Franchising Confidence Levels Dive. Worrying Outlook for Franchisor Growth

Franchize Consultants’ October 2011 Franchising Confidence Index survey finds substantial deterioration in key franchising measures, following a rebound in July.

Click here for a copy of the full October 2011 report

(Previous reports: April 2010 , July 2010 , October 2010, January 2011, April 2011, July 2011 )

• Both franchisor and service providers’ outlook for general business conditions deteriorated substantially from the FCI’s highs of July. Franchisors were less optimistic (net 6%), dropping 35% from the net 41% recorded in July.  Franchising service provider confidence levels dropped 42% to a net 23%, from the previous July quarter.

• Both franchisors and service providers registered falls in sentiment for franchisor growth prospects. Franchisors net sentiment fell from 39% in July to 17%. Meanwhile, service providers’ confidence (net 14%) took back 41% from their optimistic 55% in the previous quarter.

• Repeating the trend a year ago for the same quarter, franchisors’ attitudes for access to financing plummeted back to a negative state (-19%). Service providers managed to remain relatively positive but fell to a low 9%.

• Both franchisors (net -8%) and service providers (5%) broke new lows in their outlook for access to suitable franchisees, underlining the recruitment challenges faced by many franchise systems.

• Access to suitable staff had the only contrasting movement in confidence in the survey between franchisors and service providers. Encouragingly, franchisors responded positively, climbing to a net 17%. On the other hand, service providers declined to 14%.

• Expectations for franchisees substantially fell. Operating costs remain negative with franchisee profitability levels closely following the same direction.

Franchisors (22%) and service providers (14%) are less positive in their outlook for sales levels per franchisee. Sentiment toward franchisee operating costs remained firmly in negative territory with franchisors and service providers reporting a net -31% and -27%, respectively. Sentiment for franchisee profitability levels also fell. Franchisors’ outlook for franchisees bottom line fell to 3%. Comparatively, service providers combined for a net -23%, after a year of limited optimism in their outlook for franchisee profitability levels.

In summary, both groups share the view of an imminent slow year and inevitable tough business conditions with various external factors influencing the economy.

Franchisors were asked ‘how things are looking in their sector’, and service providers ‘how things are looking for franchisors and franchisees (generally).’

Most franchisors were finding trading challenging, although sentiment did vary markedly by sector.

Although there have been more enquiries, franchise recruitment remains a challenge. As one franchisor noted “attitude to risk is still very conservative...finding the right people with sales ability is as difficult as ever”. This is reflected in the striking results for access to suitable franchisees.

Franchisors across a number of sectors have also noticed customers being more prudent with their spending. Customers tend to be only spending to meet immediate essential requirements making selling extra services a harder task. This is echoed by the view of a service provider who responded “[t]he global economic issues are still impacting on business confidence and consumer spending.”

The entrance of international brands can bring an upswing for the market as pointed out by a service provider. However, some franchisors have also felt more pressure from increased competition within their sector. The availability of cheaper and more convenient alternatives for accessing goods (including the internet) are shifting consumers away from the conventional retail store experience. This coupled with high rent greatly concerns some.

A few franchisors reported enjoying growth, particularly one in B2B that has experienced 22 consecutive months of same store sales growth. However, the majority indicated sales and margins pressures due to a reduction in spending, increased operating costs, and tighter financing conditions. Franchisors in the automobile and building and construction sectors are still finding it difficult to lift sales levels, and some sectors continue to feel repercussions from the Christchurch earthquakes.

Franchising Confidence Grows to New Heights. Limited Boost Expected from Rugby World Cup 2011

Franchize Consultants’ July 2011 Franchising Confidence Index finds considerable improvements to most key franchising confidence indicators.

Click here for a copy of the full July 2011 report

(Previous reports: April 2010 , July 2010 , October 2010, January 2011, April 2011)

• For franchisors, increased optimism sent confidence up to a net 41% from the record      -3% low in April.   

