Opening a franchise: Is it for you?
This article first appeared in the 2nd quarter 2018 edition of Personal Finance magazine.
While quitting your day job to start your own business is undoubtedly appealing, it’s just not an option for the average Joe. Or is it? One way of doing it may be to climb on the franchise bandwagon.
“I think franchising in South Africa is healthier today than it was 20 years ago, and I think it’s a very important part of the economy,” says founder of restaurant chain RocoMamas, Brian Altriche. “It gives a lot of people an ‘in’ to business – and there is nothing better for an economy than people working for themselves. I think there’s a lot of potential for growth.”
South Africans have entrepreneurial DNA, it has been said, and franchising may well prove to be the silver bullet – a sector that seems to have miraculously sidestepped the low- to no-growth story many others are experiencing.
According to the Franchise Association of South Africa (FASA), the franchising sector in South Africa is worth over R587 billion – accounting for a whopping 13.3 percent of the country’s gross domestic product (GDP) last year. To put that in perspective, the portion of South Africa’s GDP said to come from tourism was 9.4 percent. The World Franchise Council estimates that the average contribution of the franchising sector to a country’s GDP is 2.7 percent. It’s clear that franchising in South Afica is no mini-mart.
Encouragingly, this number is an aggressively growing one. According to the International Franchise Association (IFA), the global franchising sector grew by roughly US$36 billion in 2017 alone. Although developed country’s franchise futures seem bright (America’s fitness franchise sector alone could be worth $30 billion more by 2020 than it’s worth now), it’s arguably the developing nations that have the most to get excited about. India’s fast food franchises are projected to grow by 18 percent within the next two years, to be worth almost $30 billion by 2020. And FASA’s surveys show that franchises in South Africa contributed 9.7 percent of GDP in 2014, meaning that the sector grew by R122 billion in just three years, and it is showing no signs of slowing down.
Perhaps the best news about buying a franchise in SA is that you can buy one for less than the cost of a house in most areas. A King Pie store can cost you R450 000, while a Bed Shop store can come in at about R325 000.
What’s the next best thing?
Within franchising, some tickets are said to be hotter than others – with a whole variety of sub-sectors heating up in the next couple of years that you wouldn’t necessarily associate with franchising. According to the senior economist at First National Bank (FNB), Mamello Matikinca, “although big-ticket items and semi-durable goods have taken a fall, the ‘lipstick effect theory’ is still evident – consumers are spending more on cosmetics and other items at pharmaceutical stores like Dis-Chem, on home improvement items rather than holidays away and on fast food.”
You can buy an Alpha Pharm franchise for as little as R1.2 million – pretty reasonable when you consider that opening a McDonald’s costs between R4 and R6 million.
“Entertainment is a default escape in hard times,” says the managing director of Krispy Kreme in South Africa, Gery Thomas, adding that business was booming two years after the brand opened its doors locally. “Our competitive price point attracts those consumers in shopping spaces looking for a downscaled fun experience.”
According to FASA and FNB, two franchise sectors to get behind are health and education. These can be steep – buying into the Kumon education franchise requires a minimum investment of over R40 million – but the ever-increasing costs of both, unlinked to inflation, could mean good business. “These two sectors are rapidly growing, because more people are starting to become health conscious, while on the other hand education is a priority for South Africa. As a result, there is a strong demand for these sectors,” says the head of franchising at FNB Business, Morne Cronje.
Before you give up the day job, here are five tips from the pros on owning a franchise:
See if franchising is right for you
The FASA website has the following advice for franchisee hopefuls: “Franchising isn’t for everybody, as it involves a particular mind-set and attitude, and with so many different franchise companies on the market how do you choose the right franchise to invest into? The Franchise Self-Test, courtesy of Franchising Plus and www.whichfranchise.co.za, has been designed to help you identify a starting point from which to commence your own research. The test’s 10 questions will help identify whether franchising is the right way into self-employment for you and will find the best type of franchise match for you.”
Look for a relationship – by asking other franchisees
“We were invited to the annual Krispy Kreme summit in the Philippines before we had put pen to paper,” Thomas says. “We’re talking 30 different cultures coming together – but for a franchisee to love a franchisor and hug and kiss them all the time, you know it’s good! And that helped to convince us.”
It’s no hard and fast rule, but the key to a successful franchising opportunity is to go with something you could talk about for hours until no one will sit next to you at dinner parties anymore. It’s like any other career – the people who succeed are those who bring their A-game day in and day out. Altriche also says he looks for a hands-on, enthusiastic approach when approached by potential franchisees.
Look for opportunities to diversify
Multi-unit franchising is becoming a growing trend globally and in South Africa, according to Riaan Fouche, the chief operating officer of franchising at FNB Business, meaning a single franchisee owns multiple outlets in different areas. “Multi-unit franchisees are a major trend in South Africa, and more franchisors are giving first preferences to existing franchisees due to proven success and an understanding of the franchisor’s brand. This enables the franchisor to grow its footprint in partnership with a franchisee while mitigating the risks associated with opening a new outlet. While they’re at it, established franchisees have assets, experience and a track record, which puts them in a favourable position when going to a bank for a loan.”
A dynamic franchise is a successful one
Mike Sharman of Retroviral digital communications agency says of Altriche: “Brian noticed that the images of food were not looking as good on social media as they were in real life. So, he changed the lighting in the store so that the product looked better on Instagram.” This isn’t just for hipster brands, either. South Africa’s food icon, Ina Paarman, says: “The front page of our website changes every month. Each month I do a new recipe for everyday cooking, one recipe that’s a personal favourite, and a menu for a special occasion like Valentine’s Day.”