Promising future for industry
FRANCHISING in South Africa has been underdeveloped, poorly marketed and misunderstood - but the industry is experiencing a boom due to it being highly suited to the new South Africa.
Well-known franchising authority Eric Parker of Deloitte & Touche Franchising says a number of critical issues must be considered for a business to be franchised.
Market demand must be sufficient to sustain a franchised network, or even more than one franchise, since competition will inevitably enter the marketplace. A large market will also contribute to promising margins, making it an attractive business opportunity.
It must also provide room for growth, for the benefit of the franchisee and franchisor. The profitability of franchising relies on a multiplier effect and the franchisor needs to grow the franchise network in order to be profitable.
The market must also have the potential to grow for a long period, since the franchisee usually signs a long-term contract and the franchisor has to build a solid infrastructure to support the network.
"This means that fads are not franchiseable, since its growth is not sustainable over the long term. The margins must be sufficient for the franchisee to obtain a return on the investment over a reasonable period and it must also cover the monthly royalty."
Consumers must be willing to pay a price premium for the product, in return for added values such as exceptional service.
"Product categories that are caught in price wars do not franchise well. In these instances, there is very little loyalty to the product and margins remain under pressure. A franchisee cannot be expected to prosper in such conditions," says Parker:
He says a franchisor will need capital to pilot the concept, develop the franchise package and build infrastructure. The first few stages are capital intensive.