South African franchise industry - A safer way to get into business

James Noble, Sector Executive: Wholesale, Retail & Franchise at Absa Relationship Banking gives an overview from a banking perspective on the current franchise landscape.

Overview of the current franchise landscape

The franchise industry in South Africa has been a great success story over the past few decades. The industry has grown significantly since 1994, with over 700 franchise systems in the country and some even becoming international brands, The industry goes across 14 major business categories dominated by fast-moving consumer goods, retail, automotive restaurants and quick-service restaurants, which represent more than 50% of the brands.

The franchise industry has also made good progress with regard to transformation and driving the government’s objective of financial inclusion. Nearly 50% of franchise brands have BEE shareholding. It also has a strong presence of women as shareholders. In addition, the industry is responsible for almost 5% of the employment in South Africa with nearly 500 000 employees. More than 70% of these employees fall in the previously disadvantaged group.

According to a recent survey by the Franchise Association of South Africa and sponsored by Absa, the industry has increased its contribution to gross domestic product from 10% to 15% over the past 10 years, making it a significant contributor to the South African economy. The survey also highlighted much better business confidence levels among franchisees and franchisors than in the broader economy and reflected optimism that turnover will grow over the short and medium term. However, operational costs increased, which has a negative impact on the general profitability of businesses.

Inflation levels are at its lowest level since March 2021 due to the drop in fuel prices that reduced transport costs. Hover, consumers are still under pressure and recovering from high interest rates, rising electricity costs and rising food inflation that has a negative impact on disposable income and money available for luxury goods and services. The impact of the two-pot retirement system that was implemented in September 2024 must still be seen with a lot of claimants noting that they will use the extra money to settle debt, car and home expenses, school fees and day-to-day expenses.

Most franchise brands are focused on innovation to ensure that they keep up with competitors and general consumer demands. Innovation can vary from how marketing is done via the different available channels, loyalty programmes, product innovation and diversity. Innovation can also include the delivery of products through alternative channels such as online or eCommerce platforms supported by a delivery service and optimising staff utilisation.

Where to from here?

Business format franchising is well established in South Africa and grew significantly over the past few decades, However, there is still a big opportunity with the social format franchising model in South Africa to unlock opportunities in the rural and township areas. The emerging markets offer good opportunities to provide basic services that can be focused on our youth and women in business. Opportunities exist from little spaza shops, childcare services, ablution facilities for schools and sport programmes to hair salons and barber shops.

The consumer services sector is another big untapped market where business can be done through a more formalised franchise model. The solar installation and after-sales market is a big opportunity not only for installations, but the maintenance of solar systems. Other industries like plumbing and electrical services can be formalised through franchising to build more trust among consumers and to protect them from doubtful service providers.

The use of technology, artificial intelligence (AI) and the automation of systems are becoming more important for franchisors and franchisees. Management information is crucial to manage financial benchmarks, business trends and customer behaviour. Cash-strapped consumers are continuously looking for bargains or more value for money when shopping.

Another trend that is reshaping the South African franchise industry is the growing demand for delivery services. Consumers are increasingly looking for convenience and safety, which has boosted the popularity of online ordering and home delivery. This presents a meaningful opportunity for franchisors and franchisees to expand their customer base and increase their revenue streams.

Delivery services are not limited to food and beverages but also include other products and services such as groceries, pharmaceuticals, cothing, books, flowers, gifts and more. Franchises can leverage their existing infrastructure and brand recognition to offer reliable and efficient delivery options to their customers. Alternatively, they can partner with third-party delivery platforms that have a wide network and a loyal customer base.

The benefits of franchising

One of the benefits of franchising is the reduced risk and increased profitability. South Africa has over 45 000 franchise businesses, which provide a safer way of getting into business and becoming financially independent. The support of a franchisor and value of brand recognition still outweighs the risk of starting a business on your own. Franchisors can assist with lease negotiations, product and supplier arrangements, marketing the business and raising finance and services from the bank at affordable rates to reduce operational costs.

Improved access to financial solutions: Franchising facilitates access to finance for franchisees, as lenders and investors are more likely to fund a franchise business than a start-up. Franchisees can also benefit from the franchisor’s financial assistance and advice.

Absa’s Wholesale, Retail and Franchise team operates across several business categories, for example, grocery retail, restaurants, quick-service restaurants, entertainment and leisure, and automotive and fuel.

Absa has a good understanding of the industry from a franchisor, franchisee and banking perspective. Therefore, we can provide you with the best solutions that will contribute to your business success. If you’d like to talk to us about your business plans and dreams, we’ll gladly listen.

To find out more about the wholesale, retail and franchise industry and Absa’s available financial solutions visit ABSA; email franchise@absa.co.za or call us on 011 350 8000.