The rise and rise of franchises
FZ I FEATURE
The rise and rise of franchises Everything you should know about franchising in South Africa By Tracy-Lee Nicol The South African franchise industry is big, a lot bigger than you may think. Not only are there in the region of 668 concepts as of 2013 – a number that has consistently grown from a mere 156 concepts in 1994 – but it’s integral to the economy. At the close of the financial year in February 2013, franchising
generated R302 billion (9,7%) of GDP, provided employment for more than 315 000 people, and the business format plays a leading role in fostering small business development and job creation. Here’s what franchising in South Africa looks like and the juicy bits that can influence what you invest in and where.
6% Limpopo
WHERE SOUTH AFRICA’S FRANCHISES ARE
7%
5%
Franchises occur throughout the country and across a range of sectors. The most dominant sectors however are fast food, restaurants and retail occupying a combined 42% of the franchise industry. As a result, the three densest concentrations of franchises occur in provinces with large urban hubs: Gauteng (41%), Western Cape (15%) and KZN (12%).
41% Mpumalanga
North West
3%
Gauteng
5%
12%
Free State
Kwa-Zulu Natal
Northern Cape
6% 15% Eastern Cape Western Cape
1The number 225of
franchises opened in the 2012/13 financial year
About this information All statistical information is from The South African Franchise Market survey, published on 23 August 2013. The study was commissioned by the Franchise Association of South Africa (FASA) in collaboration with Sanlam, and conducted by Research IQ. The statistics measured in the study are based on the responses of 217 participating brands, 67% of which are FASA members.
1 36 • E N T R E P R E N E U R M AG .CO. Z A N OV E M B E R 2 0 1 3
FEATURE I FZ
R302 billion contribution
FRANCHISE SECTOR OVERVIEW Retailing ** Annual revenue: R23,8b Number of people: 85 600 hires Average upfront fee: R263 654 Average management fee: 8,3% Marketing: 2,6% Number opened: 254 Number closed: 28 Found in: High streets and shopping malls
to GDP
668 Franchised concepts
30 206 Franchised outlets
Construction & related Annual revenue: R3,2b Number of people: 13 000 hires Average upfront fee: R112 923 Average management fee: 4,6% Marketing: 3,1% Number opened: 108 Number closed: 19 Found in: Industrial areas
28 368 Owned by franchisees (94%) Real estate * Annual revenue: R63,6b Number of people: 32 700 hires Average upfront fee: R111 250 Average management fee: 5,7% Marketing: 2,3% Number opened: 77 Number closed: 34 Found in: Home based and high streets
Automotive industry Annual revenue: R17,2b Number of people: 42 900 hires Average upfront fee: R57 000 Average management fee: 5,3% Marketing: 3,7% Number opened: 60 Number closed: 34 Found in: Industrial areas
Building, office & home Annual revenue: R2,1b Number of people: 10 400 hires Average upfront fee: R92 783 Average management fee: 4,8% Marketing: 2,2% Number opened: 63 Number closed: 28 Found in: Home based, shopping malls and high streets
B2B services Annual revenue: R1,8b Number of people: 51 500 hires Average upfront fee: R187 647 Average management fee: 8,8% Marketing: 2,3% Number opened: 96 Number closed: 38 Found in: Home based
Childcare & education Annual revenue: R2b Number of people: 7 300 hires Average upfront fee: R88 344 Average management fee: 10,3% Marketing: 6,0% Number opened: 118 Number closed: 44 Found in: Home based
Leisure & entertainment Annual revenue: R62m Number of people: 4 500 hires Average upfront fee: R29 000 Average management fee: 10,8% Marketing: 8,8% Number opened: 17 Number closed: 17 Found in: Various
Fast food & restaurants Annual revenue: R182,3b Number of people: 54 800 hires Average upfront fee: R161 424 Average management fee: 5,6% Marketing: 2,7% Number opened: 356 Number closed: 80 Found in: High streets and shopping malls
Health, beauty & fitness Annual revenue: R1,7b Number of people: 6 600 hires Average upfront fee: R130 611 Average management fee: 6,2% Marketing: 2,3% Number opened: 43 Number closed: 15 Found in: Shopping malls and high streets
Personal services * Annual revenue: R3,8b Number of people: 4 600 hires Average upfront fee: R53 333 Average management fee: 0% Marketing: 7,5% Number opened: 17 Number closed: 1 Found in: Home based, high streets and shopping malls
Other * Annual revenue: R402m Number of people: 1 300 hires Average upfront fee: R191 938 Average management fee: 2,0% Marketing: 1,8% Number opened: 16 Number closed: 3 Found in: Various
THE GROWTH OF SA’S FRANCHISE CONCEPTS 156
212
358
430
381
391
470
531
551
668
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
* T he number of respondents to the survey in these categories were comparatively small, and the corresponding data is therefore exaggerated, says Margaret Constantaras of Research IQ. ** The number of respondents for the petroleum industry was very small and therefore included in the retail sector.
