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 How economic trends are shaping SA franchising


 As franchising continues its steady growth in South Africa, economic trends are shaping the development of the franchise sector in interesting ways, says Gerrie van Biljon, executive director at Business Partners Limited (BUSINESS/PARTNERS).


Franchising in South Africa already boasts solid numbers: there are 627 franchise systems totalling 39 000 franchise outlets in the country; they contribute 12.5% to South Africa’s GDP, and provide work for 325 000 people. Yet there is still some way to go, says Van Biljon.

Only 6.5% of the 600 000 small and medium enterprises in South Africa are franchises, compared to countries such as Canada, where almost 30% of owner-managed businesses are franchises. It is this somewhat low level of penetration that makes Van Biljon confident that franchising will continue to grow in South Africa, not only in real numbers, but also as a proportion of the economy.

Fundamental to this growth are the advantages that franchises offer: they offer tried and tested concepts, collective marketing and buying, and a measure of support for the franchisee. Nothing in the recent developments have changed these fundamentals. Rather, the changes to South African franchising stem from the environment in which it operates.

First, the recent broad trends in the business world globally is starting to have an impact in local franchising. The global movement to a more green economy is by now well established in South Africa and has started producing franchise concepts specialising in solar energy, energy savings concepts such as LED lighting and insulation systems.

Still in its infancy, the growth prospects for the industry are exciting, but Van Biljon also advises caution to prospective franchisees. Any franchise in the industry is by definition young and less tested than some of the more traditional franchise industries such as fast food restaurants. It will still be a while before the solid franchises of the green economy will emerge.

Another growth area for franchising is the education and training industry. The universal acknowledgement in South African society that education is key to individual prosperity offers a huge market for anyone who can offer a good education, from pre-schools through to after-school degrees and vocational qualifications. Coupled with the struggling state educational sector, the demand for private sector offering is huge. It is therefore not surprising to see educational concepts emerging in South African franchising.

The rise of educational concepts will go some way towards a greater balance between retail franchises and service oriented franchises in South Africa. “In the US, if you can think of a service, there is a franchise for it, whereas service franchises in South Africa are relatively undeveloped,” says Van Biljon.

An interesting recent development that Van Biljon points to is the preference among some franchisors to work with fewer franchisees who each own multiple stores. Any new store or existing one that comes onto the market is offered to the top-performing existing franchisees first. The advantages for the franchisor are that they get to deal with a smaller number of franchisors, and get to boost the best franchisees while the weaker ones fall out of the group.

However, not all franchisors are moving towards these so-called multi-ownership units. Some indeed prefer to have one store per franchisee because it assures the total focus of each franchisee on his or her store. Smaller franchise groups also do not like a single franchisee to become too powerful in the group.

The development has several implications for franchisees. It becomes a question that a prospective franchisee has to ask before they buy into a concept: Will the group allow me to own more than one store? How many more? A positive answer means you may have more room for growth within the franchise.

On the other hand, franchises belonging to such a group may become harder to come by, as opportunities will be offered first to their existing franchisees.

Another factor that is making it harder to buy some franchises is the fall in the rand. Popular overseas concepts such as McDonald’s and Burger King are now much more expensive than before since the drop in the value of the rand. Even though the concepts are locally managed by so-called master franchisors, the international group still wants to be paid a fair value for each franchise they sell in dollars.

On the other hand, the weak rand could, to a certain extent, boost the emergence of locally developed franchise concepts as opposed to imported brands; examples of these include Tashas and Chesa Nyama. There is indeed a recent move in the market towards more affordable franchises, which is bound to contribute to the growth of franchising.

Despite the struggling economy, Van Biljon is confident that franchising will continue to grow, perhaps even because of it. In hard times, consumers are less willing to experiment with their money. They would rather buy familiar, standardised products, which is the premise of franchising. Spending may be down across the board, but less so at franchise outlets than at independent businesses.





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