Franchise sector pumps $20 billion into Kiwi economy: Report

A new report reveals franchises contribute around $20 billion to the New Zealand economy, suggesting the market is ripe with opportunity, but 88% of those franchises are home-grown.

The report, titled Franchising New Zealand 2012, was produced by the Asia-Pacific Centre for Franchising Excellence at Griffith University and Massey University in New Zealand.

According to the report, franchised businesses contribute between $19.4 billion and $21 billion to the New Zealand economy. This compares to an estimated turnover of $6.9 billion in 2003.

There are approximately 446 business format franchisors in New Zealand, up from 423 in 2010. However, 88% are Kiwi-born enterprises, suggesting it is difficult for international franchises to penetrate the market.

For those that do, it’s worth noting most franchising in New Zealand takes place in the service sector, which accounts for 40% of all franchise systems, according to the report.

“Retail trade comprises 21% of franchisors and 16% of franchise units, [but] there has been a slight reduction in the overall number of retail systems since 2010,” the report said.

“Accommodation and food services account for a further 18% of franchisors and 10% of franchise units. There were nine systems added in this category since 2010.”

“Another change in categories occurred in rental, hire and real estate (marginal decrease), and minimal increases occurred in education and training, manufacturing and the wholesale trade.”

It’s also worth noting the vast majority of New Zealand franchise systems are small.

“The median number of franchise units in the systems sampled was 21 in 2010 and there was a median of one company-owned unit,” the report said.

“At that stage, 47% of the sample did not operate a company unit at all. The average total number of units was 52 per system.”

“The 2012 sample showed a median of 36 franchised units as there were more mid-sized systems in the distribution.”

According to the report, the New Zealand franchise sector is both “mature and experienced”. Franchisors have been operating for a median of 21 years, and franchising for 15 years.

In general, concepts were piloted for only one year prior to launching the franchise. This appears to be a trend that carries on from findings in previous reports in 2003 and 2010, the report said.

Finally, the report offers insight into the performance of New Zealand’s franchise systems in 2011 and 2012 – a period characterised by “ongoing economic concerns”.

“Over half the respondent franchisors reported increases in revenue margins from sales over the two years but… overall profit margins for over a quarter declined,” the report said.

“Sixty per cent were forced to increase their marketing efforts in order to attract dwindling consumer spending.”

“Continued difficulties in the business environment are mostly impacting franchisees by decreasing profitability.”

“Although 80% of franchisors in the sample reported that their franchisees were operating profitably, there remain a significant number of strugglers.”

“Amidst fierce competition, franchisees are making every effort to reduce costs by being operationally efficient and decreasing staff numbers.”

Read Jason Gehrke’s SmartCompany blog to keep up to date with franchising news and tips.

This article first appeared on StartupSmart.