Recession? – Not in franchising

As we near the end of quarter two, the government is still wrestling with low productivity, high inflation, rising interest rates, a cost-of-living crisis, and industrial disputes.

Recession? – Not in franchising

As we near the end of quarter two, the government is still wrestling with low productivity, high inflation, rising interest rates, a cost-of-living crisis, and industrial disputes. However, there are many reasons to be optimistic, particularly for franchising.

With regards productivity, the UK lags all the main economies. Our GDP is about half that of France and Japan and even further behind the US and Canada. Of all the issues that we face this is the one most urgently in need of attention. A ray of optimism to alleviate this is provided by the franchising industry because there is no doubt that franchised businesses are more productive. Everyone who has visited McDonald’s knows that the business is highly efficient. The product is well-priced, of consistent quality and customers love it. The business is also very profitable for both the franchisor and the franchisees. The same can be said for other well-known brands such as Specsavers, KFC and Dominos. Some, less obviously operating as a franchise such as Budgens are also very successful. The industry is generally very efficient.

This is achieved by the process of refining and streamlining that must be done to operate a franchised business. The purchasing of products and services for the franchisees is negotiated centrally, which increases buying power and reduces prices. The franchisees, relieved of many of the mundane chores, can concentrate on running their businesses efficiently and providing a great service for their customers. As a result of being self-employed they are highly motivated. All of this produces the increased productivity that the UK so badly needs.

It is not surprising that many households are suffering from a cost-of-living crisis when official figures indicate earnings growth of 6% against an inflation rate approaching double that. The obvious way to overcome a cost-of-living crisis is to earn more money. This is far more effective than going on strike, which simply exacerbates the problem. In most cases, the best way to earn more is to become self-employed. The easiest and by far the safest way of running one’s own business is through franchising. The annual NatWest survey of the industry indicates that 90% of franchisees are still trading successfully after five years. This compares with a whopping 60% failure rate within three years that was shown in a recent survey by Durham City Incubator.

Even in these difficult times the service sector, in which many franchised businesses operate, remains strong. Within this area lies the care industry where there are numerous examples of excellent, and very profitable, franchises such as Home Instead, Bluebird and Heritage. In a tight labour market that is often blamed for holding businesses back, the government has issued over 200,000 visas for healthcare workers in the past year.

Turning to interest rates, the abnormally low levels seen in recent years are being replaced by regular hikes. Mark Beresford Smith, the head of economics at HSBC, suggests that rates are likely to stabilise from 2024 at about 5½%. (Mark is about to retire and deserves a huge thank you for sharing his knowledge and wisdom over the years). At that level many small businesses will suffer but as noted earlier, less so with franchised ones.

To counter higher rates, commodity prices are now falling rapidly. Oil has seen a fall of 7% during May, as evidenced by lower prices at the pumps. According to the RAC, petrol and diesel are now below £1.60 per litre and about where they were in 2014. Prices for natural gas are also much lower and approaching levels last seen before the pandemic and the war in Ukraine.

House prices have recently declined, but only modestly, and due to a slowing house-building sector, they are unlikely to fall dramatically. In most cases home equity is therefore secure and continues to provide the most obvious source of collateral for bank funding for a new business. All the main banks that concentrate on our sector, and that includes challenger banks, are keen to support new franchise start-ups.

Although Brexit has undoubtedly diminished our status as a trading nation, the UK is still seen internationally as being very important for franchising. This is partly because we are one of the least regulated countries in the world and partly due to the weakness of the pound. As a result, overseas brands are often on the lookout for master franchisees. Similar opportunities are available for UK franchisors who are considering the sale of their business. In recent years multi-brand franchisors such as Dwyer and Neighborly have made UK acquisitions. This trend is bound to continue. An interesting facet within this area are examples of UK Master franchises such as Drain Doctor and Home Instead that, after being fully developed, have been sold back, at a considerable profit, to the overseas Franchisor.

Despite considerable doom and gloom elsewhere UK franchising is thriving and has a bright future.

Tony Bowman
Tony Bowman