Consumers are under a lot of pressure due to petrol price increases, rising electricity demands and inflation in general, said Morne Cronje, head of franchising at FNB. “With the interest rate increase, the cost of borrowing will increase for franchisees and this puts some pressure on cash flow as they would have to service a bigger loan repayment.
“Consumer spending will also be affected,” he said. “Many consumers, especially in the middle income groups, are highly indebted and any interest rate increase will cause a further decrease in their expendable income. Franchises operating in this market, such as value-based food outlets are already experiencing strain due to this effect.”
The interest rate decision means that the franchise sector has even less scope to pass rising costs on to consumers, and we expect there to be an element of margin compression, explained Jason Muscat, an FNB analyst. “Running lean and efficient operations is key to navigating these difficult economic times.”
For franchisors, increasing interest rates will impact their own borrowing, but may also have a negative effect on franchisee recruitment as potential franchisees may be deterred by an environment of rising interest rates.
“Franchisors should be watching the broad economic environment and tweak their business models where needed,” said Cronje. “Site selection in retail is more important than ever: mediocre locations in a difficult economic environment would not bode well for franchise success.”
The franchise market is growing locally. “Existing franchisees should always keep revamp requirements in mind. It’s a good idea to establish some forced savings pattern such as an annuity or other investment to ensure that funds will be available for a revamp,” said Cronje.
“The more they save, the less they will have to finance such a revamp at higher interest rates.”