Suddenly, it seems, the days are getting warmer, the sun is coming up earlier and the world is feeling a little brighter. Could it be spring, or is there just a renewed positivity in the economic air?
There’s no question that the past year or two have been (at best) an uncertain period, through to an outright horrid time for business. In no particular order, we have endured elections and the lack of certainty prior, the threat of recession, falling house prices and their impact on collective consumer and economic confidence, interest rate rises, inflationary pressure, recession, and labour and supply shortages along the way.
It has been a challenging period for most businesses and some of these challenges have a compounding impact in the franchise sector. Falling revenue affects franchised businesses and their brand owners.
In most cases, these franchisors earn their revenue through royalties – often based on a percentage of revenue. So, when revenue drops at a franchisee level, it drops for the franchisor.
Inflation and margin erosion not only impact franchisees’ profitability, but it can also stress the value proposition of the franchise concept itself. Against a bleak economic backdrop, it’s no wonder that, for many systems, the past couple of years have been challenging both operationally and also in terms of growth prospects.
The first of the cycle of Official Cash Rate (OCR) and interest rate cuts have buoyed business confidence – anecdotally, I am hearing this almost every day. The US Federal Bank’s point five per cent drop will, no doubt, spark confidence that we’re in an easing cycle internationally. Confidence is important, but serviceability is critical and every .25% can make a difference when funding a business.
Inflation appears to be tamed, and the government is getting on with restoring some confidence in the economy while making business-sensible policy. Removal of the franchise specific additional restrictions to the Accredited Employer Work Visa clears a major hurdle for many to staff and run franchised businesses as well as enter and exit ownership.
There’s more than good weather and general economic conditions that should be warming potential entrepreneurs towards franchising.
For a start, there are opportunities created by this recent history. The words ‘recession’ and ‘economic downturn’ often cause concerns and are even treated as reasons for not buying a franchise.
My usual response to this is that the economy follows cycles and, during the lifecycle of owning a business, you will find yourself in both up and down stages of this cycle.
Right now, for example, potential franchisees have a current and first-hand ability to pick the eyes out of categories and brands that have weathered best during a challenging period – this should provide confidence in the likelihood of them doing so again.
Secondly, I believe there is huge opportunity in adopting a ‘buy and convert’ approach to franchising. This is where an independent business, or perhaps even a group of businesses, is purchased and converted to a franchised business.
It can lower the ingoing or establishment costs, it can remove a competitor from the market and, sometimes, it can even come with a readymade customer and or staffing base. This has long been a common approach in the food and beverage category of franchising, but it can equally be applied to everything from hair salons to tyre retail.
A recent ASB Economic Weekly report revealed per capita GDP was back to 2020 levels, down 5% from a peak of 2022. ‘Sobering’ was the word ASB used in that it’s unlikely to rise back to 2022 levels until beyond 2027. This doesn’t bode well for wage growth and overall prosperity, but making your own wealth – via entrepreneurship with the guidance of a franchise structure – may be the best way to fight stagnation in living standards. As Abraham Lincoln (apparently) said: “The best way to predict the future is to create it.”
Related: Responsible Franchising: What is it, and is NZ already a world-leading practitioner?
