Franchising Sentiment Bounces Back

Franchize Consultants (NZ) Ltd
Media Release

KEY HIGHLIGHTS

Franchize Consultants’ January 2021 Franchising Confidence Index sets the stage for the year, with 30 franchisors providing a window into current and more long-term opportunities and challenges.

In terms of sentiment, the franchising community is more positive on most indicators compared to 2020. Franchisors’ net sentiment is positive on six out of the nine measures - with significant improvement in results covering general business conditions, access to franchisees and access to suitable staff. Whist still positive at a net position, the outlook for franchisee sales has declined compared to 2020 and franchisees’ operating costs and access to finance remained concerning for franchisors.

2021 clearly brings the additional challenge of COVID-19, with the fear of another outbreak or lockdown, closed borders, and uncertainty as to the full extent of COVID-19 impact.

When asked on how things were looking among franchisors, comments were mixed depending on the sector of the business. Unsurprisingly, positive sectors included building and construction, home improvements and logistics. Meanwhile, less positive sectors included, for example, tourism, retail and hospitality.

• Franchisor outlook for general business conditions (net 20%) shows strong improvement from 2020’s net negative 30%. Service Providers sentiment is also positive increasing from net 21% to net 62%.

• Franchisor sentiment for franchisor growth prospects, showed improvement at net 31%, up from net 17% in 2020.  Service Providers’ net 55% improved even more from net 21%.

• Franchisor sentiment towards access to suitable franchisees has seen the greatest improvement reaching net 23%, and is back in positive territory for the first time since 2017. Service Providers were also very positive at net 75%, the highest level in history of the Franchising Confidence Index.

• Franchisor sentiment towards access to financing remained unchanged from 2020 at net negative 30%. Service Providers’ confidence was more positive improving from net negative 7% to net positive 33%.

• Franchisors, at net 14%, up from net 9% in 2020, were slightly more positive this year in their outlook for access to suitable locations. Service Providers were much more positive at net 69% up from net 29%.

• Similar to access to franchisees, franchisor outlook towards access to suitable staff has seen strong improvement reaching net 7% from net negative 36%, bouncing back to positive territory since 2014. Service Providers were also positive at net 17%, from net negative 36% in 2020.

• Franchisors sentiment toward future sales levels per franchisee has taken a hit, declining to net 13% (from net 39%). Meanwhile, Service Providers sentiment toward the same improved slightly from net 29% in 2020 to net 33%. 

• Franchisee operating costs continue to be a concerning area – with franchisors recording a net negative 40%. Service providers were similarly dismal, recording a net negative 58%.

• Franchisor outlook toward franchisee profitability levels remained largely stable at net negative 7%, compared to net 0% in 2020. Service Providers changed from net negative 21% in 2020 to net negative 17%. 

Greatest Challenge to Franchising Development in 2021

We asked franchisors what they perceived to be the greatest challenge to franchising development in the year ahead. 11 of the 27 responding franchisors identified COVID-19 and the uncertainty it brings as the top challenge to their development. The fear of another outbreak or possible lockdown, closed borders and unknown of the full extent of the impact of COVID-19 were included within the comments made.

The next greatest identified themes, each with six responses were finding suitable/good quality staff (for both franchisor and franchisees) and access to finance. A perception that banks have tightened up on lending was mentioned by some franchisors. 

High operating costs (associated with increasing wage cost and rent in mall locations), and access to good franchisees remained as challenges highlighted by three responses each.

Greatest Opportunity for Franchising Development in 2021

This year we once again asked Franchisors and Service Providers what they perceived to be the greatest opportunity related to franchising development in the year ahead.  A wide variety of internal and external factors were cited. Key themes identified by Franchisors and Service Providers included increased number of potential franchisees (from returning New Zealanders, corporate redundancies and former employees), focus on financial metrics (e.g. profitability and costs) and franchisee benchmarking, site and asset availability from failing businesses, market share gains from shrinking competitors, leveraging value of being part of franchise system (e.g. strong systems and procedures, franchisor support), low interest rate, border opening, growth of the New Zealand brand and local tourism.

Concluding Comments

Franchize Consultants’ Franchising Confidence Index in 2021 indicated improvement in sentiment, particularly relating to general business condition, access to franchisees and access to suitable staff. There were, however, continued negative sentiment towards franchisees’ operating costs and access to finance. Increasing wages and rent appear to be most concerning regarding franchisee operating costs. 2021 has the added challenge of COVID-19 and the uncertainty it brings with mixed outlook among franchisors dependent on sector. A potential larger pool of prospective franchisees from returning Kiwis, corporate redundancies and former employees, a greater focus on franchisee benchmarking and financial metrics such as profitability and costs, and the availability of sites and assets from failing businesses, were expected to provide the greatest opportunity related to franchising development for 2021.

Franchize Consultants observes that many franchise systems have weathered the COVID-19 storm, along with many other changing factors, extremely well over the last 12 months.

Thinking ahead to the survey result, the responses highlight the importance of many important franchise system management practices over the year ahead. Some of these practices will be business as usual for many franchisors, however, some which are more strategic will need a much close focus to ensure franchise networks continue to be positioned well for the long term.

Examples of key management practices for the year ahead will include:

1. Close monitoring of franchisor and franchisee performance from both a profitability and sustainability perspective, then identifying, prioritising and actioning key performance or situational improvement opportunities and needs. 
2. Strategic and contingency planning, planning for possible ongoing COVID-19 effects – along with changes/innovations required from other moving factors, like customer needs and behaviour, key economic variables (e.g., interest rates, inflation, economic growth, unemployment, property values, legislative changes etc), technology, workforce trends, etc.
3. Franchise structure and management adaptation to a changing environment, including potential changes to franchisee and franchisor roles, resource requirements and processes, communication structures, manuals and training systems, franchise agreements, information structures, and so on.
4. Increased franchisee engagement, including a focus on supporting group and individualised franchisee circumstances, needs, franchisee plans and objectives.
5. A focus on total franchise system team (i.e., Franchise Support Office leadership and staff, franchisees, franchisee staff, suppliers etc) wellbeing, given the previous year and ongoing uncertainty.   

Franchize Consultants further comments that many New Zealand franchisors have been incredible in their response to COVID-19, including their incredible support to franchisees, and their significant adaptive undertakings at both a franchisor and franchisee level.  

Franchising Confidence Index Background

The Franchising Confidence Index represents confidence in key measures critical to the success of franchising in this country by reporting attitudes toward general business conditions, as well as key franchising growth determinants including access to capital, suitable potential franchisees, staff and locations. The Franchising Confidence Index also covers franchising health attributes and outcomes by exploring franchisee sales, operating costs and profitability, and franchise system growth prospects.

The data and analysis presented represents the views of 30 Franchisors and 13 Service Providers collected between Wednesday 20th January and Tuesday 2nd February 2021.  Findings from both groups are reported separately.  

Respondents were asked whether they expected conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’