created.
Funding for franchisees
Franchising has proven its success in so many industries that small and medium specialist risk finance company, Business Partners Limited, has just launched its franchise fund, backed by the Development Bank of South Africa (DBSA) aimed at allowing previously disadvantaged entrepreneurs, with limited assets and access to capital, to qualify as franchisees.
According to Christo Botes, executive director at Business Partners Limited, “The total Franchise Fund amounts to R107.03 million and consists of R48.65m from National Treasury’s Jobs Fund (R38.92m for financing and R9.73m for technical assistance), as well as R58.38m from Business Partners Limited.”