They can’t beat us in rugby, but what about franchising?


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To carry out research into the behaviour of the franchise sector in South Africa is fraught with difficulties. For one thing, the number of companies entering the sector only to leave it again within a relatively short period makes it a moving target. Another problem is that both franchisors and franchisees tend to be rather sluggish when it comes to responding to surveys.

With this in mind, we decided to bring you extracts from research that has been commissioned in Australia by Price Waterhouse Coopers (PwC). PwC asked ACA Research to find out how the franchise sector is dealing with the current economic downturn.

ACA Research interviewed about one quarter of all franchised networks with 20 or more franchisees. In our view, this makes the resulting findings representative of the Australian market. Commenting on the findings, Greg Hodson, a partner at PwC, explained that while the sector has been impacted by the global financial crisis, it has managed to weather the economic downturn much better than the economy overall. During an interview published in the Sunday Telegraph of 27 September 2009, he said:

(Australian) franchisors are feeling very confident that their businesses and franchisees will experience strong growth over the next 1-3 years. Instead of slashing marketing budgets, cutting staff numbers or delaying capital investment, franchisors have been in the trenches with franchisees to combat the downturn. They have focused on supporting their franchisees, putting particular effort into collaboration and relationship management and closely monitoring any financial distress (among franchisees).

How franchisors responded to the downturn

So what have these franchisors actually done to minimise the impact of the downturn on their networks? According to the ACA research, they went out of their way to bolster their franchisees businesses, knowing full well that the fate of the sum total of their franchisees ultimately determines their own. Examples are:

Relationship with franchisees

Franchisors report that since the downturn started, 75% of them monitor the financial situation their franchisees find themselves in more closely; 68% collaborate more closely with franchisees in general terms.

Marketing activities

46% of franchisors increased their marketing spend while 64% negotiated with key suppliers including landlords to secure better deals for their franchisees.

Franchisee recruitment

64% of franchisors have strengthened the franchisee recruitment process whilst an astonishing 80% consider online marketing to be the most cost-effective medium. We at Whichfranchise.co.za were delighted to read that because it confirms what we have said all along;

“Everyone knows that Internet-advertising is the wave of the future. What some people fail to acknowledge is that the future is now!”

Turning to response rate, Australian franchisors reported that the number of enquiries received from prospective franchisees has not increased at the anticipated level. (Franchisors expected that the economic downturn would swell the number of unemployed, resulting in an increase in people keen to invest in a business of their own. For some reason, this has not happened.)

When asked to assess the quality of prospects they came across, 32% of respondents reported an increase in the perceived quality of prospects while 44% found no difference and 24% thought that the calibre of enquirers had dropped.

Expansion plans

75% of franchisors plan to improve their businesses in the short term through organic growth only while 66% will also seek expansion into new domestic markets and 59% into new products and/or services.

In the longer term, 68% of franchisors bank on expansion into new products or services, 54% plan for expansion into new domestic markets, an equal number of 54% rely on organic growth and 47% see expansion opportunities into new overseas markets. 42% of the respondents plan to grow through acquisitions.

How franchisees responded to the downturn

According to the same research, franchisees are a little more conservative than their franchisors in dealing with the downturn. They responded in the following ways:

  • 69% introduced measures designed to reduce operating costs;
  • 46% reduced staff numbers;
  • 46% maximised cash balances.

Without exception, these are all defensive steps. This cautious approach is further underlined by the fact that a mere 25% of franchisees increased (local) marketing spend. That’s OK because this kind of approach to risk taking is the reason why some budding entrepreneurs seek cover from the harsh realities of the free enterprise system by becoming franchisees.

Conclusion

The research results are pleasing because they show that instead of cutting the head count in their franchisee support division, cutting their marketing budgets and banging their heads against the wall in desperation, Australian franchisors take a pro-active stance. They work with their franchisees to pull the brand through the crisis and map out the strategy they are going to adopt once the tide turns. We have long suggested that South African franchisors should take a similar approach; in the forthcoming editions of this newsletter, we’ll show you how such an approach can best be implemented in the South African context.

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