Franchising provides a haven, but great care is needed

The economic forecast for the UK is grim.

Franchising provides a haven

During August the pound fell to its lowest level since the financial crisis of 2008, well below its long-run average against both the dollar and the euro. By mid-September it had fallen further to a 37 year low against the dollar. Following the mini-budget on 23rd September it fell even further to an all-time low. The financial markets immediately exacerbated the problem by reacting negatively. The yield on two-year gilts rose above 3% for the first time in nearly 20 years. 

Ten-year gilt yields rose to their highest level for eight years. All these factors are indicators of a lack of confidence in the UK economy. The continuing lack of productivity in the UK is likely to worsen and fears of a recession are growing. Russia’s invasion of Ukraine continues and is predicted to be a long-drawn-out war of attrition. The British Chambers of Commerce and Goldman Sachs have both recently added their names to a long list of forecasters who are anticipating extremely difficult, or even recessionary, conditions in the short to medium term.

To counter these dire warnings of doom and gloom, Liz Truss, and chancellor Kwasi Kwarteng have put together a huge package of tax cutting and measures to stimulate the economy. The most noteworthy of these, and what has dominated the headlines, is the support to mitigate rising energy bills. Behind that are many radical reforms that are intended to help businesses and promote economic growth. These will be rolled out during the coming months. An overhaul of the planning system is scheduled to take place to boost infrastructure projects and housebuilding.

The number of job vacancies in the period from June to August decreased to just over 1.2m. This was the largest quarterly fall since 2020 and suggests that employers will gradually regain a measure of control over wage demands and find it easier to recruit and retain staff. Employees, on the other hand, will see average pay fall by at least 2.8% a year when adjusted for inflation. Even with the government support for energy costs, those who are not in work will face rising food prices and higher electricity and gas bills.

Taking all these factors into account, the short to medium-term situation is clear. Those who remain in their present employment will see their salaries decrease in real terms. Those who are brave enough to leave and start their own business will benefit from the government economic stimulus strategy. But the move could be risky in such uncertain times. This, is where franchising provides the all-important de-risking factor.

Franchising already makes a massive contribution to the UK economy and that is certain to increase. Those with the entrepreneurial vision of running their own business can mitigate the risks posed by these turbulent times and shelter under the umbrella that a franchise provides. Franchisors in the right sectors will find that funding for prospective franchisees will be made easier by the increasing levels of government and local authority assistance for small businesses. Interest rates are likely to rise but not to unsustainable levels.

Changing economic conditions always produces winners and losers. What this means for franchising is that prospective franchisees should be careful to avoid areas that are likely to experience difficulties. Any business that relies on imports will struggle against rocketing prices driven by a weakened exchange rate. Big ticket discretionary spending will undoubtedly come under pressure. Franchises that require large numbers of staff, such as those in the domiciliary care and hospitality sectors, will continue to be held back by labour shortages. Areas that are likely to do well are those offering essential goods and services where a local independent provider, such as a franchisee, can deliver a better service, at a lower cost. Franchised businesses that provide services to the civil engineering and housebuilding sectors are likely to be busy.

For franchisors, and those who are planning to enter the sector, now is the time to run a safety check over their business model and method of operating. This is particularly important when it comes to recruiting new franchisees. A strong growth record or financial projections that are based on the buoyant trading conditions of recent years is all well and good, but is that momentum likely to continue? Can a new franchisee, with limited financial resources, sustain the two or three-year downturn or the recession that many predict? Is it better to postpone the launch of a new franchise until the economy has recovered, than see the first franchisees struggle and possibly fail? In an established franchise, it may be sensible to slow down the recruitment rate and concentrate on supporting the exiting franchisees. All these factors are highly relevant until stability returns.

A fundamental tenet of franchising is that the franchisor will provide guidance and support for the franchisees. This will be seriously put to the test in the trading period that we are entering. Franchisors that levy a minimum monthly management service fee should consider suspending or reducing the charge and rely on the amount payable as a percentage of sales. If pain is being endured by franchisees it should be shared with the franchisor.

As always, difficult conditions will also bring opportunities difficulties. They certainly don’t justify adopting an over-cautions siege mentality. The underlying strength of franchising as a method of doing business is not in question. In difficult times it will provide security for franchisees that is not available to independent businesses, but extreme caution will be needed in the months ahead.

Tony Bowman
Tony Bowman