N OV E M E B E R 2 0 1 3 E N T R E P R E N E U R M AG .CO. Z A •
1 37
FZ I FEATURE
88%
of franchises are optimistic about growth
WHAT DOORS OPENED AND CLOSED IN 2012/13? While the global recession over the past five years has dented most economies, including South Africa’s, the franchise business model has proven very resilient. In May 2013 Trade and Industry minister Rob Davies, stated that five out of seven new small businesses in South Africa close their doors within a year of opening. By contrast, franchise closure rates are substantially lower thanks to established franchisors. In fact, 75% of franchisors responding to the survey had been in business for more than six years, and 46% of franchisors have been in business for more than 12 years.
Opened
Closed
Other
16
3
Leisure & entertainment
17
17
Personal services
17
1
Health, beauty etc
43
15
Automotive & related
60
34
Building & related
63
28
Real estate
77
34
B2B
96
38
Construction
108
19
Childcare
118
44
Retailers
254
28
Fast food & restaurant
356
80
0
50
100
150
200
250
300
350
400
1:3,6
FRANCHISING BEYOND BORDERS
ratio of closures to opens
With the African economy steadily growing, a number of South African franchises have already expanded into Africa. According to the survey, 84 franchisors have operations in 18 African countries.
THE TOP FIVE COUNTRIES ARE Botswana with 37 South African franchise outlets in operation, Namibia with 35, Swaziland with 26, Zimbabwe with 20, and Zambia with 16 units.
FAVOURABLE SECTORS These are the total number of outlets per sector in Africa; Construction & related
11 Real estate
12
16 Automotive
35
20
Zambia
37 Namibia Botswana
Zimbabwe
26 Swaziland
South Africa
1 38 • E N T R E P R E N E U R M AG .CO. Z A N OV E M B E R 2 0 1 3
28 Childcare education & training 33 Building, office & home services 41 Fast food & restaurants
Retailing
82
98
FZ I FEATURE
YOUR INVESTMENT In comparison to international franchising, South Africa is lagging behind somewhat. The size of the US franchise industry, for example, encompasses 75 sectors, over 3 000 concepts, provides over 18 million jobs, and contributes in excess of $1,5 trillion to the economy. The challenges facing franchise growth in South Africa swing both ways. For franchisees it’s finding the initial investment capital required and having the right qualifications. The top ‘people challenges’ facing franchisors have been revealed to be finding the right franchisee, required franchisee skills, and staffing.
EXTERNAL CHALLENGES
INTERNAL CHALLENGES
Difficulty getting finance for growth, rising costs affecting bottom line, and maintaining standards.
Managing costs and finances, owner-operator compliance and maintaining standards.
PEOPLE FACTOR
The right franchisee with the right skills, and staffing for head office and outlets.
