Although franchising is one of the sectors that has shown resilience and continues to grow in this tough economic environment, the sector is not without risk for franchisees and franchisors.
Franchise systems are based on a proven model that can be successfully replicated; these types of businesses are often considered less risky by entrepreneurs. The reality is that no franchise is immune to tough economic conditions – levels of success vary depending on the concept, strength of the brand, management and the industry.
For example, fast-food and restaurant franchises are currently outperforming their peers due to the viability of the businesses and increased demand.
There are quite a few challenges that franchise owners should take into consideration during these tough times.
• Shrinking disposable income – as the cost of living increases due to a number of economic factors, consumers are beginning to spend even less. This is one of the biggest threats facing the franchising industry.
• Increasing competition (market share) – a number of foreign-owned brands such as Starbucks, Burger King and Domino's Pizza have now been incorporated into the local market. While this has a positive economic impact and gives consumer more choice, it significantly increases competition and puts more pressure on the performance of established brands.
The battle for market share is increasing, with businesses constantly finding new ways of satisfying customers who favour value for money and convenience over price and ambiance.
• Rising costs – the current drought, which has had a direct impact on food price inflation, will significantly increase costs for franchises within the fast-food and restaurant sector. With consumers already struggling due to shrinking disposable income, it will be difficult for franchises to pass on these costs to them.
Furthermore, increasing electricity costs, interest rates, salaries, transport and maintenance costs are putting more strain on the bottom line of franchises.
• Falling staff morale – when business conditions are not great, some franchises can often not afford to hire more staff or bring in temporary staff, leaving employees severely stretched and demotivated. Job security issues are also heightened during this time as some employees may fear losing their jobs.
Motivating staff and constantly updating them on how the business is doing is extremely important since quality customer service goes a long way during this time.
• Bad debts – with interest rates likely to continue increasing throughout the year, franchises may find it difficult to service debt and borrow more money, leading to cash flow constraints.
• Adapting to consumer needs – following a tried and tested model is no longer a guarantee for success in the franchising sector. Convenience and innovation in technology is increasingly becoming important to customers.
Consumers now want the option of ordering meals online and getting them delivered to their homes. Moreover, there is an emerging focus on wellbeing, with consumers opting for healthier food options and preferring to patronise businesses with ethical and sustainable business practices.
As the business landscape continues to evolve, it presents entrepreneurs with a new set of challenges and opportunities. Franchisors and franchisees who stay ahead of industry developments will continue to grow and remain a step ahead of their competitors.
*Morné Cronjé is head of franchising for FNB Business.