In South Africa, the 2012 combined turnover figure for the finance, real estate and business services and the wholesale, retail and motor trade, catering and accommodation industry came to R1062 billion. The turnover from the franchise industry has been estimated at 28% of this turnover, significantly lower than elsewhere in the world. Therefore, significant potential for growth is indicated.
As of February 2013, South Africa's GDP was R2,051,299 million. Franchising comprises an estimated 9.7% of the GDP and is a substantial contributor to South Africa's economy. It exceeds that of most other sectors including mining (at 4.0%), the retail and wholesale sectors (at 3.6%), finance and real estate (at 3.3%), construction (2.5%), manufacturing (2.4%) and agriculture (2.3%).
Sharing the pie
With franchising active in around 17 business categories in South Africa compared to over 70 in the US, what is interesting is the ever-changing landscape of franchise business categories.
Once dominated almost exclusively by fast foods & restaurants, there is now a range of sectors that have successfully established themselves in the market place. Although fast food & restaurants remains the highest at 22%, with retail second with 20% giving a combined 42% share of the franchise market, the growth of other business categories is encouraging.
Sectors such as business to business (at 10%), building, office & home services (at 9%), automotive products & services (at 8%) have proved themselves invaluable in the economic downturn as consumers turn to home improvements or car repairing rather than buying new. Childcare, education & training (at 8%) is another area that has proved resilient and continues to grow as people focus on improving their skills and preparing their children for the future.
The global recession of the past five years has scarred most economies and South Africa is no exception. In May 2013, Trade & Industry Minister, Rob Davies was quoted as saying that five out of seven new small businesses in South Africa close their doors within a year of opening. The results from this survey show that just under one in two (46%) of franchisors have been in business for more than 12 years and 75% have been in business for more than 6 years. With such an outstanding record of accomplishment, franchising should lead the SME sector as the key driver for economic growth, employment and social amalgamation in South Africa.
When asked how many new franchisees were signed up in the last financial year, the sample of franchisors reported 1205 businesses within their last financial year. Once again, fast food outlets and restaurants dominate with 30% (356 stores) of the businesses opened being fast food outlets and restaurants, followed by retailing opening 254 stores. In contrast, 341 franchise businesses were closed down during the franchisors' last financial year. 23% of these were fast food outlets, 13% in the childcare, education and training sector and 10% each were business to business services and real estate franchises. If the new stores are offset against the stores closed down, the net gain is 884 stores.
When asked what the main challenges were to running a franchise, surprisingly the 'people factor' took top priority with respondents citing 'finding the right franchisee' (20%), 'skills required' (20%) and 'staffing' (19%) as their most pressing challenges.
External costs beyond the franchisor's control was the second biggest challenge, which relates directly to accessing finance and the rising costs in rentals, electricity and fuel - all factors that have had a huge impact on any business' bottom line. Coming in as well were the 'internal costs' that fall under the franchisor's control which include maintaining standards and managing costs.
According to Vera Valasis, FASA's executive director, these findings accurately reflect the current trading environment. "Franchisors recognise that in order to manage both the 'external' and 'internal' cost challenges that face doing business in the current economic climate they need the best of the best in their franchisees - hence their concern with finding the right franchisees, with the right skills."
The often used by-line that franchising is 'being in business for yourself but not by yourself' is borne out by the optimism that franchisors surveyed showed when asked whether they expected a growth or decline in turnover in the next year. Eighty eight percent believed they would see growth, with only 4% predicting a decline and 8% not wanting to commit. This is testament to the business format of franchising that allows for diversification of risk, the sharing of benefits, enhanced structures and the propensity to innovate and adapt to meet customer needs.
The coverage for this study was extended to all franchisors listed in the 2012 FASA Franchise Directory. Out of the total market of 668 franchises, the following sample was realised:
