The economic outlook for the second half of 2024 bodes well for the franchise sector as inflationary pressures are expected to ease further and Federal Budget cost of living relief could spur consumer spending.

Inflation is still running at 3.6 per cent but is well down from its pandemic peak of 7.8 per cent. NAB expects it will continue to fall and that the Reserve Bank of Australia is likely to keep official interest rates on hold before easing later this year.

While the cost-of-living squeeze and higher rates have certainly impacted business over the past few years, strong population growth is assisting many consumer facing segments of the economy – including franchise-dominated areas such as quick services restaurants.

An extra 660,000 people were added to the population in the year to September 2023, with the strongest growth seen in Melbourne and Sydney.

The labour market remains tight with the unemployment rate at 4 per cent in trend terms, still well below the pre-pandemic rate of 5 per cent.

Budget relief

This month’s 2024-25 Federal Budget had many positives for the franchise sector. It was centred around providing cost of living relief which, along with the modified stage three tax cuts, will mean households receive a boost to income.

The first cost of living relief item was a $3.4 billion Energy Bill Relief package consisting of $300 per household from 1 July 2024 and $325 for eligible small businesses.

The second item was a rental assistance package which increases the maximum rate of Commonwealth Rent Assistance by 10 per cent. And the previously announced stage three tax cuts will mean the average taxpayer receives a tax cut worth $1,888 in 2024-25.

On the business side, the $20,000 instant asset write-off for all small businesses with annual turnover below $10 million was extended for another year.

Anecdotal feedback from NAB franchise customers suggests that the worst impact of the economic conditions of the past few year may be subsiding. The stabilisation of input costs at the same time as the introduction of the above measures should give people more disposable income, potentially boosting sales across the franchise sector.

Positioning for growth

The biggest step that business can take in this environment is to remain focused on cost control as much as top line sales. Key costs such as labour should be closely managed to match subdued demand as much as possible.

One example on the finance side may be fixing interest rates for a short-term benefit before the interest cycle turns. As NAB’s longer-term view is that interest rates will ease from late 2024, the fixed interest rates available from the bank can sometimes be lower than current variable rates.

Hedging interest rate risk allows business owners to manage interest costs and decrease the volatility in their cashflow. It may also be possible for those with bigger financial challenges to restructure debt by working closely with their banking partners to achieve an outcome that allows them to navigate a difficult operating period.

Franchisors may also be able to help franchisees take steps to increase gross margin within a system or assist with lease payments. Franchisors can also participate in any conversations with a banking partner to help its franchisees move ahead on the best footing possible.

Optimal banking outcome

Ultimately, though, the right banking package is always different for each individual customer. The optimal outcome requires a banker to have a deep understanding of individual circumstances and the specific goals of the franchisee or franchisor.

With that knowledge in place, bankers can work closely with a client to find the products, structures and services that best fit their needs – whether that be a cash flow solution, equipment finance or debt restructuring.

Today, that process can be undertaken with a view that the economy is likely to improve in the second half. This means that financial affairs can be structured in a way that will allow the franchising sector to navigate the economy as it regains its equilibrium.

In essence, a good banking partner with a focus on long term relationships, such as NAB, will support its franchising clients across the full economic cycle to allow business owners to achieve their long-term aspirations. This golden rule applies as much in today’s environment as it has always done.

Despina Kathestides is head of Franchise Banking at NAB.