Johannesburg - The local fast food industry has embraced the concept of opening up smaller and lower-cost quick-service restaurants, as operational costs continue to erode franchisees’ pockets.

“The days of opening up a restaurant that costs between R6 million to R8m are becoming few and far in between,” Mark Rose, the head of new business development at Nedbank Business Banking, said.

The franchise industry, which is dominated by the food sector, contributes about 11 percent to gross domestic product and employs about 500 000 people.

The food sector in the form of quick-service restaurants and eat-in restaurants represents about 25 percent of the total franchise sector, followed by retail, fuel and service businesses that offer educational and health-care services.

Rose said the local franchise landscape was set to become more competitive and challenging in the year ahead.

Operational costs, which include electricity and rental costs, were the biggest factors affecting the growth of franchises in the country. He said although rental costs had been static over the past few years, they had escalated by about 15 percent three years ago.

This is the reason franchise-owning firms such as Taste Holdings have opted to acquire low-cost franchises such as The Fish & Chip Co and Zebro’s Chicken. The set-up costs of these eateries are much lower than normal sit-down restaurants.

Carlo Gozanga, the chief executive of Taste Holdings, said the new Zebro’s Chicken business, which targets the lower end of the market, could require about R750 000 to set up an outlet. He said this was the lowest entry cost for a chicken franchise in the country.

America’s burger-giant group, Burger King plans to roll-out more stores in South Africa and has also partnered with Sasol forecourts.

Rose said another trend that was expected to grow in the sector was the opening of frozen yoghurt and Asian food franchises. “We are looking at growth from franchises offering frozen yoghurt, Asian food and fish and chips.”

Setting up a franchise was not only about accessing funds, but also about location.

Rose said there was an over saturation of food franchises, but “if your business is in the right location with good visibility and good foot traffic, your business does well”.

Rose added that because of the trading density, some popular brands had moved to regions outside South Africa. Companies such as Famous Brands, which owns Wimpy, Steers and Debonairs Pizza, have established their brands in Zambia, Namibia and Kenya.

Ocean Basket recently announced that a Kenyan company, Hoggers, had bought the exclusive licence for the brand. The roll-out of the first store is scheduled for this year.

Ocean Basket chief executive Manny Nichas said the deal formed part of its expansion strategy to have 300 stores in 16 countries by 2017.

Another trend the industry can look forward to is the entrance of international brands. Rose said although the local franchise industry was still in its infancy compared with the European and American sector, it was encouraging that international brands were interested. - Business Report