SO YOU WANT TO BUY A FRANCHISE? UPFRONT FRANCHISE FEE (R) Retailing
263 654
Other
191 938
Business to business services
187 647
Fast food & restaurants
161 424
Health, beauty & fitness
130 611
Construction and related
112 923
Real estate services
111 250
Building, office & home services
92 783
Childcare, education & training
88 344
Automotive
57 000
Personal services
53 333
Leisure & entertainment
29 000
MARKETING / ADVERTISING LEVIES
MANAGEMENT SERVICE FEES
Average 2,8%
Average 6,7%
75%
Average R143 280
R0
R50 000
R100 000
GO WHERE THE PEOPLE ARE In a gold rush, sell spades. WHILE AS MUCH AS 41% of South Africa’s franchises are based in Gauteng, franchisees should be thinking outside the city of gold for opportunities. Simone Cooper, head of franchising at Standard Bank, uses the Northern Cape as an example. “There’s an economic boom in the Northern Cape thanks to 13 new iron ore and manganese mines opening over the last three years. As a result, rural towns are flourishing with new prosperity and an influx of people, and growth can be seen in franchises setting up business
1 4 0 • E N T R E P R E N E U R M AG .CO. Z A N OV E M B E R 2 0 1 3
R150 000
R200 000
R250 000 R300 000
in new shopping centres,” says Cooper. “Kuruman, Hotazel, Kathu, Beeshoek and Postmasberg are doing well.” Servicing business and people needs Although the biggest franchise sectors in SA are food and retail, other sectors are finding opportunity in the Northern Cape. “With an upsurge of entrepreneurs wanting to take advantage of the economic boom, we have seen a 23% increase in franchising businesses operating in the last year alone.“ Franchise businesses opening in the Northern Cape include fast food, with one popular fried chicken brand operating
franchisors in business for more than six years
Time taken to reach break-even
43%
28%
17%
Up to six months
Seven to twelve months
More than a year
more than 21 outlets in the province; motor franchises servicing the vehicle repair and maintenance market; and enterprises providing services from contracted transport to repair and maintenance for mine operations. “With the significant spike in transport activities, fuel companies have also been quick to identify opportunities,” says Cooper. New town, new opportunity With competition being a challenge for new franchisees in urban areas, opening a franchise in a more rural area can place the franchisee in a strong business position – particularly if they are early entrants. EM
The rise and rise of franchises Everything you should know about franchising in South Africa By Tracy-Lee Nicol The South African franchise industry is big, a lot bigger than you may think. Not only are there in the region of 668 concepts as of 2013 – a number that has consistently grown from a mere 156 concepts in 1994 – but it’s integral to the economy. At the close of the financial year in February 2013, franchising
generated R302 billion (9,7%) of GDP, provided employment for more than 315 000 people, and the business format plays a leading role in fostering small business development and job creation. Here’s what franchising in South Africa looks like and the juicy bits that can influence what you invest in and where.
6% Limpopo
WHERE SOUTH AFRICA’S FRANCHISES ARE
7%
5%
Franchises occur throughout the country and across a range of sectors. The most dominant sectors however are fast food, restaurants and retail occupying a combined 42% of the franchise industry. As a result, the three densest concentrations of franchises occur in provinces with large urban hubs: Gauteng (41%), Western Cape (15%) and KZN (12%).
41% Mpumalanga
North West
3%
Gauteng
5%
12%
Free State
Kwa-Zulu Natal
Northern Cape
6% 15% Eastern Cape Western Cape
1The number 225of
franchises opened in the 2012/13 financial year
About this information All statistical information is from The South African Franchise Market survey, published on 23 August 2013. The study was commissioned by the Franchise Association of South Africa (FASA) in collaboration with Sanlam, and conducted by Research IQ. The statistics measured in the study are based on the responses of 217 participating brands, 67% of which are FASA members.
