The latest Franchising Confidence Index, produced by Franchize Consultants (NZ) Ltd, 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.

The July survey is only the second to be published and represents a wider selection of franchisors than the first (50 franchisors as opposed to 40) with a small increase in the number of service providers commenting (26 over 24). These results should therefore be treated with caution in terms of identifying trends until more surveys have taken place and the sample base has settled. Nonetheless, the indicators make interesting and valuable reading. Some highlights are:

Franchisors are positive about forthcoming general business conditions (net 32%). This represents a fall from the net 39% found in the April 2010 survey, which 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 providers were considerably more positive about general business conditions is. 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%). This compares with 63% in April; service providers’ perspective for franchisors generally was unchanged at net 32%.

A worrying net 6% of franchisors expect access to financing to deteriorate over the coming year. This is a negligible 1% up over the April figure, while service providers are more optimistic (net 12% positive up from 8%). 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%). These are two important growth drivers for the franchise sector. 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%) register considerable falls in confidence levels for finding good locations although they are still positive overall.

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. Service providers expect further deterioration (with a net -15%) compared with -12% in April) in franchisee profitability over the coming year.

The Big Picture

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 comments made by respondents 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.

Service providers believe that recovery will be slow but are cautiously positive. One notes, ‘[c]onditions should get no better but also no worse. It's a matter of continuing to “hang on”...’ Another says, ‘Those franchisors who have taken the hard decisions over the past 12 months will start to reap the benefits as conditions improve. Franchisees that have tightened their belts will see slow sales growth but will have to keep an eye on costs (and interest rates).’

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

Read the full July 2010 survey here

Read the April 2010 Franchise Confidence Index report here

About the Survey

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’.