Franchise Sector mixes up ingredients for growth third year running

29 August 2011

For the third consecutive year, the franchise sector has met or exceeded ambitious targets to deliver double digit revenue and profit growth according to PwC's Franchise Sector Indicator (FSI) released today.

Franchisor revenue has risen, on average, by 17 per cent and profit by 22 per cent. A significant increase on the targets set last year of 13 and 18 per cent respectively.

Franchisee revenue is also up, on average, to 12 per cent exceeding last year's 10 per cent forecast. And, profit is up too, to 13 per cent to meet last year's target.

PwC Private Clients partner Greg Hodson says, "Good luck has nothing to do with the franchise sector's strong year-on-year results. The sector's recipe for success is in a mix of four key ingredients."

According to Mr Hodson those key ingredients are:

• Proven and replicable business model;
• Franchisees with ‘skin in the game';
• Extensive operational and marketing support; and
• Branding, marketing and buying power that comes from strength in numbers.

He says, "Franchising has proven it is a robust business model and over the past 12 months it has also shown a capacity for change and innovation that has also contributed to the sector's success."

Growth

The franchise sector continues to be optimistic about short and medium term growth although a little more circumspect than previous years.

Franchisors are forecasting revenue growth of 11 per cent in the next year and 37 per cent over the next three years. Profits are also being tipped to rise to 17 per cent in the next 12 months ahead and 46 per cent in three years. In 2010 they were forecasting three year revenue growth of 49 per cent and profit growth over the same period of 54 per cent.

Franchisee revenue is also expected to grow by nine per cent in the next year and 29 per cent in the next three years. Profits too are on the rise and expected to grow in the next year by 11 per cent and 34 per cent in the next three years. In 2010 they were forecasting three year revenue growth of 38 per cent and profit growth over the same period of 46 per cent.

There are other signs of the sectors more conservative approach too. The appetite for acquisitions, especially in the short term has reduced and organic growth continues to be the primary strategy for growth.

Just over a third of respondents (35%) are looking to grow offshore in the next three years as compared with nearly half (44% & 47%) over the past two years."

Mr Hodson says, "Consumer confidence, a slower than expected post GFC recovery and unstable global financial markets have also contributed to franchisors being a bit more conservative. However, forecasts of double digit growth are still a clear signal of a healthy, confident sector."

Challenges & Opportunities

Recruitment still a challenge

Consistent growth hasn't made finding suitable candidates any easier for franchisors who also report a decrease in the average number of monthly enquiries from potential franchisees down from 40 in 2009 to 30 in 2011.

The non-retail sector is feeling the impact more than the retail sector, with an average of 22 enquiries per month as compared to 40.

According to the survey the effectiveness of traditional recruitment mediums is also in decline, causing many franchisors to change their approach to recruiting. An increasing number are using spotter's fees and franchisor funding to attractive franchisee candidates.

"Where franchisors have made real headway in the past 12 months is in their recruitment of Gen Y," Mr Hodson says.

More than half of the franchisors surveyed now use specific, targeted initiatives to attract Gen Y.

Funding

According to the FSI more than 56 per cent of franchisees are still struggling to get funding. Tightening lending criteria and reduced risk tolerance continue to make obtaining finance difficult.

Although, franchisors can improve franchisees prospects of financing through accreditation with one or more banks, less than one in four franchisors are actually accredited. Among the smaller systems more than one in seven is not accredited.

Mr Hodson says, "Despite the success of the sector, the banks continue to make the accreditation process extremely difficult and have been inconsistent in their lending approach to the sector over the last 12 months".

"There is a huge opportunity for a financier to ‘get it right'," he says.

Online retail increasing

One third of franchise systems now claim to have an online store and this is expected to grow to 57 per cent in the next two years.

Of the franchisors currently retailing online, nearly a quarter report that 20 per cent of their revenue is generated from online sales.

"Online channels are not being used to compete with franchisees but because they offer another channel to raise brand awareness and broaden accessibility," Mr Hodson says.

Franchisee training

"Ongoing support and training is one of the keys to strengthening operations and adding to the bottom line," says Mr Hodson.

Most franchisees are given training on how to operate their franchise and market to their local community. Only a few franchisors provide franchisees with training in team building and leadership, and detailed financial management.

"There is a big opportunity for franchisors to improve the overall business skills of many of their franchisees and provide them with additional tools that will not only improve the performance of their existing business but also enable them to take on additional franchises," Mr Hodson says.

Franchise Brand

Despite its contribution to the economy, there continues to be a low awareness across government, the business community and potential franchisees about the strength of the franchise business model.

Mr Hodson says, "Franchisors told us they wanted to see increased support from Government in areas such as franchisee funding, franchisee training and harmonisation of the State and Federal franchise legislation."

"With its robust business model and consistently strong performance, the franchise sector has not realised its potential. It represents a huge opportunity for banks, investors, government, business people and potential franchisees."

About PwC

PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.com for more information.

"PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.