Franchising falters

Confidence in the franchising sector has deteriorated markedly during the third quarter of the year. The optimism demonstrated in July Franchize Consultants’ Franchising Confidence Index survey has evaporated as the October 2011 survey reveals substantial deterioration in key franchising measures.

Franchisors were asked ‘how things are looking in their sector’, and service providers ‘how things are looking for franchisors and franchisees (generally).’ Most franchisors were finding trading challenging, although sentiment did vary markedly by sector.

Although there have been more enquiries, franchise recruitment remains a challenge. As one franchisor noted “attitude to risk is still very conservative... finding the right people with sales ability is as difficult as ever”. This is reflected in the striking results for access to suitable franchisees.

Franchisors across a number of sectors have also noticed customers being more prudent with their spending.

Customers tend to be only spending to meet immediate essential requirements making selling extra services a harder task. This is echoed by the view of a service provider who responded “the global economic issues are still impacting on business confidence and consumer spending”.

The entrance of international brands can bring an upswing for the market as pointed out by a service provider. However, some franchisors have also felt more pressure from increased competition within their sector.

Conventional reversal

The availability of cheaper and more convenient alternatives for accessing goods (including the internet) are shifting consumers away from the conventional retail store experience. This coupled with high rent greatly concerns some.

A few franchisors reported enjoying growth, particularly one in B2B that has experienced 22 consecutive months of same store sales growth.

However, the majority indicated sales and margins pressures due to a reduction in spending, increased operating costs, and tighter financing conditions.

Franchisors in the automobile and building and construction sectors are still finding it difficult to lift sales levels, and some sectors continue to feel repercussions from the Christchurch earthquakes.

Franchize Consultants (NZ) Ltd
Franchising Confidence Index is a quarterly survey of more than 350 New Zealand franchisors and 100 specialist service providers (consultants, banks, accountants, lawyers and publishers) to the franchising community.

Franchising Confidence Index October 2011 highlights:
 

• Both franchisor and service providers’ outlook for general business conditions deteriorated substantially from the FCI’s highs of July. Franchisors were less optimistic (net six percent), dropping 35 percent from the net 41 percent recorded in July. Franchising service provider confidence levels dropped 42 percent to a net 23 percent, from the previous July quarter
   
• Both franchisors and service providers registered falls in sentiment for franchisor growth prospects. Franchisors net sentiment fell from 39 percent in July to 17 percent. Meanwhile, service providers’ confidence (net 14 percent) took back 41 percent from their optimistic 55 percent in the previous quarter.
   
• Repeating the trend a year ago for the same quarter, franchisors’ attitudes for access to financing plummeted back to a negative state (-19 percent). Service providers managed to remain relatively positive but fell to a low nine percent.
   
• Both franchisors (net -8 percent) and service providers (five percent ) broke new lows in their outlook for access to suitable franchisees, underlining the recruitment challenges faced by many franchise systems.
   
• Access to suitable staff had the only contrasting movement in confidence in the survey between franchisors and service providers. Encouragingly, franchisors responded positively, climbing to a net 17 percent. On the other hand, service providers declined to 14 percent.
   
• Expectations for franchisees substantially fell. Operating costs remain negative with franchisee profitability levels closely following the same direction.
   
• Franchisors (22 percent) and service providers (14 percent) are less positive in their outlook for sales levels per franchisee. Sentiment toward franchisee operating costs remained firmly in negative territory with franchisors and service providers reporting a net -31 percent and -27 percent, respectively. Sentiment for franchisee profitability levels also fell.
   
• In summary, both groups share the view of an imminent slow year and inevitable tough business conditions with various external factors influencing the economy.