Finding opportunities in retail franchising

By HS Van der Linde, Business Development Manager – Retail Franchising, Absa Business Banking

Retail franchising is a fast-paced and vibrant sector offering an array of opportunities to ambitious and dedicated franchisees. However, the industry is not immune to the economic difficulties sweeping the globe. With typically wafer thin margins set in an economy not predicted to grow more than a couple of percentage points, franchise owners are required to be more agile.

The retail franchising industry that Absa supports can be broadly divided into food, hardware/building material/spare parts stores and the second-hand tradable goods sectors. Each sector comes with its own set of intricacies, challenges and prospects resulting in unique solutions being offered in a recessionary environment.

Food retailers, for example, have seen a decline in margins of between two and three percent in the past 18 months. This is due to consumers having notably less money to spend. Major retail brands are experiencing a saturated local trading environment and, as such, not much growth is predicted in this space until the economic outlook turns.

The silver lining is that people will always need to eat. Even when consumers are battling to sustain disposable income levels, they still need to buy essentials such as food. It is luxury goods that bear the brunt as people tailor their spending to match their budgets.

In keeping with this trend, the DIY and spare parts sector booms in times of recession for one simple reason: when consumers do not have money, they will attempt to fix whatever is broken themselves. In particular, building retailers, because of the nature of the goods they sell and their appeal to markets such as pensioners, are seeing an uptake in trade compared to other retailers. As long as the recession continues, this sector is expected to continue growing with healthy margins of between 15 and 21 percent.

Likewise, the second-hand goods market is performing better than forecasted for such a depressed operating climate. Retailers in this sector are operating with very good margins. Because they offer micro-financing and lending services over and above the ability to buy and sell second-hand goods, they are able to gain a competitive advantage and operate with healthy margins.

Franchisees can create this sort of buffer by buying bulk, stocking up when the price is low and pushing products at the right margins. This is incredibly important for lower LSMs and market segments that are price sensitive and simply will not buy products if they are not getting the best value for their money. In that vein, franchisees across the spectrum need to know the area they are operating in and adapt accordingly to meet the needs of the customers in that area.

It is also vitally important for retailers to forecast and manage their cash flow carefully. This will ensure they are not caught unaware and on the wrong side of the balance sheet. The importance of sound and solid financial advice ties into this. Banks and their business advisors are able to assist retailers to optimally gear their business and grow in a sustainable manner.

Ultimately, the retail franchisees that will succeed are those that stay committed and focused. Businesses of all sizes and across all industries have peaks and troughs. The trick for operators is to draw on the passion that first drew them into the business. They should follow the contingencies they have put in place, remain steadfast and continue to work their way through the difficulties.