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Why food remains a lucrative industry in franchising

Gross profit margin are generally higher.

According to a 2017 survey by the Franchising Association of SA (Fasa), the fast food and restaurants sector still dominates franchising in SA, accounting for 29% of all franchising sales by turnover.

“In general, the food industry trades at a higher gross profit margin (45-70%) compared to retail that has a much lower GP (17-35%). There is therefore a little bit more room of error,” says the survey.

SA also punches above its weight in international franchising rankings, with a total R587 billion generated from franchising as a whole – equivalent to 13.3% of national GDP. This places SA 36th in a list of 181 countries, between Malaysia and Ireland. This is a substantial increase in franchising’s 9.7% contribution to GDP in 2014, and perhaps explains why this has been touted as one of the fastest ways to grow jobs and black participation in the economy.

Most franchised food brands are developed in SA. Next in importance to food and restaurants are three sectors accounting for 43% of franchising turnover: building, office and home services; retailing; and business-to-business services.

Interestingly, the survey found that 60% of respondents expected to break even within the first year. When the same survey was conducted in 2013 and 2014, nearly half expected to break even in six months. That percentage has deteriorated to 16% in the latest survey, though a clear majority expect to hit break-even within a year of start-up. Some 78% of respondents expected to see an increase in turnover over the coming year.

Another feature of food franchising in SA is the number of listed companies trading in this space: Spur, Famous Brands, Taste Holdings, Burger King, Gold Brands and Yum/KFC. Famous Brands has far and away the largest store count (more than 2 850) and turnover (R7 billion), the result of an aggressive acquisition strategy over the last two decades.

Fast food and restaurant franchises also grew aggressively in terms of net store openings, with 684 stores opened and 120 closed, leaving a net growth of 564. This puts it slightly above retailing, which reported net store growth of 558, according to the Fasa survey.

Retailing is the largest employer within the franchising universe, accounting for more than a third of the 343 319 jobs in the sector. Next in line is fast food franchising, with 65 500 employees. Sixty-five percent of employees across all franchising sectors are black, 24% white, 6% coloured and 5% Indian. The number of black employees has increased by 8%.

Ownership by previously disadvantaged individuals (PDIs) for 2017 was reported at 17% in 2017, similar to the 18% mentioned for 2016. There was a slight downward trend in terms of PDI ownership since the 2015 survey, which may be as a result of the changes to the BBBEE Act of 2013. Categories such as childcare, education and training, personal services, fast foods and restaurants, and building, office and home services are above average in this regard. Approximately half the respondents (56%) did not have any PDI ownership in their businesses at all.

Brought to you by Nedbank Franchising.

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