• A majority (63.4%) of franchisors indicated that the Rugby World Cup would not have a positive impact on their franchise system. However, 24.4% responded maybe, and 12.2% responded yes.

• Franchisors consolidate optimism in their own growth prospects (net 39%). Meanwhile service providers, on balance, are more confident in their growth outlook for franchisors (net 55%).

• For the first time, franchisors’ expectations for access to financing rose to a positive net 24%, breaking out of the negative trend that lasted more than one year.
  
  
• Franchisors register marginal improvement and remain subdued in their sentiment for finding suitable franchisees (net 8%). Franchisee recruitment is still a challenge for franchisors. Service providers remain considerably more optimistic (net 41%).

• Franchisor and service providers’ outlook for finding suitable staff both declined. Franchisor fell from a net 36% (April) to a net 0%. Meanwhile, service providers remain positive on balance (net 27%), albeit decreasingly so.

• Expectations for franchisees showed some positive movement. Franchisee sales and profitability level indicators improved more than expectations for franchisee operating costs – which remain negative overall. Both franchisors (44%) and service providers (50%) are positive in their outlook for franchisee sales. Meanwhile, both (franchisors -32%, service providers -27%) remain concerned about the outlook for franchisee operating costs. Notwithstanding, both (franchisors 22%, service providers 14%) report improved sentiment for overall franchisee profitability levels. 

In summary, both groups continue to acknowledge that times remain tough. However, many felt steady improvements were being made and the outlook appears more positive.

Franchisors were asked ‘how things are looking in their sector’, and service providers ‘how things are looking for franchisors and franchisees (generally).’ In addition, both groups were asked about how they think the upcoming Rugby World Cup will impact upon franchising operations.

Franchisors indicated a mix of experiences. Most notably, the building and construction sector remains particularly challenged. One franchisor noted: “The worst I have seen it in 49 years of building.” Another stated: “Heading for record low residential consent numbers in 2011.” They were not alone.

Others joined with challenges, including those involved in automobile related businesses – where challenges were variously related to the Japan earthquake and tsunami, volatile petrol prices, and increased competition.

Some sectors feel that the pressure on discretionary income is not helping their business get out of the flat trend. Maintaining the status quo is their immediate goal.

At the other end of the spectrum, some franchisors and sector groups report a general stabilisation and/or increased demand. Interestingly, only a small number of franchisors indicated that they were enjoying good sales. Discouragingly, none reported fast growth.

Overall, the views of service providers mirror the thoughts of franchisors with both groups agreeing the impact of the Rugby World Cup on franchise operations will be negligible.

A “short burst of joy” may drive some positive sales and regain confidence but benefits in the long-run are not foreseeable in the future. To some respondents, the Rugby World Cup poses a distraction that will draw focus away from franchise owners.



Confidence Erodes as the Christchurch Quake Pummels Some Franchisee and Franchisor Businesses

Franchize Consultants’ April 2011 Franchising Confidence Index finds many key confidence measures deteriorating following the February 22 earthquake and after shocks in Christchurch.

Click here for a copy of the full April 2011 report

(Previous reports: April 2010 , July 2010 , October 2010, January 2011)

• Franchisor sentiment toward general business conditions (net -3%) has substantially deteriorated (from net positive 30% in January)

• Franchisors are still generally positive about forthcoming growth prospects for their organisations (net 36%), however optimism has dampened

• Franchisors expect access to capital to remain challenging (net -10%).  Franchisor expectations regarding financing have now been negative for 12 months.
  
  
• Whilst improving marginally, franchisors expect franchisee recruitment to remain challenging (net 5% up from 3% in January 2011). Comparatively, service providers are considerably more positive in their outlook for franchisee recruitment (net 45%).

• Meanwhile, franchisor and service provider perceived access to suitable staff are aligned and firmly positive reporting net 36% and 35%, respectively. Franchisors and service providers are positive, although less optimistic about franchisor access to suitable locations than January.

