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In the balance

My favourite time each year writing articles on the franchise business model is looking back at what I had written the year before and looking forward into my crystal ball and predicting what’s install for the year ahead.

I get some of it right, but like the ambiguous comments of the fortune teller, some predictions become half right – or half wrong. Like my call last year that “We have historic low interest rates, which look to be around for some time and the impact on business borrowing cannot be stressed enough.”

The historic low interest rates have moved up faster than most commentators would have expected, but the “impact on business borrowing cannot be stressed enough” remains on point, and we will come back to that a bit later.

My predictions for 2022 and growth in the franchise business model will be a fine balance of factors, some of which I can identify, but not necessarily tip which way the balance will go.

The great resignation

From early on in New Zealand’s first 2020 lockdown we were questioning whether people would want to return to their business-as-usual jobs and lifestyles. There has since been much written about the great resignation. I’m not sure from we have that is quite happening in New Zealand, but unquestionably people are looking for flexibility in their work-life balance and most importantly, a sense of self-determination.

Invariably this leads many to purchase or start a business, and sensibly a great number of new business owners are and will continue to invest in a franchise business.

Regional migration to accelerate

As ex-Aucklanders we have been beating the regional migration drum for some time. I think it’s been heard, as Bay of Plenty and other regions are and will continue to see an influx as people moving to the regions and establishing franchised businesses. Not surprisingly, this has spiked over the Auckland lockdown.

The impact of a peaking property cycle

Last year I wrote that rising property prices were a positive for encouraging investment in franchising by both raising the general mood of the economy and potentially providing equity.

My take on this for 2022 supports this comment. However, the relationship between rising property prices and investment in franchising is now influenced by a number of factors; the rate of growth has slowed and many may be looking to exit the property market.

The above forementioned regional migration means some may look at selling in Auckland, and buying a franchised business and house regionally. The above all sit in the pro-growth bucket, but there are an equal number of factors that may slow growth over the coming year.

Funding challenges

As mentioned, interest rates have moved from the historic lows and have done so relatively quickly. The impact on business borrowing can be significant, in percentage terms if funding is “against the bank of house”, interest costs could have more than doubled in the past year.

Additionally, the cautious will not only be looking at what has happened with rates but looking forward and wondering where they may head. And, so are the banks in terms of looking at affordability and repayments.

I would suggest more importantly, credit conditions have changed in the past 12 months and it will continue to become more difficult to borrow to establish or grow businesses. A positive for the franchise business model as I have said many times, is that success rates are higher and there is generally more information available including benchmarking, making it potentially easier for the banks to review and fund versus a stand-alone business.

Staff shortages

A quick stroll through Bayfair or along the Mount main street will demonstrate that staff shortages are rampant. I cannot see what is going to change positively in this regard in the short to medium term and suspect that inflation and wage pressure will only make this worse.

We’re aware of a number of franchise businesses whose growth is being directly impacted by staff shortages. The flipside is franchise businesses that have a low labour component and or man-power requirements are likely to flourish.

Disruption to supply chain

Ongoing disruption to the supply chain will continue to impact all business models and sectors, the extent will depend on several factors including the mix of domestic and or international supply chain, the level of vertical integration and the reliance on certain sectors such as building and construction.

There will be an associated varied impact on franchised businesses, but some may have an advantage by having established and larger purchasing and negotiation ability, perhaps vertically integrated supply chains versus stand alone businesses.

Related: Covid’s ongoing impact on franchising

Nathan Bonney
Nathan Bonney
Director of Iridium Partners. He can be reached at nathan@iridium.net.nz or 0275-393-022

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