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Interest in sectyor grows, but banks are getting stricter
May 28, 2009

By Lucky Biyase

Retrenchments triggered by the deepening economic meltdown have driven more people to look at investment opportunities in the franchise industry, according to industry specialists.

“Based on the interaction with our clients in general, there is an increase in the number of enquiries from prospective franchisees,” said Bendeta Gordon, the director of Franchise Direction, which conducts research on small, medium and micro enterprises (SMMEs).

But although interest was growing, newcomers were battling to find funding to buy franchises. “Banks are applying more stringent criteria to approving franchise applications,” she said.

“For the period 2006 to 2008 we saw more than 115 new franchised systems being introduced. We expect this number will increase during 2009 and 2010 as companies look at risk-averse ways of expanding their networks,” Gordon added.

Christine Schreuder, the head of franchising at the state financier the Industrial Development Corporation (IDC), agreed that interest in franchising was rising and retrenched employees were looking to become self-employed to generate income.

“Their retrenchment packages come in handy as start-up capital in such firms,” she said.

But in spite of the renewed interest, franchised firms had, in general, experienced a downturn in revenues last year, compared with 2007. According to Schreuder, it was likely that surviving firms still felt the pressure.

Franchises selling luxuries were feeling more pain, while some fast-food outlets and non-food sectors were holding up.

Schreuder added: “We do expect 2009 to still be a difficult year for franchised businesses, but there are still opportunities for new business owners, provided they thoroughly research the strength of the brand and business model, the viability of the location and find creative ways to attract customers.”

Anita du Toit, a franchise specialist at First National Bank, said there was a strong interest in franchising business. The UK and US franchising sectors had proven to be resilient during previous economic downturns.

“A franchisee gets support from the franchisor, which, in most cases, has experienced a downturn before, and can therefore help the franchisee weather the storm. Retrenched people will often consider buying a franchise as opposed to starting a business by themselves, because of the mitigated risks that good franchise opportunities offer,” she said.

Both Gordon and Du Toit pointed to performance figures shown by listed franchises as evidence of the defensive nature of the sector.

For the year to February, Taste, which sells Maxi’s, Scooters Pizza and NWJ Jewellery franchises, had more than quadrupled group revenue and more than doubled operating profit. Revenue rose to R136 million from R34m, while operating profit grew 118 percent to R26m.

Famous Brands posted a 30 percent revenue growth to R1.5 billion in the same period. Operating profit increased by 20 percent to R262m. The group operates franchises such as Wimpy, Steers, Debonairs Pizza and House of Coffee.

But Business Partners managing director Nazeem Martin said the tougher economic conditions had damaged the viability of most franchise businesses.

Franchisees and potential franchisees were finding it more difficult to secure finance.

“For example, at Business Partners during the 12 months to March, we approved finance for 105 franchises to the value of R112m,” Martin said.

“This was considerably lower than during the previous 12-month period, when we approved finance for 143 franchises to the value of R161m,” Martin said, adding that other financiers would show a similar decline.