Posted:29-May-2009
Franchise industry holding its own despite recessionary pressures
Despite recessionary pressures, the franchise industry contributed £11.4 billion to the country’s GDP last year, with overall profitability levels remaining strong, and in line with those recorded twelve months ago, according to the latest findings from the annual NatWest/bfa survey.
The number of franchises trading profitably (90%) is unchanged compared to last year, and compares favourably with the height of the last recession (in 1990) when just 70% of franchises traded profitably. However, turnover levels have dropped by 9% over the past twelve months from £360,000 to £326,000. Whilst the economic contribution of franchising to the UK economy is down by 8% (from 12.4bn in 2007 to 11.4bn in 2008) over the past 12 months, this still represents an increase of 5% compared to 2006 (£10.8bn) and the current figure is therefore more in line with historical averages.
2008 was a year of expansion for many franchises, with the total number of franchise systems now reaching 838 – an increase of 3.6% on the 809 systems recorded last year. Franchisors’ prospects for expansion also remain bullish, with plans to open an average of 9 new franchise units over the next 12 months. The newer systems (up to 3 years old) are looking to expand at a greater rate with an average of 14 new franchise units.
Graeme Jones, Head of NatWest’s Franchise team, comments: “It appears that 2007 was an exceptional year for the franchise industry, with rampant and above average growth in every respect. This level of growth isn’t sustainable in the current climate, and 2008’s performance is more in line with historical trends. It is still too early to tell how the full impact of the recession will impact the franchise industry, but NatWest remain committed to lending to the sector and maintaining our position as the leading bank for franchising.”
Brian Smart, Director General of the bfa, said “There is little indication so far of the recession having a severe impact on the franchise industry. It seems franchised businesses are in a much stronger position as they have the additional protection of a proven business model and brand and, are a lower risk option for customers.”
Looking to the future, franchisors and franchisees are realistic about the economic climate and the challenges their businesses will face going forward. The majority (60%) of franchisors and franchisees (66%) think that general economic conditions will become more difficult in the next 12 months. However, conversely, 82% of franchisors anticipate that that their business will improve or stay the same over this timeframe, whilst the remaining 18% expected business to become more difficult. This level of confidence has understandably dipped since last year when 95% of franchisors expected their business to improve or stay the same over the same time period.
Encouragingly, those franchisors and franchisees who expected trading for their own business to become more difficult were taking positive action to protect their businesses against this. Their focus will be on increasing advertising (29%), growing their existing client base (24%), improving productivity (21%) and reducing prices (15%). Franchisors experiencing difficult trading conditions are also looking to grow existing clients and target new ones, but there is also much more focus on reducing business overheads.
Although the number of individuals employed in franchising has not risen over the last 12 months, the franchising sector still represents employment for 467,000 (1.3%) of the UK workforce. As unemployment levels rise, it is likely that franchising will be seen as an increasingly popular career move.
However, estimated start up costs have declined, and new entrants can expect to pay £50,400 in franchise fees and other associated costs to their franchisor (down from £64,900 last year). This reflects the fact that franchisors are adapting to challenging economic conditions, and being flexible in terms of the financial support they are demanding.
Graeme Jones continued, “Franchising continues to be an attractive business model for entrepreneurs, and the recession is putting more potential franchisees in the market and enabling the recruitment of really high quality staff, who may be struggling to get employment through other routes.
“Despite the economic downturn, franchisors and franchisees are starting to benefit from a number of cost savings that are beginning to filter through. These include reductions in commodity and energy prices, and those with retail premises are also taking advantage of more flexible negotiations with landlords regarding the provision of rental payments. We are also seeing evidence of franchisors and franchisees becoming much more hands on with their business, to ensure high standards and sales targets are maintained through this difficult period.”
Brian Smart concluded, “It’s clear from this survey that the franchise sector is proving resilient to the economic downturn by investing heavily in activities to drive business forward and ensure future success. It is a mark of the enthusiasm and commitment of franchisors and franchisees that they continue to drive new business and retain it with such vigour."
