Towards the end of each year I write on what I see as the emerging trends in franchising for the coming year. If 2020 has taught me anything, providing predictions is a dangerous preoccupation, so this year I am going to keep the focus a little tighter and answer the question: in the current environment, are there opportunities in franchising?
The simple answer is yes. Let’s look at the economic and social environment and then a delve into what sectors and specific industries are currently providing the strongest opportunities.
The economic environment
Generally, franchising is anti-cyclical to the economy. When the economy is upbeat, less people make the jump from paid employment and lower unemployment means there are usually less people looking to start their own business out of necessity.
The recession that followed the Global Financial Crisis (GFC) was unusual as unemployment did not rise as much as previous recessions. Our current recession has already seen an increase in unemployment and an increase in demand to buy into franchised businesses. Is it necessity or opportunity?
We have historic low interest rates, which look to be around for some time and the impact on business borrowing cannot be stressed enough. Adding to this that a significant amount of business borrowing in New Zealand is secured against or funded by equity in homes, the lower interest rates have a double whammy – ie, lower rates on both their franchise business loan and the home loan.
There has however for several months been some query around the banks’ appetite for business loans and we are certainly seeing them be more cautious. However, franchises often provide more comfort for the banks due to lower failure rates, their ability to benchmark and they generally know what is and should be happening in a business at any time.
High property prices
The New Zealand mood lifts when property prices go up. The current runaway property market in Auckland in particular is raising some smiles for those already on the property ladder. These are often also the people looking to make the jump into a franchised business, so the triple whammy, added to lower interest rates is an increase in potentially available equity for many.
The figures for the amount of money captured in the New Zealand economy from Covid-related travel restrictions is quite incredible. In spite of the demise of international inbound tourism, in September the New Zealand balance of trade recorded the highest trade surplus in more than five years.
This is a lot of money staying in, and being spent in New Zealand that was leaking overseas. We have read the articles on high end cars sales going through the roof as people cannot take their overseas holidays. There is also a renewed sense of wanting to spend locally. We will come back to how this is playing out.
Promising industries or sectors
So with some of the economic conditions favouring business growth through franchising generally, where are the current hot spots and opportunities by sector?
Basically, any services that were able to trade through lock-down have performed extremely well. However, over the past six months, one sector that has gone from strength to strength is cleaning and hygiene.
Traditionally seen as a low entry point franchise model, this category has seen massive increase in demand and opportunities for new franchisees.
As demand matures, brand and delivery will become that much more important and the well franchised, well-managed, marketed and reputable systems will further prosper.
This provides opportunities for not only new entries, but for independents in the industry, including larger firms, to join franchise systems due to high demand levels and benefit from brand awareness, which you could argue was previously largely irrelevant.
Online and on demand goods and services
Already a macro-trend of our times, this has been accelerated by weeks of us being locked at home. For the food and beverage industry this means models that have a strong delivery or pick up model and a technology and perhaps internal delivery platform to match. Sales continue to be strong and defy expectations.
Small footprint, suburban and regional distribution capabilities are also performing well. This bodes well for would be multi-site franchisees that have the capacity to capitalise on opportunities and spread future risk by operating across multiple sites and markets, or perhaps across brands.
Home improvement and renovation
Back to our closed economy comment, there is currently a massive increase in demand for home renovation and improvement services, and long-life durables. Franchised businesses and brands in this space are doing extremely well. In the case of property related, rising property prices tend to encourage people to spend more on refurbishments and improvements.
This year has demonstrated a need to be flexible in so many areas. For many individuals, this flexibility is a new-found interest in achieving a work-life balance. Looking towards franchised businesses that provide flexibility in working hours and/or location, such as a man in a van type business with relatively low ingoing cost, can provide such an option.
At the other end of the investment spectrum and the yet completely unanswered question is the future of CBDs and centralised work.
Flexible work space and decentralized work locations provide a huge opportunity for individuals and landlords. So yes, whilst we have some serious dark skies ahead of us, there are plenty of opportunities in franchising.