Franchisors expect challenging year ahead

Franchize Consultants (NZ) Ltd
Media Release

KEY HIGHLIGHTS

Franchize Consultants’ January 2022 Franchising Confidence Index sets the stage for the year, with 37 franchisors providing a window into current and more long-term opportunities and challenges. 

In terms of sentiment, franchisors are expecting a tough year ahead with net sentiment being negative on six out of the nine measures collected in the survey. Franchisor sentiment on availability of staff, access to financing, franchisee operating costs, and to a lesser extent, franchisee profitability are at an all-time low with the lowest net confidence recorded for these measures since the Franchising Confidence Index was established in 2010. Compared to 2021, all nine indicators have declined.

When asked on how things are looking among franchisors, unsurprisingly, comments remain positive from certain sectors of business (e.g. construction and trade-related businesses, logistics and retailers). However most franchisors expect challenges in the year ahead, citing rising costs, staff shortages, supply issues and the uncertainty associated with Omicron as key examples.

• Franchisor outlook for general business conditions shows deterioration to net negative 27% in January 2022 from net 20% in January 2021.

• Franchisor sentiment for their growth prospects softens to net 14%, down from net 31% in 2021.

• Franchisor sentiment towards access to suitable franchisees returns to net negative 27% in 2022 following improvement to net 23% in 2021.

• Franchisor sentiment towards access to financing deteriorates further to an all-time low at net negative 70%, the lowest net confidence recorded since the Franchising Confidence Index was established in 2010.  

• Franchisor outlook on suitable locations remains largely unchanged at net 9% from net 14% in 2021. 

• Franchisor outlook towards access to suitable staff shows a strong decline to net negative 78% following from an improvement in 2021. The net negative 78% is the lowest net confidence recorded for this measure since the Franchising Confidence Index was established.  

• Franchisors sentiment toward future sales levels per franchisee declines to net 0% from net 13% in 2021.

• Franchisee operating costs remain a concerning area – with franchisors sentiment worsening to net negative 73% in 2022 from net negative 40% in 2021. 

• Following a similar trend to franchisee sales and operating costs, franchisor outlook on franchisee profitability levels decline to net negative 43% in 2022 from net negative 7% in 2021.

Greatest Challenge to Franchising Development in 2022

We asked franchisors what they perceived to be the greatest challenge to franchising development in the year ahead. 13 of the 35 responding franchisors identified finding suitable staff as the top challenge to their development. This is followed by COVID-19 and the uncertainty it brings with 11 franchisors identifying it as a challenge. 

Other challenges highlighted by franchisors include finding suitable franchisees, access to funding (or funding with reasonable interest rates), government regulations, rising inflation and supply issues.

Greatest Opportunity for Franchising Development in 2022

This year we once again asked franchisors what they perceived to be the greatest opportunity related to franchising development in the year ahead. 29 of the 37 franchisors were able to provide a response. Key themes identified by franchisors include better availability of premises/sites, increased number of potential franchisees (from people returning to New Zealand and people looking for self-employed opportunities), market share gains from failing competitors, diversification into other new products and services and new channels (e.g. e-commerce).

Concluding Comments

The first case of COVID-19 in New Zealand was reported on 28 February 2020. Now almost two years later, we await the peak of another variant and its damaging effects to the country and businesses. 

It is therefore not surprising Franchize Consultants’ Franchising Confidence Index in 2022 indicated declining sentiment among franchisors with outlook for general business conditions falling to net negative 27%. 

Franchisors were particularly pessimistic on availability of staff, access to financing, and franchisee operating costs and profitability levels. Other challenges identified for the year ahead included rising costs, issues with supply, the impact of COVID-19 and the uncertainty associated with Omicron, and, government regulations. 

Better availability of premises/sites, a potential larger pool of prospective franchisees, market share gains from failing competitors, new product/service offerings and new channels are expected to provide the greatest opportunity related to franchising development for 2022.

Franchize Consultants observe the ongoing and incredible resilience of many franchise systems, including both franchisors and franchisees, that continue to weather the COVID-19 storm. Furthermore, many franchise systems continue to adapt their offerings and operations, and provide considerable new support (in various forms) to franchisees.  

Looking ahead the immediate issue is dealing with Omicron and its effects. From there, franchisors and franchisees will hopefully [be able to] move towards more strategic planning and operating certainty.   

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

1. Continued 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. This will include cost containment measures in view of price and labour cost increases. 
2. A focus on factors relating to team (franchisor and franchisee staff) wellbeing and retention, given the previous years, ongoing uncertainty and tight labour market.   We’d also note the importance of focusing on individual team learning and development, an area that has been difficult to plan during COVID-19 times. Franchise companies really need to be positioning themselves as an employer of choice. 
3. 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, labour supply, property values, legislative changes, etc), technology, workforce trends, climate issues, etc.      
4. 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. The last two years have seen a reduction in this work. Future changes will be needed. 
5. Continued high levels of franchisee engagement, including a focus on supporting group and individualised franchisee circumstances, needs, franchisee plans and objectives. Engagement will also be important for future franchisee adaptions from needed innovation and franchise structure changes.

Franchize Consultants further comments that many New Zealand franchisors continue to be incredible in their response to COVID-19, including their outstanding support to franchisees, and 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 37 franchisors collected between 18th January and 1st February 2022. Respondents were asked whether they expected conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’