Johannesburg - Data from auditing firm PwC indicates that franchising will continue to see growth in 2011 as the consumer and economic recovery deepens
Funding, however, is likely to remain a challenge.
Each year the International Franchise Association (IFA) releases its annual Business Economic Outlook and most recent data suggests that this year will be a good one for entrepreneurs and small business owners to look at franchising to build personal wealth.
While the report is primarily geared for franchisors in the US, local entrepreneurs should still take note of some of the research.
"Growth in franchise establishment and employment was very sluggish in 2010," notes PwC. "Economic output by franchised businesses increased in 2010 after being relatively flat in 2009. In 2011, PwC projects faster growth in nearly all franchised business lines for establishments, employment and economic output."
The IFA report identifies 10 major business lines into which it divides franchising. In terms of growth in the number of establishments in the US, it is anticipating the following:
- Automotive (3.9%)
- Commercial and Residential Services (3.7%)
- Quick Service Restaurants (2.6%)
- Table/Full Service Restaurants (2.3%)
- Retail Food (3.2%)
- Lodging (4.4%)
- Real Estate (1.1%)
- Retail Products and Services (3.9%)
- Business Services (-0.2%)
- Personal Services (2.5)
Franchising businesses are heavily exposed to the consumer market and depend on consumer confidence.
Across the globe data indicates that consumer spending is on the up, however banks remain wary of extending credit.
This is perhaps best reflected on the domestic front by recent data from the Spark Cash Index managed by Spark ATM Systems.
According to their survey, the average withdrawal amount of cash in December was R447, up from the R434 averaged in December 2009.
Managing director Marc Sternberg expects this trend to continue in 2011 but with consumers continuing to prefer to use cash over credit facilities.
Estate agents in SA, many of whom operate in a franchising environment are feeling slightly more bullish about prospects in 2011 according to FNB's 4th quarter 2010 Estate Agent Survey, released last week.
The survey shows that more agents expected an improvement in first quarter 2011 in buy-to-let buying.
"This is an interesting turn in estate agent sentiment after five previous quarters of deterioration," said John Loos, FNB's property economist.
According to Loos, the recovery in prices for buy-to-let buying may take longer than the estate agents are expecting, but concedes that the market fundamentals will change this year to allow for this to happen.
While the outlook is rosier, one constraint is likely to hold back the sector growth for smaller operators and that is access to credit facilities.
IFA President and CEO Stephen Caldeira however does caution: "While the forecast reflects a stronger outlook for the franchise industry and the overall economy, franchise businesses will continue to struggle with accessing sufficient credit that would enable business expansion and job growth.”
Caldeira said that he believed that lending to franchise businesses in 2010 was down by between 40 and 50%.
Funders who spoke to Fin24.com indicated that while they were lending money to franchises in 2010, they remained cautious about backing established brands with proven track records.
Chris Delport, regional manager at small business financing firm Grofin told Fin24.com that while franchises are traditionally lower risk propositions than funding a new business, a number of new franchisors had come on to the scene.
"Their goal is to try and get as many outlets established and will make their money through the upfront franchise fees, rather than establishing sound and sustainable business that will benefit both the franchisor and the franchisee over a number of years."
- Fin24.com