Experience key for entrants into R100bn retail franchising market

Previous experience in retail or in managing related ventures is a critical success factor for prospective entrepreneurs who want to crack it in South Africa’s R100-billion-plus food retail franchising business, says Standard Bank’s Head of Franchising, Thabiso Ramasike.

Mr Ramasike says although this business is lucrative and has minimal failure rate, it is however a difficult environment that requires newcomers to have huge amounts of business management experience, patience, capital and a willingness to learn.

The food retail sector is one of the five sectors that Standard Bank believes needs financial, entrepreneurial and mentorship support in order to improve the success rate of franchisees and growth in employment opportunities.

Telecommunications, fast-foods, restaurants and fuel are the other four sectors with strong franchising and job creation potential, and in which Standard Bank is closely involved.

Mr Ramasike says entering the food retail sector is made more difficult by the fact that it is among the most expensive franchise sectors. He says a small retailer franchises sells for nothing less than R5-million, while category “A” super brands go for anything up to R45-million.

As a result, franchisors and banks usually insist on newcomers having prior experience or else expect them to be prepared to go through “a very steep learning curve”. He says prospective players should always consider starting small, and then graduating into the big league over a period of time.

“Food retail is a very tough sector; margins are very low, ranging between 5% and 7%. It is a complex environment and it would be very helpful and a huge advantage if franchise owners have experience in the broader FMCG (fast moving consumer goods) sector. This is because food retailing has many moving parts, such as perishables and inventories. The typical retail outlet has easily more than 500 different products, and owners need to have some knowledge about sourcing, logistics, supply chain management and inventory management,” he says.

In addition to these factors prospective entrepreneurs need to understand that there is intense competition in the industry. Mr Ramasike says this competition is not just among the food retailers, but it also comes from retailers in other sectors like fast foods.

He says Standard Bank has been developing an enterprise development and mentorship programme to support less experienced first-time players.

“For most first time players some of these retail stores are out of their league. If we have someone who is a first time player in the sector, it would make sense to partner with them and provide mentoring support so that they succeed.”

He says franchisors and banks play a big part in ensuring that the failure rate in food retail franchising is very low by properly screening potential candidates and stepping in quickly to support whenever franchisees experienced problems.

“Those franchisees that will make it in this sector will have done their homework properly to understand the local environment and are keen to learn. 

Despite the high entry barriers in the sector, Mr Ramasike believes that there is still scope for growth in food retail franchising.

“Standard Bank’s view is that expansion will continue, especially in rural areas and many other townships. Another area that provides scope for further expansion for franchisors is the liquor business. According to reports the highest number of new applicants for liquor licenses comes from food retailers,” he says.

Press release from  Thabiso Ramasike, Head of Franchising at Standard Bank

Magna Carta Public Relations Pty Ltd