Franchisors predict 18% profit growth in 2010

After sailing through the downturn relatively unscathed, franchisors are predicting 13% revenue growth and 18% profit growth in the next 12 months, according to a survey by PricewaterhouseCoopers.

The survey which concentrated on 67 of the 300 franchise systems in Australia which have 20 franchisees or more, found the sector has out-performed the wider economy over the last 12 months.

Despite the downturn, franchisor and average franchisee revenue increased by 4%, while franchisor and average franchisee profit jumped by 1%. However, franchisor profit in the services sector (that is, non-retail franchise systems) fell by 8%.

Greg Hodson, PwC’s national lead partner in the franchising practice, says the results are impressive in a year when many expected the franchise sector could struggle.

“I think they are fantastic results and I think they really do prove the resilience of the franchise business model in tough times.”

Part of the reason for the solid performance was the quick action taken by franchisors to support franchisees. Three quarter of franchisors increased their monitoring of franchisee financial distress, and just under two thirds attempted to renegotiate deals with landlords and key suppliers.

Franchisees responded to the downturn by cutting operating costs and wage bills.

“Getting closer to their franchisees is a pretty strong theme amongst franchisors,” Hodson says. “They’ve really actively got down in the trenches and fought with them.”

It is also clear franchisors remain very bullish about the near future. In the next 12 months they expect franchisor revenue to increase 13%, while average franchisee revenue is tipped to increase 9%. Franchisors expect profits to climb an impressive 18%.

Over the next three years, franchisors expect revenue to increase 19% and average franchisee revenue to rise 14%. Franchisor profit is tipped to rise 24%.

Little wonder then that 92% of franchisors have no intention of selling their business in the next two years. “These guys are very confident in their ability to deliver on their growth projection so they are going to hang in there,” Hodson says.

However, achieving the bullish growth projections will not be easy. The expected boom in franchisee recruitment that was supposed to happen as unemployment rose has simply not eventuated. Franchisee inquiries increased 12% according the survey, although PwC says this was skewed by a few results.

“Achieving the organic growth targets this time is proving a challenge for franchisors as the unemployment levels have not risen as dramatically as in previous downturns,” Hodson says.

When the franchisors can find recruits, arranging funding remains a big challenge – 83% of respondents cited a lack of access to funding for franchisees as a major impediment to growth.

Hodson says recruit-hungry franchisors will need to continue to work hard on maintaining their marketing efforts, financial performance, strong supplier agreements and support mechanisms for franchisees.

“I think what we’ll find is that is still a flight to quality amongst franchisees and it’s just going to be vitally important to be on top of their game in terms of what they offer franchisees to entice them to buy a franchise.

Medium-term growth strategies include expansion into new products or services (68%) and acquisition of other businesses (42%).