RECIPE FOR SUCCESS - JSE MAGAZINE

RECIPE FOR SUCCESS

The SA franchise model may be the answer to driving the continent’s small business development

RECIPE FOR SUCCESS

Franchising is emerging as a key part of the solution to one of Africa’s biggest development issues – weak small business growth. Franchise business operations have thrived in SA and in very recent years in Egypt. In the last three or four years there has been a big increase in interest and investment in the model across the continent.

In 2013, some of the most significant franchise growth in Africa happened outside SA. In September, the country’s largest listed franchise company Famous Brands bought a 49% stake in Nigeria’s UAC Restaurants (UACR), which houses the continent’s single largest food franchise brand north of SA, Mr Bigg’s. The Nigerian company has 165 franchised restaurants in the country.

Famous Brands owns Steers, Wimpy, Mugg & Bean and Debonairs Pizza, among other operations. The company planned to open 55 new franchises in Africa in 2013. Debonairs Pizza has proven a particularly attractive brand with outlets being opened in Kenya, the DRC, Sudan and Nigeria. The UACR purchase offers Famous Brands a way of establishing a meaningful foothold in Africa’s biggest market, Nigeria, with its booming oil economy and population of 170 million people.

This deal is part of a trend. The world’s biggest food franchiser, the US-based Yum Restaurants International, which owns Kentucky Fried Chicken, added 100 new African outlets in 2011. SA’s Spur Corporation announced plans for new outlets in five African countries, including Nigeria, in 2014.

In tandem with the growth of franchise operations, more finance is becoming available. Banks have recently been ‘beefing up’ their franchise units and looking for opportunities outside of SA. One of the virtues of franchising is that it makes small enterprises relatively easy to finance.

Franchising essentially means the sale of a brand, training and ongoing support. Very often the franchisee’s stock is also supplied by the primary or master franchisor, making it easier to maintain a constant standard. Small businesses are simply less risky where they are operated through a franchise model.

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‘If your franchise model cannot support 100 stores, it won’t work. all you are getting is around 7%’

CARLOS GONZAGA, CEO, TASTE HOLDINGS

It is not difficult to understand why there is such interest, not only in franchising, but in the sub-Saharan consumer market generally. It is growing faster than any other continental market in the world. Driven by the resources boom, Africa’s economy has grown at a rate of nearly 5% per year since 2000. It was one of only two regions – alongside Asia – that experienced growth during the global contraction of 2008. Along with this is a booming consumer class. The McKinsey Global Institute’s report titled Lions on the Move projects an increase in the African households with disposable income from 59 million in 2000 to 128 million in 2020.

According to SA economist Mike Schüssler, speaking at the launch of Absa’s Small and Medium Enterprise Index in 2012, the franchise sector is doing far better in SA than the economy generally. Research commissioned by the Franchise Association of South Africa (FASA) in 2012 showed that 3 700 franchise units had opened by the end of the financial year, bringing the total number in the country to more than 30 000.

There are nearly 700 different franchises available in SA covering 17 different business categories. This might seem small next to the 70 business categories covered by the franchising industry in the US, but that country has a franchise driven economy with around half of all retail business being carried out through various franchise networks.

It may well be argued that the distinctive character of contemporary US social and political culture is related to the success of franchising and the free enterprise culture it enables.

According to FASA, the industry accounted for R302 billion in 2011, some 9.7% of SA’s GDP. But what is truly significant about franchising from an African perspective, is that it has taken on a life of its own. Approximately 90% of the 668 franchise brands available in the country are locally developed and not simply master franchises for big US brands like McDonald’s. The inescapable idea, currently being tested in implementation, is that these may provide a better fit for the emerging African consumer markets.

Franchising is not confined to fast foods and restaurants as the popular image might suggest. According to FASA, 20% of the available brands are in retail (e.g. Pick n Pay, SpecSavers), 10% in business-to-business services (PostNet, Minuteman Press), 9% in building, office and home services (the Drain Surgeon, Easylife Kitchens), 8% in automotive and 8% in child care education and training.

For decades African governments have wrestled with the problem of how to encourage the growth of small businesses. That a vibrant and expanding small business sector is desirable has never been in doubt. Small business is known to be the great job creator and key to generating a middle class independent of state patronage. Despite a plethora of state-sponsored institutions designed to promote small business, across the continent the sector has always struggled.

