Johannesburg - Despite South Africa’s tough economic conditions, franchising businesses are still flourishing, their owners told a summit on Thursday.
At the FNB Franchising Summit, held in Johannesburg, several franchisees spoke on how the ailing economy does not necessarily mean doom and gloom for their businesses.
Widely considered the premier franchising event in South Africa, the summit is seen as a useful barometer for the state of affairs in the franchising space.
In contrast to most of South Africa’s retail, food and hospitality sector players, franchising businesses are performing above expectations, several figures quoted at the summit showed.
According to the most recent survey by the Franchising Association of South Africa, franchises account for 13.3% of South Africa's GDP - an increase from 2016's 11.6%. This amounts to some R580bn in 2017.
Lipstick theory
Most notably, certain franchises are tipped to do well, because of the struggling economy.
FNB senior economist Mamello Matikinca said that while “big ticket items and semi-durable goods” have largely taken a fall, the “lipstick effect theory” is evident.
The famous lipstick index theory was coined by Estée Lauder's Leonard Lauder during the days of the 2001 recession, when he noticed lipstick sales rising despite consumers cutting down on luxury items. His theory is that women facing an uncertain environment turn to beauty products as an affordable indulgence, while they cut back on more expensive items.
“Consumers are spending more on cosmetic and other items at pharmaceutical stores like Dis-Chem, (and on) home improvement items rather than holidays away and fast food.”
A tale of two growth rates
The summit’s theme was ‘Exponential Growth’, a strange choice in the current economic climate. But while the economy at large may be in the doldrums, the same is not true of all segments of franchising in SA, the conference heard from several of the speakers.
Matikinca said “disposable income has improved, as have savings, in the general population”.
“Entertainment is a default escape in hard times,” said Gerry Thomas, managing director of Krispy Kreme in South Africa.
He said business is 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.”
Success in other franchise sectors
Traditionally one of the most resilient segments in South Africa, franchising in other segments is experiencing similar success stories, recent figures seem to suggest.
The recently released survey by the Franchising Association of South Africa showed franchisees are scoring an average of 9.5% in net profits per annum, with 79% of franchisees still optimistic about the growth of their business – the same figures as last year.
Allure of franchising
“I think franchising is growing,” said RocoMamas founder Brian Altriche. “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.
“A lot of people that wouldn’t necessarily be able to do it on their own, it gives them an ‘in’ to business - and there nothing better for an economy than people working for themselves. I think it’s got a lot of potential for growth – in America everything’s franchised.”
In terms of the allure of franchising, Altriche indicated that it is a popular beacon of certainty for aspiring entrepreneurs in increasingly uncertain times.
“With buying a franchise, you pay for something upfront and you know exactly what you’re going to get, and that’s the beauty of franchising.”
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