New Zealand Franchising Sentiment Falls As Concerns For Franchisees Escalates

The July quarter New Zealand Franchising Confidence Index finds positive but falling sentiment across many key franchising indicators. The second Franchising Confidence Index, undertaken by Franchize Consultants, finds falling franchisor net sentiment across many key franchising indicators. In particular, the survey finds substantial decreases in sentiment associated with general business conditions, availability of suitable staff, availability of suitable locations, sales levels per franchisee, operating costs per franchisee, franchisee profitability levels, and franchisor growth prospects. Franchisors and service providers share considerable concern for franchisee operating costs.
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• Franchisors are positive about forthcoming general business conditions (net 32%). This represents a fall from the net 39% found in the April 2010 survey. This fall compares with falls in other business confidence surveys, including the BNZ Confidence Survey (falling from 42% in March to 26% in June) and the National Bank Business Outlook Survey (falling from 50% in April to 40% in June). Comparatively, service provider sentiment for general business conditions is considerably more positive. A net 62% of service providers expect conditions to be better over the next 12 months (compared with 36% in the previous survey).

• Franchisors are still positive about forthcoming growth prospects for their organisations (net 48%), compared with service providers perspective for franchisors generally (net 32%).

• A worrying net 6% of franchisors expect access to financing to deteriorate over the coming year. Service providers are marginally more optimistic (net 12% positive). This finding demonstrates access to finance (a key franchising constraint) continues to trouble the franchise sector.

• Franchisors are, on balance, positive about forthcoming access to suitable franchisees (net 14%) and staff (net 16%) – two important growth drivers. Service providers are also more buoyant regarding franchisee and staff recruitment with a net 31% and 27%, respectively. Both franchisors and service providers register falls in confidence pertaining to availability of suitable staff – another important growth constraint.

• Franchisors (net 34%) and service providers (net 31%) are still positive, but register considerable falls in confidence levels for finding good locations – where applicable.

• Franchisors register a considerable drop in sentiment for franchisee sales levels (dropping to a net 36% from 59%). Service providers were consistent at a net 27%, compared to 28% in April.

• Worryingly franchisors (net -29%), and service providers (net -46%), expect franchisee operating costs to be higher over the next 12 months.

• Comparatively, franchisors are positive, albeit less so, about franchisee profitability with a net 16% (compared to 41% in April) expecting franchisee profitability to improve. This drop in sentiment is alarming. Service providers expect further deterioration (with a net -15% compared with -12% in April) in franchisee profitability over the coming year.

Franchisors and service providers, alike, are less confident about the year ahead for franchisors and franchisees than they were in April. Moreover, both groups reveal falling (and worrying) sentiment across a number of key franchising performance indicators.

Franchisors and associated franchisees are finding trading difficult – exacerbated by increasing competition, falling business and consumer confidence and spending, cheaper imports, rising costs and falling margins.

As the comments indicate sales levels are challenging for many systems across retail and service sectors. However there are exceptions, including retail grocery, freight, travel and computer repair examples.

Comments are typified by one service provider who notes “[c]onditions should get no better but also no worse. It's a matter of continuing to ‘hang on’...”

Overall, conditions again remain tough for franchisors and franchisees alike.

Franchising Confidence Index Background

Franchize Consultants’ Franchising Confidence Index is a quarterly survey of 354 New Zealand franchisors and 109 specialist service providers (e.g. consultants, banks, accountants, lawyers and publishers) to the franchising community.

The Franchising Confidence Index represents confidence in key measures critical to the success of franchising in this country by reporting attitudes toward general business conditions, as well as key franchising growth determinants including access to capital, suitable potential franchisees, staff and locations. The Franchising Confidence Index also covers franchising health attributes and outcomes by exploring franchisee sales, operating costs and profitability, and franchise system growth prospects.

The data and analysis presented represents the views of 50 franchisors and 26 service providers collected between Monday 28 June and Friday 2 July 2010. Findings from both groups are reported separately.

Note, respondents are asked whether they expect conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’