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The private sector in most African countries has been characterised by a ‘missing middle’. At one end of the spectrum are the corporates, mostly multinationals and involved in resource extraction. At the other end lies most of the indigenous private sector, predominantly ‘survivalist’ small enterprises such as the ‘spaza shop’. These businesses have overwhelmingly been characterised by low entry costs, informality and insignificant growth potential.

What is truly significant about franchising from an African perspective, is that it has taken on a life of its own

Furthermore, rates of business failure among small enterprises have always been extremely high. In 2013, SA’s Minister of Trade and Industry Rob Davies told parliament that of every seven small enterprises established in SA, five would close their doors within their first year. Describing this reality as ‘a scary statistic’, Davies argued that the solution is ‘small business incubation’.

There is however, already a private sector small business incubation model deeply entrenched in SA – franchising. Research suggests that franchises are much lower-risk than independent ventures.

Schüssler argues that ‘while there is no definite information … franchises seem to remain in business longer’.

According to FASA’s research, 75% of franchises have been in business for more than six years. Other virtues of franchising include the skills transfer, start-up support and ongoing operational assistance involved. The model appears to provide the perfect mechanism for dealing with some of Africa’s most persistent shortcomings.

The relationship between franchising and entrepreneurship is tailor-made for situations where the appetite for entrepreneurial risk is low. The real entrepreneur is the founder of the franchise.

A good example is KwaZulu-Natal businessman Carlos Gonzaga, the founder of Taste Holdings. Gonzaga, a law graduate who originally wanted to be a game ranger, bought into the pizza outlet established by his immigrant father.

That experience provided the basis for a company that recorded sales of more than R900 million in the year to February 2012. Gonzaga set out to establish a franchise, Scooters Pizza, in 2000. He marketed the original business plan to the successful franchise Nandos, which backed his idea by taking a 30% stake in the business. Partly because, according to Gonzaga, they liked ‘the kooky glint in my eye’. Scooters now claims to be the second biggest pizza franchise in SA with 136 outlets.

Taste’s track record shows the combination of entrepreneurial flair and sound management essential to establishing a franchise. It listed on the AltX Exchange in 2006 and on the Main Board in 2011. It has subsequently acquired the brands Maxis and the Fish & Chip Co among others.

In interviews, Gonzaga consistently stresses two issues that will come up for any franchise attempting to expand in Africa. First, ‘choosing the right partners is the single most important consideration’, he says. Few comment openly on the matter but this is undoubtedly an issue when any foreign company invests in sub-Saharan Africa.

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‘While there is no definite information … franchises seem to remain in business longer’

MIKE SCHÜSSLER, ECONOMIST

Second, Gonzaga stresses the needs for volumes. ‘If your franchise model cannot support 100 stores, it won’t work. All you are getting (as the franchisor) is around 7% with which you must service and support your franchisees.’

Franchises do best where the overall business environment is strong. The strongest possible redress mechanisms are needed especially when it comes to consumer and creditor rights as well as legal contracts. In SA, the Consumer Protection Act gives franchisees explicit rights as consumers and codifies many practices long advocated by FASA, such as the right to cancel a franchise agreement within 10 business days.

This sort of legislation and other elements of the legislative framework are often inadequate in other African countries. So too are other parts of the equation such as adequate assured supplies. These problems have led to many misadventures.SA’s Chicken Licken franchise was an early mover into the Nigerian market. However, as a result of what the company’s CEO called ‘unscrupulous franchisees’ and the impossibility of legal redress, the company withdrew from Nigeria, Zimbabwe and Mauritius. It was also bedevilled by ‘inconsistent chicken supplies’.

This last factor may also have been the reason for the failure of Nandos in Nigeria, despite its worldwide success. In April 2013, it closed down operations in Nigeria and Malawi. Anecdotal evidence suggests it was impossible to maintain the quality of service required. Some Nigerian customers had first been exposed to the brand in the UK and felt the Nigerian version simply didn’t measure up.

The CEO of Famous Brands, Kevin Hedderwick, referring to the company’s previous experience in Africa, said in 2013 that his management team had ‘gone a long way up the learning curve’ and that ‘we have paid our school fees’.

There can be little doubt that negative previous experiences had informed Famous Brands’ decision to re-enter Nigeria via a partnership mechanism, in this case with UACR.

Positive talk from the big SA franchises is part of the selling process. This is neither unusual nor wrong. It does not seem unreasonable to expect franchising to take African business into hitherto unchartered territory.

By David Christianson
Image: Andreas Eiselen/HSMimages