• Expectations for franchisees are increasingly discouraging overall, particularly relating to franchisee profitability. While expectations for franchisee sales levels stabilise (net 33%), franchisor expectations for operating costs (net negative -38%) and profitability (net negative -3%) both deteriorated from the previous quarter. Franchisor expectations for franchisee profitability are now negative on balance for the first time since the survey began a year ago. Service providers’ expectations align with franchisors for franchisee operating costs and profitability, but service providers are less optimistic in their outlook for franchisee sales levels.

In summary, as per the last survey, both groups continue to see challenging times ahead for franchised businesses in 2011 and early 2012.  

Franchisors were asked how things are looking in their sector and how the Christchurch earthquakes had impacted franchising operations and their outlook.

Accordingly, it is clear the February 22 quake and subsequent aftershocks have proved particularly damaging and have affected franchising and business confidence.  There have been many franchisee store or unit closures (whether temporary or permanent) and there is an over-riding feeling of uncertainty.

Both franchisees and franchisors have been impacted. Many franchisees face various issues right across their business, such as problems relating to income, essential services, insurance, work-in-progress, suppliers, locations and finance.

For franchisors, there are issues with royalty payments, increased support costs, advanced supplies, growth plans and finance. For some franchise systems, the Christchurch earthquakes have heightened viability concerns for both franchisees and their franchisor.

Some franchisors and franchisees have been severely affected:

 “Very hard impact. We have a number of retail outlets seriously affected and not operating. The outlook for any growth in this area is very unlikely over the next two years.”

“We lost 1 franchise store and could not replace at the same occupancy costs. Rentals have been artificially inflated. We are closing a second store which is near a suburb badly affected and which has been depopulated. We do not anticipate business getting back to normal in the following 2 years at least. This is our second biggest city and will therefore have a significant impact on the overall business.”

Most franchisors report a direct impact on business whether through permanent or temporary store/unit closures and subsequent reductions in demand and sales.

Many franchisees have dealt with temporary store closures and have now commenced trading.

Meanwhile, the outlook for some is more uncertain.

“The earthquakes have impacted us with closed stores and unknown dates for access to some of those stores affected.”

“Currently our Christchurch store is sitting in a 40ft container. We don't expect to be trading in Christchurch for at least 6-9 months. We also would not want to re-open until the city location is ready and in a position to trade at a profitable level.”

In contrast, some affected franchisors (though few in numbers) have noted increased demand following the earthquakes, often due to competitive closures (whether permanent or temporary) or changes to purchasing patterns and/or business strategy (e.g. increased demand for virtual office services).

“We have six stores in the Christchurch area and have been very fortunate to have none greatly affected by the earthquake. Revenues in those six stores are actually higher than expected due to high demand for products/services when the city was shut down.”

However, more than 25% of respondents reported store closures within their comments, including a number of permanent closures.

More broadly, franchisors report a mixed outlook for the next twelve months with the majority noting either negative or middling demand growth. Some however, do note growth and in some instances strong growth. But overall there is a cautionary outlook and it is not expected the Rugby World Cup will provide more than a short-term injection.

Franchisors variously note differences by region and the impact of the Christchurch earthquake, either through local operations or the flow on effects. Franchisors also touch on consumer discretionary spending pressures, such as increased food and fuel costs, and note consumers taking more care and being more risk averse.

Pricing pressures are also evident due to competition and/or customers expecting more from their money.  Finally, financing continues to remain a stated growth challenge for some.



Franchising Commences 2011 With Mixed Sentiment. Franchisee Unit-Level Trading Conditions Are Expected To Remain Challenging

Franchize Consultants’ January 2011 Franchising Confidence Index finds mixed sentiment, including further challenges for franchisees. Franchisee profits are expected to remain challenged despite perceived improvements to general business conditions, access to suitable staff and access to suitable locations. Franchisee sales levels and operating costs are also expected to deteriorate over the next 12 months.

