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Franchising success in SA

A lower-risk option of getting into your own business than starting from scratch.

SIKI MGABADELI: This evening we are focusing on franchising in South Africa as we try to develop more business owners, with franchising widely seen as an effective way to enter the world of business for aspirant business owners. However, franchising in South Africa represents a significantly smaller portion of our GDP. That’s about 8%. And if you compare that to other countries, particularly in the first world, like the UK and the US where franchising accounts for more than 50% of GDP, how do we get there?
    It’s estimated that franchising directly employs around 300 000 people in South Africa, so there is great potential in growing its contribution to economic and job growth. But how do we get that franchise – what do you need to have in place, what will you get in return? All those franchising questions hopefully will be answered for you this evening.
    We are peaking to Naas du Preez, who is vice-chairman of the Franchising Association of South Africa and also the franchisor of Oasis Water. Naas, thanks for your time this evening.

NAAS DU PREEZ: Good evening Siki, and to all the listeners. Ja, it’s nice to be on the air with you guys and share some of FASA’s vision and hope.

SIKI MGABADELI: Before we talk about FASA, you are a franchisor of Oasis Water. You are in the water bottling business, right?

NAAS DU PREEZ: Yes. We are bottling water and also the pioneers of a greener initiative to do the refilling of water. You can bring an empty container to one of our outlets and then refill that. So we encourage the reuse of the containers.

SIKI MGABADELI: How has the franchising experience been for you as a franchisor?

NAAS DU PREEZ: We started out in 2005/6. Those were the heydays of the economy. We started off very well. And then obviously with the economic meltdown in 2008/9, yes, we had to clamp down and almost go back to the drawing board and reinvent ourselves to be relevant. But franchising has been good to us. It’s definitely a safer environment to operate in than to start entirely on your own. So franchising is definitely for entrepreneurs who want to enter the mainstream economy; it’s a much safer option.

SIKI MGABADELI: Just explain why – what are the benefits of going the franchising route?

NAAS DU PREEZ: Firstly you have a franchisor. He’s the originator of the concept and he has a proven track record in terms of a business system. And then he gives you the framework to operate your business in. So he will establish the trademark; he has an established name. As I said, it’s a tried and trusted business system. And then he in a sense closes that or tries to make it simple to replicate. That already gives a framework that a lot of people with their own resources, their own abilities, won’t be able to do. But, having developed that, you already have a good start and the chances of success are much higher.
    Compared to your normal start-ups, where 90% will fail in the first year – that is the unfortunate statistic – in franchising it’s the other way round. Only 10% will fail and 90% will succeed. So that is a huge difference.

SIKI MGABADELI: So how much does it cost to buy into one?

NAAS DU PREEZ: That differs quite significantly. You have systems where it’s fairly cheap or the investment is quite low. And then you have your restaurants, where it can be substantial amounts – a few million – to buy into those systems. So there is whole range of different segments, and within those segments you have really different sections where it’s from R100 000, for instance, up to a million. So that varies and there’s no across-the-board answer to that one.

SIKI MGABADELI: So obviously there are different things that you pay for and different things that you have to consider as well. Let’s talk about the things that you have to consider, because I’ve got a question on Twitter from Lebogang who says: “Why is finding space such a headache? How can franchisees go about finding space at the right location?”

NAAS DU PREEZ: Finding the right location is definitely one of the bigger challenges, and you have the different factors – from being in the right area, the right market, and then the daily things that you have to face like your overheads and rent to make it sustainable. So there again the franchisor will assist the franchisee, giving him the parameters to say that this is the type of squarage, this is the type of shopping centre you are looking at, what is a viable cost.
    That is a challenge because, as I say, times are tough. Apart from all the rent, there are the electricity bills and all the costs just adding up. So again there a franchisor will give you quite a lot of information. And, looking at it from the retailer side, they prefer to engage with a franchisee being part of an established band. So again the chance of getting better rates that independent stores is also better.

SIKI MGABADELI: Here’s a question from Edward from Pinetown, who is looking at franchising and asking if there are opportunities in alternative power.

NAAS DU PREEZ: Yes, there are definitely. I’ve just recently seen one of the service providers to FASA – so I can encourage all listeners to go to the FASA website, www.fasa.co.za. There they can see all the different sectors, they can see all the members there, and then there are also service providers that will list some of these franchisors. And I’ve actually seen today the launch of an alternative power franchise system in South Africa. So there is one that has just been launched. So I think when you are looking at our FASA website you will definitely find that.

SIKI MGABADELI: So, besides power – obviously we know why we need hopefully more businesses in that, given that we are lights-out almost every single day in South Africa. At this point, where else are the opportunities for people to develop either franchises or to become franchisees?

