Confidence Erodes as the Christchurch Quake Pummels

Franchize Consultants’ April 2011 Franchising Confidence Index finds many key confidence measures deteriorating following the February 22 earthquake and after shocks in Christchurch.

• Franchisor sentiment toward general business conditions (net -3%) has substantially deteriorated (from net positive 30% in January).

• Franchisors are still generally positive about forthcoming growth prospects for their organisations (net 36%), however optimism has dampened from January (net 54%). Service providers (net 40%) shared franchisors current optimism for growth.

• Franchisors expect access to capital to remain challenging (net -10%). Franchisor expectations regarding financing have now been negative for 12 months.
• Whilst improving marginally, franchisors expect franchisee recruitment to remain challenging (net 5% up from 3% in January 2011). Comparatively, service providers are considerably more positive in their outlook for franchisee recruitment (net 45%).

• Meanwhile, franchisor and service provider perceived access to suitable staff are aligned and firmly positive reporting net 36% and 35%, respectively. Franchisors and service providers are positive, although less optimistic about franchisor access to suitable locations than January.

• Expectations for franchisees are increasingly discouraging overall, particularly relating to franchisee profitability. While expectations for franchisee sales levels stabilise (net 33%), franchisor expectations for operating costs (net negative -38%) and profitability (net negative -3%) both deteriorated from the previous quarter. Franchisor expectations for franchisee profitability are now negative on balance for the first time since the survey began a year ago. Service providers’ expectations align with franchisors for franchisee operating costs and profitability, but service providers are less optimistic in their outlook for franchisee sales levels.

In summary, as per the last survey, both groups continue to see challenging times ahead for franchised businesses in 2011 and early 2012.

Franchisors were asked how things are looking in their sector and how the Christchurch earthquakes had impacted franchising operations and their outlook.

Accordingly, it is clear the February 22 quake and subsequent aftershocks have proved particularly damaging and have affected franchising and business confidence. There have been many franchisee store or unit closures (whether temporary or permanent) and there is an over-riding feeling of uncertainty.

Both franchisees and franchisors have been impacted. Many franchisees face various issues right across their business, such as problems relating to income, essential services, insurance, work-in-progress, suppliers, locations and finance.

For franchisors, there are issues with royalty payments, increased support costs, advanced supplies, growth plans and finance. For some franchise systems, the Christchurch earthquakes have heightened viability concerns for both franchisees and their franchisor.

Some franchisors and franchisees have been severely affected:

“Very hard impact. We have a number of retail outlets seriously affected and not operating. The outlook for any growth in this area is very unlikely over the next two years.”

“We lost 1 franchise store and could not replace at the same occupancy costs. Rentals have been artificially inflated. We are closing a second store which is near a suburb badly affected and which has been depopulated. We do not anticipate business getting back to normal in the following 2 years at least. This is our second biggest city and will therefore have a significant impact on the overall business.”

Most franchisors report a direct impact on business whether through permanent or temporary store/unit closures and subsequent reductions in demand and sales.

Many franchisees have dealt with temporary store closures and have now commenced trading.

Meanwhile, the outlook for some is more uncertain.

“The earthquakes have impacted us with closed stores and unknown dates for access to some of those stores affected.”

“Currently our Christchurch store is sitting in a 40ft container. We don't expect to be trading in Christchurch for at least 6-9 months. We also would not want to re-open until the city location is ready and in a position to trade at a profitable level.”

In contrast, some affected franchisors (though few in numbers) have noted increased demand following the earthquakes, often due to competitive closures (whether permanent or temporary) or changes to purchasing patterns and/or business strategy (e.g. increased demand for virtual office services).

“We have six stores in the Christchurch area and have been very fortunate to have none greatly affected by the earthquake. Revenues in those six stores are actually higher than expected due to high demand for products/services when the city was shut down.”

However, more than 25% of respondents reported store closures within their comments, including a number of permanent closures.

More broadly, franchisors report a mixed outlook for the next twelve months with the majority noting either negative or middling demand growth. Some however, do note growth and in some instances strong growth. But overall there is a cautionary outlook and it is not expected the Rugby World Cup will provide more than a short-term injection.

Franchisors variously note differences by region and the impact of the Christchurch earthquake, either through local operations or the flow on effects. Franchisors also touch on consumer discretionary spending pressures, such as increased food and fuel costs, and note consumers taking more care and being more risk averse.

Pricing pressures are also evident due to competition and/or customers expecting more from their money. Finally, financing continues to remain a stated growth challenge for some.

Franchising Confidence Index Background
Franchize Consultants’ Franchising Confidence Index is a quarterly survey of more than 350 New Zealand franchisors and 100 specialist service providers (e.g., consultants, banks, accountants, lawyers and publishers) to the franchising community.

The Franchising Confidence Index represents confidence in key measures critical to the success of franchising in this country by reporting attitudes toward general business conditions, as well as key franchising growth determinants including access to capital, suitable potential franchisees, staff and locations. The Franchising Confidence Index also covers franchising health attributes and outcomes by exploring franchisee sales, operating costs and profitability, and franchise system growth prospects.

The data and analysis presented represents the views of 39 franchisors and 20 service providers collected between Monday 4 April and Friday 8 April 2011. Findings from both groups are reported separately.

Note, respondents are asked whether they expect conditions to be ‘better,’ ‘same’ or ‘worse.’ ‘Net’ confidence is the difference between those reporting ‘better’ and ‘worse.’

ENDS

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