NEW ZEALAND FRANCHISING STARTS 2012 WITH IMPROVED CONFIDENCE, BUT UNCERTAINTY REMAINS.

The Franchize Consultants’ January 2012 Franchising Confidence Index finds a rebound in franchisor confidence, following the substantial deterioration in October 2011. However, considerable uncertainty remains.
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• Both franchisor and service providers’ outlook for general business conditions have rebounded to a net 32%, following the substantial deteriorations recorded in the October 2011 survey. Note, responding franchisor sentiment in late January appears more positive than that reported by general business in the December reports of the NZIER (-3%), BNZ (3.20%) and National Bank business confidence surveys.
   
• Both franchisors and service providers registered increases in sentiment for franchisor growth prospects. Franchisors net sentiment improved from net 17 % in October to net 34% in January. Meanwhile, service providers’ confidence (net 37%) improved from a net 14% in the previous quarter.However, franchisors have become notably less confident in their growth prospects over time.
   
• Encouragingly, the outlook for financing has improved. Both franchisors (net 18%) and service providers (net 37%) recorded substantial improvements in sentiment for access to financing.
   
• In regards to the ease of access to suitable franchisees, small uptrends are noted with franchisors (net 3%) and Service Providers (net 37%).
   
• Sentiment regarding access to suitable staff for both franchisors (net 21%) and Service providers (net 26%) improve.
   
• The franchisor outlook for access to suitable locations remains reasonable (net 26%), while this percentage lowers slightly from net 32% (Oct 2011) to 26% for Service providers.
   
• On balance, recruitment is expected to remain challenged overall.
   
• Franchisor expectations for franchisee sales levels (net 29%) and operating costs (negative net 26%) showed slight improvements, while their outlook for franchisee profitability levels declined (negative net 8%). Service provider sentiment for franchisee sales levels decreased slightly (net 11%), but increased for franchisee operating costs (negative net 11%) and profitability levels (negative net 5%).

The outlook for 2012 has improved, but sentiment remains relatively varied and negative in certain sectors.


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

Positively, of the 33 franchisors, almost half (16) reported current and/or expected sales growth. Of these, a number indicated strong levels of sales growth – particularly those involved with pet care, but also selected domestic and/or commercial service companies.

Only two franchisors stated good franchise recruitment sales and one noted specific mentioned improved margins.

For those more challenged seven reported flat, patchy, plain difficult or just uncertain trading conditions. Notably, five of the seven identified themselves as retail and three complained of margin, profit, cost containment and/or landlord issues.

Views from those involved in construction remain challenged, but the outlook is improving slightly.

Other responses variously referred to the negative impact of external factors, such as the World Cup (diverting spending), cheap imports (as substitutes) and rub off in consumer confidence and spending from international economic concerns.

Service providers were similarly contrasting in their perception of how things looked for franchisors and franchisees generally. Specific challenges outside the general economic malaise included employees wanting more (after a period of low wage inflation), changing consumer behaviour reducing discretionary spending, increased competition, continued franchisee margin and profitability pressure, slow franchisee recruitment, and failures of poorly prepared franchise systems. By contrast, positive mentions included new outlet and system concept growth, perceptions of stabilising input costs with low inflation, improved access to quality sites, franchisees and access to finance.

Greatest Challenge to Franchising Development in 2012

Franchisors and service providers alike were asked what they perceived to be the greatest challenge to franchising development in the year ahead (see full report for illustration).

The responses indicate real concern for franchise network growth, with both franchisors and service providers indicating challenges associated with finding suitable franchisees and aligned prospective franchisee confidence to invest.

Access to finance for franchisees rated next for franchisors, followed by challenge, fear and uncertainty relating to the general economic outlook. The latter concern (economic factors) rated most highly for service providers. Other notable concerns (with at least two responses from franchisors and service providers combined) included finding suitable locations, franchisee profitability and return on investment, consumer sentiment, relationship pressures, franchisee complacency or business execution and franchisor resources.

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 37 franchisor and 19 service provider (e.g. franchise specialist bankers, lawyers, accountants, consultants, publishers, shop designers and fitters) respondents collected between Monday 23 and Friday 27January 2012. Findings from both groups are reported separately.

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