Click here for a copy of the full January 2011 report

(Previous reports: April 2010 , July 2010 , October 2010)

• Franchisors sentiment toward general business conditions (net 30%) stabilises in positive territory, and compares closely to the National Bank Business Outlook Survey (35% in December). Meanwhile December results for the BNZ Confidence Survey (net 18%) and the NZIER survey (net 3%) are less optimistic. Franchise service providers are also less optimistic (net 17%).

•  Franchisors are still generally positive about forthcoming growth prospects for their organisations (net 54%), compared with service providers perspective for franchisors generally (net 21%).

• Franchisors expect access to capital to remain challenging (net -14%). Service providers are marginally more optimistic (net 8% positive) for franchisors generally. These findings demonstrate access to finance (a key growth constraint) continues to trouble development within the franchise sector. Franchisor expectations have been negative for 12 months.

• Whilst improving marginally, franchisors expect franchisee recruitment to remain challenging (net 3% up from -5% in October 2010). Meanwhile, perceived access to suitable staff improves to 25%. Comparatively, service providers continue to see a more positive outlook for franchisee and staff recruitment generally with a net 25% and 50%, respectively.
  
  
• Franchisors (net 38%, up from 30% in October) and service providers (net 54%, up from 52% in October) share a generally positive outlook for finding good locations – where applicable.

• Franchisee expectations are increasingly discouraging. Franchisor expectations for franchisee sales levels (net 33%), operating costs (net -22%) and profitability (net 5%) all declined from the previous quarter. Operating costs are expected to worsen and franchisee profitability narrowly escapes net negative territory overall. Comparatively, service providers again remain less optimistic in their outlook for franchisees, generally. A net 4% expected franchisees sales levels to improve. 33% (compared to -41% in October) expected deterioration in operating costs. Finally, service providers’ expectations for franchisee profitability were equivocal (net 0%).

In summary, as per the last survey, both groups continue to see challenging times ahead for franchised businesses in 2011.  

Franchisors were asked ‘how things are looking in their sector,’ and service providers ‘how things are looking for franchisors and franchisees (generally).’

Responses were mixed with more franchisors expecting economic deterioration than improvement. Many challenges were noted (across sectors) including the Christchurch earthquake, few forward sales, demand for low-cost (versus premium) products, depressed demand from consumers not spending, increased competition, lower supplier loyalty, margin pressure, lease problems and issues with access to capital.

Conversely some franchisors were more optimistic (again, across sectors), noting increased interest from prospective franchisees, returning consumer confidence, increased sales, average spend and conversion rates.

Clearly, as noted by franchise service providers, there are substantial challenges ahead for businesses – franchised or otherwise. The business environment is expected to remain uncertain at best. Meanwhile, eroding franchisee sales and profitability pressure the franchise relationship.

Franchising Sentiment Slides Further. Capital Constraints and Franchisee Concerns Remain

Wednesday 13 October 2010 - Franchize Consultants’ October 2010 quarter Franchising Confidence Index finds positive but falling sentiment across many key franchising indicators, including general business conditions, access to financing, suitable franchisees and locations. Meanwhile, franchisee sales levels and operating costs, and franchisor growth prospects are forecast to improve, while availability of suitable staff and franchisee profitability levels are expected to remain unchanged.

Click here for a copy of the full October 2010 report

(Previous reports: April 2010 & July 2010)

• Franchisors remain generally positive about forthcoming general business conditions (net 28%). This represents a gradual decline from April (net 39%) and July (net 32%), respectively. Overall, franchisor sentiment exceeds general business sentiment as measured by the BNZ Confidence Survey (net 18% in October), National Bank Business Outlook Survey (14% in September) and the NZIER (-9% in September). Meanwhile, service provider sentiment for general business conditions (for franchisors generally) plummeted to net 7%, from 62% in July.
  
  
• Franchisors are still generally positive about forthcoming growth prospects for their organisations (net 56%), compared with service providers perspective for franchisors generally (net 17%).
  
