Franchisors have exceeded their growth forecasts for the current year, are specifically focused on recruiting more Gen Y franchisees and are moving into online retailing without cannabilising the sales of their existing networks, the third annual PwC report on the sector has revealed.
However, franchisors are dialling back their growth forecasts due to market volatility, declining consumer confidence and the prospect of further unemployment.
According to the PwC Franchise Sector Indicator report, the industry has performed "extremely well" compared to the rest of the economy, particularly within a challenging year.
Last year, the report indicator stated that franchisor revenue and profit was expected to grow by 13% and 18%, with this year's results coming in at 17% and 22% respectively. PwC said the industry "has achieved growth targets in worse conditions than were anticipated at the time of this survey last year".
Franchisee revenue rose by 12%, above the 10% forecast, while profits increased by 13%, in line with forecasts.
More surprising is the breakdown for retail – retail franchisor revenue grew by 22%, compared to non-retail of just 12%. Profit also grew by 26%, compared to 18%. And of the franchisors that are currently retailing online, 23% said over 20% of their revenue is generated that way.
PwC franchising national lead partner Greg Hodson says the firm was "waiting with baited breath" to see if the results would be in line with expectations. "And they have been exceeded."
However, going forward the industry isn't quite as bullish. The report indicates that franchisors only expect revenue growth of 11% for 2012, and 37% over the next three years. Profits are set to grow by 17% in the next year, with 46% over the next three years.
Franchisees are expected to see revenue grow by 9% in the next year and by 29% over the next three years, while profits are expected to grow by 11%. Hodson says it is no surprise that forecasts are more conservative than they were last year.
Specifically, the report states that 61% of respondents now see consumer confidence as a significant factor regarding a potential impediment to growth.
"I think that's just on the back of us taking a little bit longer to get out of the GFC, and concerns about what's happening around the world."
"We can see over the next three years, that franchises are being a little bit more conservative."
While some franchise experts have speculated the expected job losses over the next year will provide franchisees with fresh recruits, Hodson says it will need to be seen over the next year if this will be the case.
Hodson says the performance of franchises boils down to four key ingredients – a proven model, franchisees taking initiative, marketing support from franchisors and strength in numbers. "I think these four ingredients stack up to have results that are better than the average business community."
But the report also shows that franchises are continuing to innovate. In particular, the growing number of franchises that are moving online – a topic that will be a major theme at the Franchise Council national conference next month.
"There has been much discussion over the past 12 months regarding the effect of online on traditional forms of business. Although 34% of franchisors are utilising online retailing, they are using it to build brand awareness and increase coverage and not as a tool to compete with their franchisees."
"They are certainly focused on the importance of the web and other tools to the success of their business with 23% saying they are looking to increase their online retailing activities over the next 12 months."
There have been a number of conversations over the past year regarding the franchise model and how it would work online, and whether franchisee sales would be cannibalised. However, the PwC report indicates that 73% of systems report full revenue going to the franchisee.
Hodson says this is encouraging, particularly as the report shows more franchises are innovating with online, with 7-Eleven and KFC used as examples of offering digital coupons.
"They certainly seem to be taking to online more than the general business community, and are using it for good rather than evil. They don't seem to be competing against franchisees.
"We've had lots of discussions through franchisors with their online models and to see that such a high proportion of them are directly benefiting franchise is encouraging."
Social media is also a widely used tool, with 8% of franchise groups now using or planning to use social media for marketing and customer feedback. Overall, one third of franchises have an online store, and that's expected to grow to 57% within two years.
However, finding candidates is still a challenge. As a result, franchisors are looking to younger business owners.
"The sector is becoming increasingly active in trying to attract Gen Y as franchisees, with more than half of the franchisors using specific recruiting tools in a bid to attract this group, compared to only 38% in 2010," it states.
Some high profile franchises including Baker's Delight have already announced campaigns of this nature. Hodson says there will be more to come.
"Last year we'd been talking about the whole issue of finding suitable candidates. One of the questions this year was whether franchises had changed their approach to recruiting franchisees, and this year the majority of them have said they have."
"Most of them have specific initiatives aimed at Gen Y. It shows they are continuing to adapt, and are trying to find innovative solutions to their challenges."
Some concerns include that only 38% of franchisors have their systems accredited with banks, and that 75% of smaller systems are not accredited. PwC muses that this may be an indication of the "difficult and time-consuming accreditation process adopted by the banks".