Franchise model has higher survival rate

Cape Town - The survival rate for franchises is generally longer than other business types, economist Mike Schüssler said on Monday.

Schüssler was speaking at the release of the small and medium enterprises (SME) index for South Africa compiled by Absa Group [JSE:ASA]. The index rose by 1.4 index points to 93.4 in the second quarter of 2012, boosted by growth in self-employment.

“Franchises seem to remain in business generally longer than the businesses which operate, on average for less than five years", said Schüssler, who works on the index.

"While there is no definite information on the length of time franchises stay in business, the fact that many franchises are sold to new owners indicates a longer survival rate for franchises," he said.

SA had 707 000 employers during the fourth quarter of 2012.  

Schüssler said that employer numbers had a year-on-year decline of 2.1% in 2012 but the last quarter saw a slightly smaller drop of 0.2%.

The average size business employs about 12.6 people but excluding mining, utilities and household then this number drops to around 10.6 people.
 
"If one then looks at the average number of people employed by franchisees in South Africa it is just over 17 people, indicating that the average franchise employs 36% more people.

"However leaving out mining and utilities, the average franchisee employs about 62% more people," Schüssler said.

Absa also noted that banks financing franchises is another indicator that they last longer and have a lower risk profile than the general business in South Africa.

Andre Rosslee, Absa’s head of sector solutions and franchising, said the bank recognises the important contribution that the franchise sector plays in wealth and job creation.

"Our aim is to gain an intimate understanding of the franchise industry and to use this knowledge to deliver competitive products and innovative solutions.”

Rosslee said it appears that food retailers, quick service restaurants and restaurants servicing the middle income market were less affected by the economic meltdown given that some businesses reported record turnovers in December 2012.

“They are however still under pressure resulting from increases in food inflation and operating costs," he cautioned.

He noted that 2012 saw 72 new franchised systems compared to 111 in 2010, adding that bigger brands expressed the desire to acquire smaller brands.

"A number of the more established brands are evaluating their options for expansion into other African countries," Rosslee said.

The index data is based on various economic indicators gathered from Statistics South Africa, said Sisa Ntshona, head of enterprise development at Absa Business Banking.

Ntshona said the index is crucial for policy makers regarding SME development, high unemployment and job creation.

Click here for a graph indicating the sectors within the SA franchise industry. 

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