Franchising Confidence Grows To New Heights

Wednesday 13th July 2011

Franchising Confidence Grows To New Heights. Limited Boost Expected From Rugby World Cup.

Franchize Consultants’ July 2011 Franchising Confidence Index survey finds considerable improvements to most key franchising confidence indicators. In particular, franchisors and service providers are unified in their outlook for improved general business conditions – reaching new heights at 41% and 65%, respectively. Similarly, expectations for access to financing also reach heights. Notably, franchisors (net 24%) are positive in their access to financing for the first time since the survey began in April 2010. Interestingly, most franchisors (63%) did not think the Rugby World Cup would have a positive impact on their franchise system.

Both franchisors and service providers foresee improvements in general business conditions. For franchisors, increased optimism sent confidence up to a net 41% from the record -3% low in April. Service providers were even more optimistic with a net 65%.

This positive outlook is also reflected in other general business confidence surveys in June, namely NZIER (27%), BNZ (57%) and National Bank (46.5%).

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%). RESULTS SUMMARY TABLE* *The figures indicate ‘net’ confidence. Net’ confidence is the difference between those reporting ‘better’ and ‘worse’ © 2011 Franchize Consultants (NZ) Ltd |www.franchize.biz | www.franchisingconfidence.co.nz 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. Service providers remained optimistic (net 43%). 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. At net 7%, franchisors’ expectations in access to suitable locations are much lower than the previous quarter, whereas service providers thought more positively (net 32%). 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.

Service providers share the view business conditions are slowly improving, however, with reservations due to global economic uncertainty. That said, they indicate opportunities are emerging and outlook is a little more optimistic, but franchise businesses will be confronted with increased cost pressures. As two service providers note “Things will slowly improve in next 12 months, but will still be some margin pressure in most businesses.” “Slightly more rosy than last year - although the general economic environment is not showing strong signs of growth.” Some service providers feel that franchised businesses should seek ways to stay competitive and strive for continuous improvement during such tough times.

Rugby World Cup 2011 Impact

Franchisors were surveyed on whether they thought the Rugby World Cup would have a positive impact on their franchise system.

A majority (63.4%) indicated that it would not. However, 24.4% responded maybe, and 12.2% responded yes.

Those that did believe the Rugby World Cup would shed some positive light on their businesses were clearly associated with hospitality, accommodation, tourism and, to a lessor extent, general retail. Rather than being an impetus to sales, some franchisors consider the Rugby World Cup to bring problems such as traffic congestion, time off by franchise owners, reduced access to houses near grounds, and disruption to schooling. A lesser proportion could see the Rugby World Cup translate into opportunities that could assist sales and increase business. Service providers believe that the Rugby World Cup will bring marginal positive impact that will temporarily benefit relevant service industries in the right location. One noted: “On average it may have minimal effect, as any gains made by sales to visiting tourists could well be offset by higher costs and lessened demand from locals. In any case, the majority of franchise operations are in industries/service sectors that will be impervious to RWC influences.” The food, accommodation, tourism, transport and retail service industries are likely to get a lift for the duration of the Rugby World Cup. But this opportunity requires business owners to be proactive and to ensure they are providing ‘first-class’ customer services when all eyes are on New Zealand. Brand reputation and experience will be crucial. Despite positive sales growth likely to be short-term, the influx of tourists will help the economy in general. 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

Franchising Confidence Index The Franchising Confidence Index represents the views and expectations of franchising, an important domain of business within the New Zealand economy. Franchising commands its own confidence index for at least two reasons. First, franchising is a substantial and growing domain of business making up an important part of the New Zealand economy. The latest Franchising New Zealand 2010 survey, conducted by Massey University in collaboration with Griffith Business School, indicates New Zealand has 423 individual franchise systems comprising some 23,600 units (owned mostly by franchisees). The survey also suggests local franchise systems employ some 80,400 people, including 57,700 permanent full-time employees. Finally, local expert estimates of total franchise system turnover range from $15 to $25 billion – suggesting franchising is a strong contributor to New Zealand GDP – as it is around the world. Second, franchising is a distinct form of organisation with unique characteristics and associated challenges. Given this, and the importance of the sector overall, it is clear the Franchising Confidence Index provides information of value to all key franchising community stakeholders - which includes franchisors, franchisees, suppliers, customers, service providers, and government. Companies involved in franchising are as diverse as Foodstuffs (New World, PAK'nSAVE, Four Square), NZ Post, Fisher & Paykel, Contact Energy, McDonald’s, Columbus Coffee, Fastway Couriers, Harcourts and Fletcher Building. 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 41 franchisors and 23 service providers collected between Monday 4 and Friday 8 July 2011. Findings from both groups are reported separately. Results and analysis were completed by Vivian Ng and Callum Floyd. Note, respondents are asked whether they expect conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’

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