  
• An increasing, and worrying, net -19% of franchisors expect access to financing to deteriorate over the coming year. This compares with -5% and -6% in April and July, respectively. Service providers are marginally more optimistic (net 7% positive) for franchisors generally. These findings demonstrate access to finance (a key growth constraint) continues to trouble development within the franchise sector.
  
  
• Franchisors see tougher access to suitable franchisees in the year ahead (net -5%), down from 14% in July. Meanwhile, perceived access to suitable staff holds at net 16%. Comparatively, service providers see a more positive outlook for franchisee and staff recruitment with a net 31% and 45%, respectively.
  
  
• Franchisors (net 30%, down from 34% in July) and service providers (net 52%, up from 31% in July) share a generally positive outlook for finding good locations – where applicable.
  
  
• Encouragingly, franchisor sentiment for franchisee sales levels climbed to net 48% (from 36% in July), and the outlook for operating costs improved dramatically – with a net 51% (compared to -29% in July) expecting improvements over the next 12 months. Meanwhile, a net 16% of franchisors expect franchisee profitability levels to be better (same as July, but down from 41% in April).
  
  
• Comparatively, service providers were far less optimistic in their outlook for franchisees, generally. A net 7% (27% in July) expected deterioration in franchisees sales levels. 41% (compared to 46% in July) expected deterioration in operating costs. Finally, a net 24% expected franchisee profitability levels to deteriorate. Overall, while franchisors expect improvements in sales and growth, both groups clearly see tough times ahead for franchisees generally. 

Franchisors were asked ‘how things are looking in their sector,’ and service providers ‘how things are looking for franchisors and franchisees (generally).’ Franchisor comments indicate huge variations in current and expected sales activity. Indeed comments range from “still very grim” to “solid and looking promising.” On balance sales were challenging, but expected to improve – with some franchise systems more positive than others.

Clearly challenges exist within many sectors with competition driving margin erosion and some customers internalising tasks previously outsourced to franchise companies. A number of franchisors also note profit pressure due to rising inputs costs, rents and inflexible landlords.

Access to financing is also raised. Bank lending criteria has changed and one franchisor notes the development of alternative funding sources. Aligned levels of franchisee enquiries are slow, with few qualified enquiries cited, generally – however, two franchisors cited good, strong potential growth prospects.

Franchise service provider comments reflect the uncertain environment. Most note “uncertainty” and expect a slow recovery at best. Comments such as “tougher work to make the same dollar” and “it will be a tough year ahead” show service providers expect challenging times for many franchisors and franchisees to continue.

Franchise challenges cited included tougher bank lending criteria, GST impact short-term (affecting required working capital), increasing struggling franchisees and royalty delinquency rates (i.e. franchisees not paying franchisor royalty income), difficulties maintaining confidence in the franchise system, and workplace competition for prospective franchisees.

On a more positive note, service providers note the potential for further interest in franchising from increased redundancy levels, examples of franchisees de-leveraging and favourable leases renegotiations.

Moving forward there is a recognised need for franchisors to review, streamline and improve their networks, and increase focus on franchisee profitability levels. Externally, it suggested the government provide more focused interest and SME support as per the USA and UK.

Dr Callum Floyd, Director of Franchize Consultants, who undertakes the survey, notes:

“The continued downward trend in sentiment and low levels of expectations for many key franchising variables is of considerable concern to franchisors and franchisees, and should concern the wider economy and government.”

“Franchising is pervasive covering many important sectors of business from grocery to home services, and is a great contributor to job growth, business training, SME compliance (due to good business systems) and GDP. But it requires the right environment including, crucially, access to capital for expansion and confidence.”

“Many well-known (and lesser-known) franchisors and franchisees have been hammered by the economy and continue to trade and battle despite considerable adversity. They do not crave handouts but they are desperate for an environment that fosters positive business growth and development.”

“It’s time government recognised franchising properly for its contribution, and needs.”