B-BBEE: The franchise sector weighs in
A relatively large number of players in the franchise sector are lagging behind with the implementation of meaningful B-BBEE initiatives. This could create the impression that the sector resists transformation but this is not the case at all. We decided to examine the situation and came up with the following findings.
Problem statement
Transformation in the franchise sector has indeed been slow. This is an unintended consequence of the criteria for transformation set out in the B-BBEE Act. The Act lists five elements for compliance: Ownership, management control, skills development, enterprise development and socio-economic development. The weightings applied in terms of the Act placed emphasis on ownership and management control. Meeting requirements in these two areas created difficulties for franchisors and their franchisees alike.FRANCHISORS
Responsible franchisors pride themselves on assuming moral responsibility for their franchisees’ success chances. This forces them to take into account that for historic reasons, many prospective franchisees drawn from the PDI grouping lack access to sufficient funding. They also know that even if a lender can be found who is willing to advance near 100% of the capital required, the resulting repayments will cripple the business before its owner had a chance to show his mettle.
This does not mean that up to now, franchisors haven’t contributed towards righting the wrongs of the past. At a recent FASA event, Greg Solomon, managing director of Macdonald’s South Africa, remarked, “Some franchisors are doing much in terms of social upliftment and so forth but are generally not receiving the recognition they deserve.”
His comment is not a lone voice in the wilderness. In the Business Newsmakers column of the Sunday Times of 21.10.2018, Gareth Ackerman, chairman of Pick n Pay and major franchisor, lamented the distrust that exists between government and business. He said that government seems to think that business is doing nothing, making no investments, just relying on government to do everything but this is not the case. “A lot of companies do a hell of a lot, but the government needs to be made aware of what they are doing. This would start a multiplier effect happening in the economy,” he said.
FRANCHISEES
During 2017, the value of business conducted through franchised networks (excluding motor vehicle and petrol sales) amounted to 15% of South Africa’s GDP. In many individuals and probably also in government circles, this creates the perception that franchised brands are extremely powerful. Indeed, they are but the sector’s structure breaks this down into many individual islands of power.
Fact is that their uniform appearance notwithstanding, the majority of branches of franchised chains are owned and operated by individuals and their families. Because of family ties, owners of these businesses find it difficult to make shares available to non-family members or appoint them to their boards of directors.
The annual FASA/Sanlam survey into franchising in South Africa* confirms this. It tells us, among other things, that the franchise sector consists of 865 brands. These brands conduct business through more than 45,000 individually owned and largely family-managed business units.
The same survey records that in 2015, it took an average of 6 months for a new franchised outlet to reach the all-important breakeven point. Fast-forward to 2017 and the corresponding figure has ballooned to over 12 months. It is easy to see that this puts additional pressure on cashflows and requires a commensurate increase in working capital.
* The complete survey can be accessed free of charge on www.fasa.co.za.
An opportunity not to be missed
The B-BBEE Act is currently undergoing a revision. Indications are that although the five elements of the revised Code will substantially remain the same, weightings will change. Most notably, the weighting for Enterprise Development is expected to increase to 40%. Although tackling this one element only will not result in an acceptable B-BBEE rating, it offers franchisors and their franchisees the opportunity to make an immediate, meaningful and sustainable contribution towards their B-BBEE obligations.All that’s required from franchisors is that they assist qualifying suppliers to achieve preferred supplier status within their networks before guiding their franchisees towards utilising this up to now underutilised pool of suppliers.
Positive acceptance
Early indications are that the franchise sector welcomes this development with open arms. To facilitate this development, the Transformation, Stakeholder and Funding Committee of franchising’s representative body, FASA, launched the FASA Supply Chain Transformation Initiative (SCTI). This initiative aims to provide a link between franchisors, their franchisees and qualifying suppliers of goods and services. |
| Tony da Fonseca |
“To overcome this apparent deadlock, the FASA Transformation, Stakeholder and Funding Committee initiated the SCTI. We knew that to get this initiative off the ground would require the creation of a database of transformed suppliers. We also knew that to do this from scratch, and do it well, would exceed FASA’s resources by a wide margin. That’s why we were delighted when Proudly South African (PSA) agreed to partner with us on this exciting journey.”
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| Eustace Mashimbye |
“I welcome the tie-up with FASA and am delighted to facilitate access to our membership database by FASA. I expect that this will drive enquiries for products and services offered by our members and eventually, result in purchase orders, for mutual benefit. Our members will benefit greatly from exposure to the substantial combined purchasing power of the sector.”
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| Akhona Qengqe |
At its core, B-BBEE is a growth strategy that targets the South African economy’s weakest point, namely inequality. Social peace and lasting prosperity cannot be achieved unless everyone who does business in South Africa accepts that and makes a meaningful contribution.
Because franchising is all about brand awareness, skills transfer, initial and ongoing support and mentoring, the sector is uniquely positioned to achieve superior and sustainable results.
Seeing that the franchise sector is a substantial contributor to the South African economy, it has the power to make a real difference. This is not only in the realm of offering franchises to PDIs but even more so by driving transformation through the supply chain. This was the rationale for launching the SCTI in the first place.
Because the PSA is partnering FASA in promoting this initiative, franchisors have access to a database of reliable and fully transformed suppliers. Dealing with them contributes directly to local enterprise development and job creation.
I want to encourage all franchisors, both members and non-members, to utilise the FASA Supply Chain Transformation Database. Users will find a diverse and steadily growing range of quality goods and services on offer.
It is early days yet but franchisors wishing to find out more about the FASA Supply Chain Transformation Initiative should contact FASA on info@fasa.co.za.
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