A mixed response to questions about New Zealand’s state of business in a recent survey, Franchising Confidence, has revealed challenges across many sectors of the franchising arena, including finance issues and profit pressure.

A net 16 percent of franchisors expect franchisee profitability levels to be better, though service providers are less optimistic: a net seven percent (27 percent in July) expected deterioration in franchisees sales levels, while 41 percent predict deterioration in operating costs. And a net 24 percent expected franchisee profitability levels to deteriorate.

The survey also found that:

• Franchisors remain generally positive about forthcoming general
  business conditions (net 28 percent) and growth prospects for their
  franchise systems (net 56 percent).
• However net -19 percent of franchisors expect access to financing to deteriorate over the coming year.
• Encouragingly, franchisor sentiment for franchisee sales levels
  climbed to net 48 percent (from 36 percent in July), and the outlook
  for operating costs improved dramatically _ with a net 51 percent
  (compared to net-29 percent in July) expecting improvements over the
  next 12 months.

The challenges that the franchising industry could soon be faced with include tougher bank lending criteria, franchisees not paying franchisor royalties, difficulties maintaining confidence in the franchise system and workplace competition for prospective franchisees.

Clearly challenges exist within many sectors with competition driving margin erosion and some customers internalising tasks previously outsourced to franchise companies. A number of franchisors also note profit pressure due to rising inputs costs, rents and inflexible landlords, says Dr Callum Floyd, director of Franchize Consultants, which undertook the quarterly survey.

The message for franchisors? Streamline networks, and concentrate on improving franchisee profitability levels.

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’.