1 36 • E N T R E P R E N E U R M AG .CO. Z A N OV E M B E R 2 0 1 3
FEATURE I FZ
R302 billion contribution
FRANCHISE SECTOR OVERVIEW Retailing ** Annual revenue: R23,8b Number of people: 85 600 hires Average upfront fee: R263 654 Average management fee: 8,3% Marketing: 2,6% Number opened: 254 Number closed: 28 Found in: High streets and shopping malls
to GDP
668 Franchised concepts
30 206 Franchised outlets
Construction & related Annual revenue: R3,2b Number of people: 13 000 hires Average upfront fee: R112 923 Average management fee: 4,6% Marketing: 3,1% Number opened: 108 Number closed: 19 Found in: Industrial areas
28 368 Owned by franchisees (94%) Real estate * Annual revenue: R63,6b Number of people: 32 700 hires Average upfront fee: R111 250 Average management fee: 5,7% Marketing: 2,3% Number opened: 77 Number closed: 34 Found in: Home based and high streets
Automotive industry Annual revenue: R17,2b Number of people: 42 900 hires Average upfront fee: R57 000 Average management fee: 5,3% Marketing: 3,7% Number opened: 60 Number closed: 34 Found in: Industrial areas
Building, office & home Annual revenue: R2,1b Number of people: 10 400 hires Average upfront fee: R92 783 Average management fee: 4,8% Marketing: 2,2% Number opened: 63 Number closed: 28 Found in: Home based, shopping malls and high streets
B2B services Annual revenue: R1,8b Number of people: 51 500 hires Average upfront fee: R187 647 Average management fee: 8,8% Marketing: 2,3% Number opened: 96 Number closed: 38 Found in: Home based
Childcare & education Annual revenue: R2b Number of people: 7 300 hires Average upfront fee: R88 344 Average management fee: 10,3% Marketing: 6,0% Number opened: 118 Number closed: 44 Found in: Home based
Leisure & entertainment Annual revenue: R62m Number of people: 4 500 hires Average upfront fee: R29 000 Average management fee: 10,8% Marketing: 8,8% Number opened: 17 Number closed: 17 Found in: Various
Fast food & restaurants Annual revenue: R182,3b Number of people: 54 800 hires Average upfront fee: R161 424 Average management fee: 5,6% Marketing: 2,7% Number opened: 356 Number closed: 80 Found in: High streets and shopping malls
Health, beauty & fitness Annual revenue: R1,7b Number of people: 6 600 hires Average upfront fee: R130 611 Average management fee: 6,2% Marketing: 2,3% Number opened: 43 Number closed: 15 Found in: Shopping malls and high streets
Personal services * Annual revenue: R3,8b Number of people: 4 600 hires Average upfront fee: R53 333 Average management fee: 0% Marketing: 7,5% Number opened: 17 Number closed: 1 Found in: Home based, high streets and shopping malls
Other * Annual revenue: R402m Number of people: 1 300 hires Average upfront fee: R191 938 Average management fee: 2,0% Marketing: 1,8% Number opened: 16 Number closed: 3 Found in: Various
THE GROWTH OF SA’S FRANCHISE CONCEPTS 156
212
358
430
381
391
470
531
551
668
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
* T he number of respondents to the survey in these categories were comparatively small, and the corresponding data is therefore exaggerated, says Margaret Constantaras of Research IQ. ** The number of respondents for the petroleum industry was very small and therefore included in the retail sector.
N OV E M E B E R 2 0 1 3 E N T R E P R E N E U R M AG .CO. Z A •
1 37
FZ I FEATURE
88%
of franchises are optimistic about growth
WHAT DOORS OPENED AND CLOSED IN 2012/13? While the global recession over the past five years has dented most economies, including South Africa’s, the franchise business model has proven very resilient. In May 2013 Trade and Industry minister Rob Davies, stated that five out of seven new small businesses in South Africa close their doors within a year of opening. By contrast, franchise closure rates are substantially lower thanks to established franchisors. In fact, 75% of franchisors responding to the survey had been in business for more than six years, and 46% of franchisors have been in business for more than 12 years.
Opened
Closed
Other
16
3
Leisure & entertainment
17
17
Personal services
17
1
Health, beauty etc
43
15
Automotive & related
60
34
Building & related
63
28
Real estate
77
34
B2B
96
38
Construction
108
19
Childcare
118
44
Retailers
254
28
Fast food & restaurant
356
80
0
50
100
150
200
250
300
350
400
1:3,6
FRANCHISING BEYOND BORDERS
ratio of closures to opens
With the African economy steadily growing, a number of South African franchises have already expanded into Africa. According to the survey, 84 franchisors have operations in 18 African countries.
