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January 25, 2011 - Franchize Consultants’ January 2011 Franchising Confidence Index finds mixed sentiment, including further challenges for franchisees. Franchisee profits are expected to remain challenged despite perceived improvements to general business conditions, access to suitable staff and access to suitable locations. Franchisee sales levels and operating costs are also expected to deteriorate over the next 12 months.

* Franchisors sentiment toward general business conditions (net 30%) stabilises in positive territory, and compares closely to the National Bank Business Outlook Survey (35% in December). Meanwhile December results for the BNZ Confidence Survey (net 18%) and the NZIER survey (net 3%) are less optimistic. Franchise service providers are also less optimistic (net 17%).

* Franchisors are still generally positive about forthcoming growth prospects for their organisations (net 54%), compared with service providers perspective for franchisors generally (net 21%).

* Franchisors expect access to capital to remain challenging (net -14%). Service providers are marginally more optimistic (net 8% positive) for franchisors generally. These findings demonstrate access to finance (a key growth constraint) continues to trouble development within the franchise sector. Franchisor expectations have been negative for 12 months.

* Whilst improving marginally, franchisors expect franchisee recruitment to remain challenging (net 3% up from -5% in October 2010). Meanwhile, perceived access to suitable staff improves to 25%. Comparatively, service providers continue to see a more positive outlook for franchisee and staff recruitment generally with a net 25% and 50%, respectively.

* Franchisors (net 38%, up from 30% in October) and service providers (net 54%, up from 52% in October) share a generally positive outlook for finding good locations – where applicable.

* Franchisee expectations are increasingly discouraging. Franchisor expectations for franchisee sales levels (net 33%), operating costs (net -22%) and profitability (net 5%) all declined from the previous quarter. Operating costs are expected to worsen and franchisee profitability narrowly escapes net negative territory overall. Comparatively, service providers again remain less optimistic in their outlook for franchisees, generally. A net 4% expected franchisees sales levels to improve. 33% (compared to -41% in October) expected deterioration in operating costs. Finally, service providers’ expectations for franchisee profitability were equivocal (net 0%).

In summary, as per the last survey, both groups continue to see challenging times ahead for franchised businesses in 2011.

Franchisors were asked ‘how things are looking in their sector,’ and service providers ‘how things are looking for franchisors and franchisees (generally).’

Responses were mixed with more franchisors expecting economic deterioration than improvement. Many challenges were noted (across sectors) including the Christchurch earthquake, few forward sales, demand for low-cost (versus premium) products, depressed demand from consumers not spending, increased competition, lower supplier loyalty, margin pressure, lease problems and issues with access to capital.

Conversely some franchisors were more optimistic (again, across sectors), noting increased interest from prospective franchisees, returning consumer confidence, increased sales, average spend and conversion rates.

Clearly, as noted by franchise service providers, there are substantial challenges ahead for businesses – franchised or otherwise. The business environment is expected to remain uncertain at best. Meanwhile, eroding franchisee sales and profitability pressure the franchise relationship.

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