The role that banks play in franchising

The importance of franchising over the past forty-five years can be seen in many of the top banks having dedicated franchise divisions as franchises have always proved to be more resilient and successful than start-ups.

The banking sector understandably has become more risk averse in these trying times but, at the end of the day, it is in the business of financial lending and whilst looking to mitigate their risks, will also be open to taking risks to either support existing clients or in financing new business opportunities that will definitely emerge post-crisis.

FASA’s Franchise Survey looked at the banking environment and its relationship to the franchise sector with the following findings highlighted.

The incidence of using more than one bank for business purposes was 2,3 per franchisor. Franchisors indicated that the main bank used by franchisees mirrored those that they (the franchisors) use as their main bank.
The four main reasons for selecting the main business bank were longevity (41%), excellent service (27%), financing options (23%) and lower banking/ service fees (17%). Other lesser reasons included higher loan approval rates (10%), use of technology and innovative payment methods (9% each).
Three in five franchisors (61%) rated their main business bank’s service as excellent (9 or 10 out 10) and a further 30% rated the service (8 out of 10).
Security/ fraud protection (39%), good service (35%) and lower banking fees (31%) were the three main requirements of a business bank. These were followed by business loans/ good loans (26%), good relationships (19%), and lower interest rates (15%).

Overview of the current franchise landscape

We asked James Noble, Executive – Sectors: Wholesale, Retail and Franchise Business, Absa Relationship Banking, who sponsored FASA’s 2023 Franchise Survey to give us his overview of the current franchise landscape as outlined in the survey and the trends that will drive growth.

“The franchise industry in South Africa has been a great success story over the past few decades. The industry has grown significantly since 1994, with over 700 franchise systems in the country, and some even became international brands. The industry spans 14 major business categories, dominated by fast-moving consumer goods, retail, automotive, restaurants and quick service restaurants, which represents more than 50% of the brands.”

The franchise industry has also made good progress with regard to transformation and driving government’s objective of financial inclusion. Nearly 50% of franchise brands have BEE shareholding. It also has a strong presence of women as shareholders. In addition, the industry is responsible for almost 5% of the employment in South Africa, with nearly 500 000 employees. More than 70% of these employees fall in the previously disadvantaged group.

According to a recent survey by FASA and sponsored by Absa, the industry has increased its contribution to gross domestic product from 10% to 15% over the past ten years, making it a significant contributor to the South African economy. The survey also highlighted much better business confidence levels among franchisees and franchisors than in the broader economy and reflected optimism that turnover will grow over the next 12 months. However, the cost to operate increased, which has a negative impact on the general profitability of businesses.

Operational expenses also have a significant influence on the profitability and viability of businesses, including the cost of overcoming load-shedding, the cost of electricity, rentals and labour. Gross profit margins are also impacted by the rising cost of goods from suppliers.

Most franchisors are focused on innovation to ensure they keep up with competitors and general consumer demands. Innovation can vary from how product innovation and diversity; innovation can also include product delivery through alternative channels such as online or eCommerce platforms supported by a delivery service and optimising staff utilisation.

Where to from here?

“Business format franchising is well established in South Africa and grew significantly over the past few decades. However, there is still a big opportunity with the social format franchising model in South Africa to unlock opportunities in rural areas and townships. The emerging markets offer good opportunities to provide basic services that can be focused on our youth and women in business. Opportunities exist from little spaza shops, childcare services, ablution facilities for schools and sports programmes, to hair salons and barber shops.”

The consumer services sector is another big untapped market where business can be done through a more formal franchise model. The solar installation and after-sales market is a big opportunity, not only for installations, but also the maintenance of solar systems. Other industries such as plumbing and electric services can be more formal through franchising to build more trust among consumers and to protect them from doubtful service providers.

The use of technology, artificial intelligence (AI) and automation of systems is becoming more important to franchisors and franchisees. Management information is crucial to manage financial benchmarks, business trends and consumer behaviour. The use of technology can streamline and optimise businesses to ensure operational efficiency that can lead to cost savings and better financial performance.

Customer loyalty and reward programmes have become a necessity in business and have a significant influence on customer behaviour. Cash strapped consumers are continuously looking for bargains or more value for money when shopping.

Another trend that is reshaping the South African franchise industry is the growing demand for delivery services. Consumers are increasingly looking for convenience and safety which has boosted the popularity of online ordering and home delivery. This presents a meaningful opportunity for franchisors and franchisees to expand their customer base and increase their revenue streams. Delivery services are not limited to food and beverages, but also include other products and services such as groceries, pharmaceuticals, clothing, books, flowers, gifts and more. Franchises can leverage their existing infrastructure and brand recognition to offer reliable and efficient delivery options to their customers. Alternatively, they can partner with third party delivery platforms that have a wide network and a loyal customer base.

The benefits of franchising

“One of the main benefits of franchising is the reduced risk and increased profitability. South Africa has over 45 000 franchise businesses, which provides a safer way of getting into business and becoming financially independent. The support of a franchisor and value of brand recognition still outweighs the risk of starting a business on your own. Franchisors can assist with lease negotiations, product and supplier arrangements, marketing of the business and raising finance and services from the bank of affordable rates to reduce operational costs.”

Improved access to financial solutions: Franchising facilitates access to finance for franchisees, as lenders and investors are more likely to fund a franchise business than a start-up. Franchisees can also benefit from the financial assistance and advice of the franchisor.

Absa’s Wholesale, Retail and Franchise team operates across several business categories, namely grocery retail, restaurants, quick service restaurants, entertainment and leisure, automotive and fuel, just to name a few. Absa has a good understanding of the industry from a franchisor, franchisee and banking perspective. Therefore, they can provide you with the best solutions that will contribute to your business’ success. To find out more about the wholesale, retail and franchise industry and Absa’s available financial solutions visit ABSA, email franchise@absa.co.za or call +27 11 350 8000.