NEW ZEALAND 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.
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• 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 Index Background

The Franchising Confidence Index represents the views and expectations of franchising, an important domain of business within the New Zealand economy.

Franchising is a substantial and growing domain of business making up an important part of the New Zealand economy. The 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. 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 36 franchisors and 22 service providers collected between Monday 3 and Friday 7 October 2011. Findings from both groups are reported separately.

Results and analysis were completed by Vivian Ng and Callum Floyd.

Respondents are asked whether they expect conditions to be 'better', 'same' or 'worse'. 'Net' confidence is the difference between those reporting 'better' and 'worse'.