NZ Franchisors Brace for 2020 and Beyond

KEY HIGHLIGHTS

Franchize Consultants’ January 2020 Franchising Confidence Index sets the stage for the next decade. With 24 NZ franchisors providing a window into current and more long-term opportunities. Declines in positivity, apparent since 2015, continued to hold. NZ Franchisors remained negative, on balance, in five out of nine measures. There were, however, important positives. In particular, franchisors had a strong positive outlook for sales levels per franchisee and, whilst to a lesser extent, their own growth prospects. Standout challenges this year relate to finding franchisees, and, increasing regulations and compliance. Both challenge areas also important for the next decade, along with adaptation to threats and opportunities provided by technology.

• Franchisor outlook for general business conditions (net negative 30%) showed slight improvement from the October 2019 of net negative 32%, whilst Service Providers sentiment stayed the same at net 21%.
• Franchisor sentiment for franchisor growth prospects, showed improvement at net 17%, up from net 4%, bringing it into line with January 2019 sentiment. Service Providers’ net 21% also improved from net 7% in October.
• Franchisor sentiment toward access to financing worringly also remained negative, at a net negative 30%. Service Providers confidence was less positive dropping from 7% to a net negative 7%.
• NZ Franchisors sentiment toward access to suitable franchisees has been seen as the greatest challenge for some time. This remains at net negative 30% (previously net negative 60%). Service Providers at net negative 7% (down from net 7%) were more positive, on a relative basis.
• Franchisors continue to indicate their outlook for access to suitable staff remains a critical challenge at net negative 36%. Service Provider confidence met with that of franchisors at a net negative 36% (down from net negative 7%).
• Franchisors, at net 9%, up from net 4%, were slightly more positive this quarter in their outlook for access to suitable locations. Service Providers were more positive at net 29% up from net 14% in October.
• Franchisors sentiment toward future sales levels per franchisee has been steadily increasing with current view at a positive net 39% (from net 24%). Service Providers sentiment also increased to net 29% up from 14%.
• Franchisee operating costs continue to be a concerning area – with NZ franchisors recording a net negative 43%. Service providers were similarly dismal, recording a net negative 57%.
• On a more positive note, Franchisor outlook toward franchisee profitability levels recorded a net 0%, up from net negative 12%. Service Providers were improved from a net negative 43% in October 2019 to a net negative 21%.
• Franchisors identified top three challenges to franchise system development in 2020 as 1) finding franchisees, 2) increasing regulation and compliance and 3) access to finance.
• Franchisors identified many improvement opportunities for the year ahead covering areas, low interest rates, site availability, technology, government policy changes and growth through new offerings

Greatest Challenge to Franchising Development in 2020

For the ninth year running NZ franchisors were asked what they perceived to be the greatest challenge to franchising development in the year ahead. The number one challenge continued to be finding suitable franchisees, followed by increasing regulation and compliance and access to finance. Other notable challenge themes included finding suitable locations and franchisee investment and costs.

Greatest Opportunity for Franchising Development in 2020

This year we once again asked NZ Franchisors and Service Providers what they perceived to be the greatest opportunity related to franchising development in the year ahead.  A wide variety of internal and external factors were cited. Key themes identified by NZ Franchisors and Service Providers included low interest rates within a stable economy, site availability due to demise of smaller businesses, growth through new offerings, generational changes in franchisees, review of model to assess all areas of opportunity, investment in infrastructure, technology, and, government policy changes including potential election outcomes.

What do you expect to be the greatest challenge/opportunity for franchising this decade?

This year we also sought insights from Franchisors and Service Providers into what they regard as key challenges for the new decade, which were different from just the 2020 year. Challenges associated with finding suitable franchisees continued. In addition, other key challenges cited included changes to business and franchising legislation (including the impact from Australian franchising regulations), rising operating costs, innovation and adaptation relating to technology, and, changing population demographics.

Concluding Comments

Franchize Consultants’ January 2020 Franchising Confidence Index sets the stage for the next decade, with 24 franchisors providing a window into current and more long-term opportunities and challenges. In terms of sentiment for the year ahead, declines in positivity apparent since 2015 continued to hold. Franchisors remained negative, on balance, in five out of nine measures. There were, however, important positives. In particular, franchisors had a strong positive outlook for sales levels per franchisee and, whilst to a lesser extent, their own growth prospects. Standout challenges this year relate to finding franchisees, and, increasing regulations and compliance. Both challenge areas also important for the next decade, along with adaptation to threats and opportunities provided by technology.

Franchising is not alone in lacking strong confidence toward future business conditions, as earlier comparisons to key New Zealand general business surveys have indicated. Key will be ensuring that this backdrop of general poor sentiment does not limit positive steps, innovation and investment directed toward continually improving franchise system performance and associated franchisor and franchisee returns.

We at Franchize Consultants note the general resilience of franchising systems; however, it remains our view that much can be done to better future-proof franchise networks and build more valuable and sustainable businesses for franchisors and franchisees alike. We maintain that vigilance in identifying and acting on making improvements and change, where required, is imperative to ensure long-term franchise system returns and sustainability.

For a copy of the full report: www.franchisingconfidence.co.nz or www.slideshare.net/franchizeconsultants/

Franchising Confidence Index Background

Franchize Consultants’ Franchising Confidence Index is a quarterly survey of circa 400 New Zealand franchisors and 100 specialist service providers (e.g., consultants, banks, accountants, lawyers and publishers) to the franchising community.

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 23 franchisors and 14 Service Providers collected between Monday 20th January and Monday 2 February 2020.  Findings from both groups are reported separately.  Respondents were asked whether they expected conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’