Franchising Sentiment Falls as Concerns for Franchisees Escalates

The July quarter New Zealand Franchising Confidence Index finds positive but falling sentiment across many key franchising indicators. The second Franchising Confidence Index, undertaken by Franchize Consultants, finds falling franchisor net sentiment across many key franchising indicators. In particular, the survey finds substantial decreases in sentiment associated with general business conditions, availability of suitable staff, availability of suitable locations, sales levels per franchisee, operating costs per franchisee, franchisee profitability levels, and franchisor growth prospects. Franchisors and service providers share considerable concern for franchisee operating costs.

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• Franchisors are positive about forthcoming general business conditions (net 32%). This represents a fall from the net 39% found in the April 2010 survey. This fall compares with falls in other business confidence surveys, including the BNZ Confidence Survey (falling from 42% in March to 26% in June) and the National Bank Business Outlook Survey (falling from 50% in April to 40% in June). Comparatively, service provider sentiment for general business conditions is considerably more positive. A net 62% of service providers expect conditions to be better over the next 12 months (compared with 36% in the previous survey).
  
  
• Franchisors are still positive about forthcoming growth prospects for their organisations (net 48%), compared with service providers perspective for franchisors generally (net 32%).
  
  
• A worrying net 6% of franchisors expect access to financing to deteriorate over the coming year. Service providers are marginally more optimistic (net 12% positive). This finding demonstrates access to finance (a key franchising constraint) continues to trouble the franchise sector.
  
  
• Franchisors are, on balance, positive about forthcoming access to suitable franchisees (net 14%) and staff (net 16%) – two important growth drivers. Service providers are also more buoyant regarding franchisee and staff recruitment with a net 31% and 27%, respectively. Both franchisors and service providers register falls in confidence pertaining to availability of suitable staff – another important growth constraint.
  
  
• Franchisors (net 34%) and service providers (net 31%) are still positive, but register considerable falls in confidence levels for finding good locations – where applicable.
  
  
• Franchisors register a considerable drop in sentiment for franchisee sales levels (dropping to a net 36% from 59%). Service providers were consistent at a net 27%, compared to 28% in April.
  
  
• Worryingly franchisors (net -29%), and service providers (net -46%), expect franchisee operating costs to be higher over the next 12 months.
  
  
• Comparatively, franchisors are positive, albeit less so, about franchisee profitability with a net 16% (compared to 41% in April) expecting franchisee profitability to improve. This drop in sentiment is alarming. Service providers expect further deterioration (with a net -15% compared with -12% in April) in franchisee profitability over the coming year.

Franchisors and service providers, alike, are less confident about the year ahead for franchisors and franchisees than they were in April. Moreover, both groups reveal falling (and worrying) sentiment across a number of key franchising performance indicators.

Franchisors and associated franchisees are finding trading difficult – exacerbated by increasing competition, falling business and consumer confidence and spending, cheaper imports, rising costs and falling margins.

As the comments indicate sales levels are challenging for many systems across retail and service sectors. However there are exceptions, including retail grocery, freight, travel and computer repair examples.

Comments are typified by one service provider who notes “[c]onditions should get no better but also no worse. It's a matter of continuing to ‘hang on’...”

Overall, conditions again remain tough for franchisors and franchisees alike.

What will the July Franchising Confidence Index find?

Starting next Monday Franchize Consultants will begin surveying New Zealand franchisors and services providers for their 12-month outlook on key confidence measures. In the spotlight will be franchisor growth prospects and, key contributors to franchising network growth and health, including general business conditions, access to financing, suitable franchisees and locations, franchisee sales, operating costs and profitability.

As demonstrated by the following, the economic backdrop is currently mixed to fair:

• The latest Manpower Employment Outlook Survey  shows New Zealand employers are at their most optimistic levels in two years (Source: NZ Herald, June 8)
• Key banks (e.g., ASB, ANZ, National Bank, BNZ, Westpac and Kiwibank) have all instituted selected post OCR rate hikes
• BNZ Confidence Index slips from a net positive 34% in May, to 26% in June (Source: BNZ)
• The May ANZ-Roy Morgan Consumer Confidence survey demonstrates three successive lifts in consumer confidence (Source: ANZ)
• The Westpac-McDermott Miller Consumer Confidence Index moved up 4.6 points to 119.3 in June 2010 and up by 13.3 points compared with this time last year (Source: McDermott Miller)
• In mid-May, the quarterly ASB Investor Confidence index revealed a dip in investor confidence. A net 23 percent of investors expected a better rate of return over the forthcoming year compared with a fall of 7 points since the December 2009 quarter (Source: ASB Bank)

We look forward to results from the July Franchising Confidence Index survey. Franchisors and service providers will be surveyed between Monday 28 June and Friday 2 July (5 days). Results can be expected by Wednesday 7 July.