THE TOP FIVE COUNTRIES ARE Botswana with 37 South African franchise outlets in operation, Namibia with 35, Swaziland with 26, Zimbabwe with 20, and Zambia with 16 units.
FAVOURABLE SECTORS These are the total number of outlets per sector in Africa; Construction & related
11 Real estate
12
16 Automotive
35
20
Zambia
37 Namibia Botswana
Zimbabwe
26 Swaziland
South Africa
1 38 • E N T R E P R E N E U R M AG .CO. Z A N OV E M B E R 2 0 1 3
28 Childcare education & training 33 Building, office & home services 41 Fast food & restaurants
Retailing
82
98
FZ I FEATURE
YOUR INVESTMENT In comparison to international franchising, South Africa is lagging behind somewhat. The size of the US franchise industry, for example, encompasses 75 sectors, over 3 000 concepts, provides over 18 million jobs, and contributes in excess of $1,5 trillion to the economy. The challenges facing franchise growth in South Africa swing both ways. For franchisees it’s finding the initial investment capital required and having the right qualifications. The top ‘people challenges’ facing franchisors have been revealed to be finding the right franchisee, required franchisee skills, and staffing.
EXTERNAL CHALLENGES
INTERNAL CHALLENGES
Difficulty getting finance for growth, rising costs affecting bottom line, and maintaining standards.
Managing costs and finances, owner-operator compliance and maintaining standards.
PEOPLE FACTOR
The right franchisee with the right skills, and staffing for head office and outlets.
SO YOU WANT TO BUY A FRANCHISE? UPFRONT FRANCHISE FEE (R) Retailing
263 654
Other
191 938
Business to business services
187 647
Fast food & restaurants
161 424
Health, beauty & fitness
130 611
Construction and related
112 923
Real estate services
111 250
Building, office & home services
92 783
Childcare, education & training
88 344
Automotive
57 000
Personal services
53 333
Leisure & entertainment
29 000
MARKETING / ADVERTISING LEVIES
MANAGEMENT SERVICE FEES
Average 2,8%
Average 6,7%
75%
Average R143 280
R0
R50 000
R100 000
GO WHERE THE PEOPLE ARE In a gold rush, sell spades. WHILE AS MUCH AS 41% of South Africa’s franchises are based in Gauteng, franchisees should be thinking outside the city of gold for opportunities. Simone Cooper, head of franchising at Standard Bank, uses the Northern Cape as an example. “There’s an economic boom in the Northern Cape thanks to 13 new iron ore and manganese mines opening over the last three years. As a result, rural towns are flourishing with new prosperity and an influx of people, and growth can be seen in franchises setting up business
1 4 0 • E N T R E P R E N E U R M AG .CO. Z A N OV E M B E R 2 0 1 3
R150 000
R200 000
R250 000 R300 000
in new shopping centres,” says Cooper. “Kuruman, Hotazel, Kathu, Beeshoek and Postmasberg are doing well.” Servicing business and people needs Although the biggest franchise sectors in SA are food and retail, other sectors are finding opportunity in the Northern Cape. “With an upsurge of entrepreneurs wanting to take advantage of the economic boom, we have seen a 23% increase in franchising businesses operating in the last year alone.“ Franchise businesses opening in the Northern Cape include fast food, with one popular fried chicken brand operating
franchisors in business for more than six years
Time taken to reach break-even
43%
28%
17%
Up to six months
Seven to twelve months
More than a year
more than 21 outlets in the province; motor franchises servicing the vehicle repair and maintenance market; and enterprises providing services from contracted transport to repair and maintenance for mine operations. “With the significant spike in transport activities, fuel companies have also been quick to identify opportunities,” says Cooper. New town, new opportunity With competition being a challenge for new franchisees in urban areas, opening a franchise in a more rural area can place the franchisee in a strong business position – particularly if they are early entrants. EM
