Still going strong

The annual NatWest/bfa franchise survey reveals the industry is holding its own despite the economic downturn...

 

It’s good news for those considering going into franchising as overall profitability levels in the franchise industry remain strong, despite recessionary pressures, according to the NatWest/bfa survey 2009.
The industry proved it is holding its own as it contributed £11.4 billion to the UK’s GDP last year, and the number of franchises trading profitably (90 per cent) is unchanged. This compares favourably with the height of the last recession in 1990 when just 70 per cent of franchises traded profitably.

However, the survey revealed a decline in turnover levels (nine per cent) over the past twelve months from £360,000 to £326,000. Whilst the economic contribution of franchising to the UK economy is down by eight per cent (from 12.4 billion in 2007 to 11.4 billion in 2008) over the past 12 months, this still represents an increase of five per cent compared to 2006 (£10.8 billion) and the current figure is therefore more in line with historical averages.

Brian Smart, director general of the bfa, said: “There is little indication so far of the recession having a severe impact on the franchise industry. It seems franchised businesses are in a much stronger position as they have the additional protection of a proven business model and brand, and are a lower risk option for customers.”

More positive news for potential franchisees is that estimated start-up costs have declined, and new entrants can expect to pay £50,400 in franchise fees and other associated costs to their franchisor (down from £64,900 last year). This reflects the fact that franchisors are adapting to challenging economic conditions, and being flexible in terms of the financial support they are demanding.

Graeme Jones, head of NatWest’s franchise team, said: “Despite the economic downturn, franchisors and franchisees are starting to benefit from a number of cost savings that are beginning to filter through. These include reductions in commodity and energy prices, and those with retail premises are also taking advantage of more flexible negotiations with landlords regarding the provision of rental payments. We are also seeing evidence of franchisors and franchisees becoming much more hands-on with their business to ensure high standards and sales targets are maintained through this difficult period.”

Undeniably,  2008 was a year of expansion for many franchises, with the total number of franchise systems now reaching 838 – an increase of 3.6 per cent on the 809 systems recorded last year. Franchisors’ prospects for expansion also remain bullish, with plans to open an average of nine new franchise units over the next 12 months.

Graeme added: “It appears that 2007 was an exceptional year for the franchise industry, with rampant and above average growth in every respect. This level of growth isn’t sustainable in the current climate, and 2008’s performance is more in line with historical trends.

“It is still too early to tell how the full impact of the recession will impact the franchise industry, but NatWest remains committed to lending to the sector and maintaining our position as a the leading bank for franchising.”

 

Looking to the future, franchisors and franchisees are realistic about the economic climate and the challenges their businesses will face going forward. The majority (60 per cent) of franchisors and franchisees (66 per cent) think that general economic conditions will become more difficult in the next 12 months. However, conversely, 82 per cent of franchisors anticipate that that their business will improve or stay the same over this timeframe, whilst the remaining 18 per cent expected business to become more difficult. This level of confidence has understandably dipped since last year when 95 per cent of franchisors expected their business to improve or stay the same over the same time period.

Encouragingly, those franchisors and franchisees that expected trading to become more difficult were taking positive action to protect their businesses against this. Their focus will be on increasing advertising (29 per cent), growing their existing client base (24 per cent), improving productivity (21 per cent) and reducing prices (15 per cent).

Although the number of individuals employed in franchising has not risen over the last 12 months, the franchising sector still represents employment for 467,000 (1.3 per cent) of the UK workforce. As unemployment levels rise, it is likely that franchising will be seen as an increasingly popular career move.

Graeme continued: “Franchising continues to be an attractive business model for entrepreneurs, and the recession is putting more potential franchisees in the market, enabling the recruitment of really high quality staff who may be struggling to get employment through other routes.”
Brian Smart concluded: “It’s clear from this survey that the franchise sector is proving resilient to the economic downturn by investing heavily in activities to drive business forward and ensure future success. It is a mark of the enthusiasm and commitment of franchisors and franchisees that they continue to drive new business and retain it with such vigour.”