NAAS DU PREEZ: Well, I will just quickly give a global perspective – in South Africa franchisees only cover around 17 business sectors. And if you again compare that to the first world countries, the USA has 75 sectors that are franchised. So again, there is scope and opportunity in franchising, even in sectors that are currently not franchised. I think for me the key phrase for tonight is “there is opportunity”. There are opportunities within an existing sector; there are opportunities either in systems that currently are not even in South Africa, so for entrepreneurs that want to start and franchise new systems.
    For instance we pioneered the refill water franchise system. So that was a first in South Africa. So there is definitely opportunity and there is help out there from service providers, from the Franchise Association. And we are looking for ideas to assist new upcoming entrepreneurs and to establish successful systems.
    The beauty with the South African system is that almost 90% of all our franchises are home-grown. So those are developed locally and I think that is better suited to the South African market, the talent you’ve got…so there is a lot of opportunity.

SIKI MGABADELI: Here’s a question from Facebook, from Israel Mkhise, who says “Please look at franchising in the light of the township economy, because that terrain should be an intensified site of economic struggle. How can government up its collateral backup for that end?” I suppose that speaks toward the funding of those who want to go into this space and the fact that they obviously have to put up a percentage of the money themselves, or some sort of collateral. Could there be some support for that?

NAAS DU PREEZ: Yes. We are definitely lobbying all the different arms of government to assist people with that. Just recently in April we signed a memorandum of understanding with SEFA, the Small Enterprise Finance Agency, of working closer together with them. And then two weeks ago the Minister of Small Business, Minister Lindiwe Zulu, singled out franchising as a catalyst for economic growth and job creation, and she then also said that they are looking at assisting in terms of finance and all different measures in which government can assist. So they have identified franchising as definitely one of the ways to grow our economy. That is very positive. So apart from government there are also your private financial institutions. If there is the will there, there is a way. I think the opportunities are there.

SIKI MGABADELI: Thanks to Naas du Preez.
    Again, Wayne, we keep talking about the potential that small businesses have in terms of creating jobs – any way that we can support people.

WAYNE McCURRIE: Franchising is expensive, because you’ve got to pay the royalties and the capital and all of that. But it’s cheap when you look at the success rate. If I had to open up Wayne’s Burgers, I wouldn’t stop the traffic on Rivonia Road. But if you open another burger company – I won’t mention its name – on Rivonia Road, it stops the traffic for two weeks. You can’t even drive down the road. So the [well-known] franchise does work because you get a brand. You also get allocated an area where you have exclusive use of that brand.

SIKI MGABADELI: And they market it for you.

WAYNE McCURRIE: Nothing is easy. It requires work and you’ve got to, as I said, find the right place because effectively you’ve got to have feet past your door. That’s what it boils down to in any sort of retail environment. So you can’t start your franchise in some back street somewhere where people don’t even know who you are there and don’t even see you. You’ve got to be in a fairly well-established retail environment. And it’s hard to get that, because everyone wants to be there.

SIKI MGABADELI: And also understand your market. You can’t have a certain – unmentioned – chicken joint in the middle of Hyde Park where it would work better at Bree taxi rank, for example,.

WAYNE McCURRIE: Quite correct. But franchising is actually a lower-risk option of getting into your own business than trying something completely by yourself from scratch. It is lower risk. It costs you money, make no mistake. You are going to pay for that franchise.

SIKI MGABADELI: You can go up to about R6m, depending.

WAYNE McCURRIE: You are going to pay for that franchise but the odds are that you’ll probably do all right. Just choose one that’s been there a long time.

SIKI MGABADELI: That’s the trick.

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Royaties, marketing fees, admin fees, direct access to my bank account, a frinchise agreement that is 99% for the franchisor and 1% for the franchisee, franchisor takes his cut from day one. No room for error, wrong location and you are gone, you will be there for life breaking even every month, sell the business franchisor has first pick and so it goes on. R 3m to start the business that is the risk, start your own business R 1m that is the risk. So until the franchisors understand the franchisee needs at least 18 months to get going without having the onerous cost structures enforced, being a franchisee is as good as investing at the roulette wheel. Doing all the fancy bail out and restructuring deals afterwards to keep things afloat is not the answer you just get more exposed. I understand they do this to make money but rather pointless to bring out the Porsche and then fit square wheels.

Another marketing piece for a franchise group.

Biggest con thrown out there by franchisers is the success ratio of 90/10.
With them they say you have a 90% success. what they dob’t tell you are those that sold quickly, closed or taken over. What they don’t tell is a franchisee is an “Employee” and their concept is much like a pyramid scheme.

The suckers who join are usually those who have taken a knee jerk reaction to sign up, when the reality is if one takes a little time, “see the wood from the trees” one can approach a small business idea into a successful enterprise.

Ask the majority of franchise owners about trading in this economy and they will paint you a bleak picture. High royalties and marketing costs that average 9% of nett turnover is crazy when one has to factor in rentals, labour and operating costs. Franchisors also mark up the stock or services usually supplied by a ‘preferred supplier’ or third party and then get hefty kick backs at the end of the year. Most franchise agreement tie you up for years and there is severe penalties should you wish to defranchise or close the business. The cost of opening a the average franchise is way to high when one considers the dismal resell value which is usually a percentage of the initial capital outlay. To me franchising is for lazy minded people with no lateral thinking!

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