Franchising holding its own

The franchise industry contributed £11.4billion to the country’s GDP last year, with overall profitability levels remaining strong, according to the latest findings from the annual NatWest/British Franchise Association survey.

Despite the economic downturn, the number of franchises trading profitably (90 per cent) is unchanged compared to last year, and compares favourably with the height of the last recession, when just 70 per cent of franchises traded profitably. However, turnover levels have dropped by nine per cent over the past 12 months from £360,000 to £326,000.

While the economic contribution of franchising to the UK economy has fallen by eight per cent over the past 12 months (from 12.4billion in 2007), this still represents an increase of five per cent compared to 2006 (£10.8billion).

Last year was a period of expansion for many franchises, with the total number of franchise systems now reaching 838 - an increase of 3.6 per cent on the 809 systems recorded in 2007. Franchisors’ prospects for expansion also remain bullish, with plans to open an average of nine new franchise units over the next 12 months. The newer systems (up to three years old) are looking to expand at a greater rate, with an average of 14 new franchise units.

Says Graeme Jones, head of NatWest’s franchise team: “It appears that 2007 was an exceptional year for the franchise industry, with rampant and above average growth in every respect. This level of growth isn’t sustainable in the current climate, and 2008’s performance is more in line with historical trends.”

Says Brian Smart, director general of the bfa: “There is little indication so far of the recession having a severe impact on the franchise industry. It seems franchised businesses are in a much stronger position, as they have the additional protection of a proven business model and brand, and are a lower risk option for customers.”

Looking to the future, franchisors and franchisees are realistic about the economic climate and the challenges their businesses will face going forward. The majority of franchisors (60 per cent) and franchisees (66 per cent) think that general economic conditions will become more difficult in the next 12 months. However, 82 per cent of franchisors anticipate that their business will improve or stay the same over this timeframe, while the remaining 18 per cent expected business to become more difficult.

Estimated franchise start-up costs declined in 2008, according to the survey. Franchisees can expect to pay £50,400 in franchise fees and other associated costs to their franchisor (down from £64,900 last year).

Says Graeme Jones: “Franchising continues to be an attractive business model for entrepreneurs, and the recession is putting more potential franchisees in the market and enabling the recruitment of really high quality staff, who may be struggling to get employment through other routes.

“Despite the economic downturn, franchisors and franchisees are starting to benefit from a number of cost savings that are beginning to filter through. These include reductions in commodity and energy prices, and those with retail premises are also taking advantage of more flexible negotiations with landlords regarding the provision of rental payments.

“We are also seeing evidence of franchisors and franchisees becoming much more hands-on with their business to ensure high standards and sales targets are maintained through this difficult period.”