Tough economic times to drive consolidation in the restaurant business

The South African restaurant sector can expect further consolidation as the industry battles to survive increased competition as a result of the tough economic conditions, says Thabiso Ramasike, Standard Bank’s Head of Franchising.

With the restaurant sector relying heavily on franchise business models, Mr Ramasike expects conditions for existing and prospective franchisees to be challenging.

He says consolidation is already happening, with bigger brands acquiring smaller competitors to boost customer volumes and declining margins.

Mr Ramasike says Standard Bank anticipates further merger and acquisition announcements before the end of the year among some of the local industry players as recent developments have shown.

“The sector is very sensitive to business cycles and the recent recessionary environment and continuing economic uncertainty is affecting competition in the industry. Margins are tight as consumers tend to hold back in such economic times. As a result, we see more room for further consolidation in this sector to counter the tough business climate,” says Mr Ramasike.

“However, this is still very much a viable business because of a fairly strong culture of eating out in South Africa, but a tough sector for franchisees to venture into as it requires more than just “capital and interest” from prospective restaurateurs,” he says.“It is the smallest things that count in this business, such as having the right kind of staff and ensuring quality of service and food all the time. One of the complexities in this business is making sure that you have a right pool of staff -who understand the needs of customers. This is what makes it such a unique business.”

What makes the restaurant trade tough is that besides competing among themselves, restaurant franchisees also have to contend with food retailers, fast-food outlets and numerous independent restaurant owners, says Mr Ramasike. However, franchised restaurant businesses tend to have a  longer lifespan than restaurants that are independently owned because consumers know and trust the brands, hence there is infrastructure built around the franchisee.

The restaurant sector is one of the five sectors that Standard Bank believes needs financial, entrepreneurial and educational support in order to improve the success rate of franchisees and growth in employment opportunities. Food retail, fast-foods, cellular stores and fuel are the other four sectors with strong franchising and job creation potential, and in which Standard Bank is closely involved.

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

Magna Carta Public Relations Pty Ltd