Absa SME Index hails franchising sector

Franchising is proving to be the most viable route towards self employment for many South Africans.

This was firmed up in the latest Absa SME Index which registered improving trends in the last quarter of 2012 attributed to the growth of self employment. As things stand South Africa is estimated to have about 1, 2m self employed business people. There is consensus that the growth of this number will come to address unemployment as self employment develops into employment of others.

Absa SME Index rose slightly in the last quarter of 2012 and is now 1,4 index points off its low of 92 reached in the second quarter of 2012. Self employment grew by 1,1% over the last quarter and overall 2% over the last year in South Africa.

Franchising seems to be leading in sustainability measures within these trends. Mike Schussler who works on the Absa SME Index said “Franchises seem to remain in business generally longer than the businesses which operate, on average for less than five years. While there is no definite information on the length of time franchises stay in business, the fact that many franchises are sold to new owners indicates a longer survival rate for franchises.”

On average private sector companies employ about 13 people including the owner, while the average franchise employs 17,2 people including the employer, said Schussler.

Banks seem to concur with that view if the observation accompanying the Absa SME Index is anything to go by. “Banks financing franchises is another indicator that these types of businesses last longer and have a low risk profile than the general business in the South African economy”.

Andre Rosslee, Absa’s Head of Sector Solutions and Franchising said the bank recognised the vital role that the franchise industry plays in creating wealth and employment opportunities. “We believe in partnering with our franchise clients and to this end have established a dynamic team focused specifically on the franchise industry. Our aim is to gain an intimate understanding of the franchise industry and to use this knowledge to deliver competitive products and innovative solutions.”

Rosslee said it appears that food retailers, quick service restaurants and restaurants servicing the middle income market were less affected by the economic downturn with some businesses operating in this arena achieving record turnovers in December 2012. “They are however still under pressure resulting from increases in food inflation and operating costs. A change in the consumers’ replacement patterns for vehicles also supported franchises operating within the automotive service and aftermarket sectors. The fuel industry has shown more resilience with increased profitability resulting from margin increases over the past few years”.

In a statement released yesterday Nicolas De Sousa, marketing and operations director at Traditional Brands, said there was plenty room for improvement in South Africa’s franchising industry. He believes that local entrepreneurs have the ability to revolutionise the South African franchising industry and in so doing strengthen the economy.

De Sousa said the local franchising industry remains a somewhat rough terrain. “South Africa has great potential but there are still a number of areas which require significant attention. One of the greatest challenges is the current lack of industry regulation. “Anyone is able to franchise their brand in this country without having to comply with legislation, this being a situation which does not encourage expertise, originality or standards.”

Schussler said “The growth in self employment shows that SME’s are also benefitting from low interest rates and would also benefit in future if tax relief for them was introduced as this could be positive for business formation and sustainability”.

He added that self-employment was still 2,5% below its recent highs indicating that some smaller negative effects from the global economic crisis still linger. Schussler also noted that the ABSA SME index showed there were 707,000 employers in South Africa during the fourth quarter of 2012. Employer numbers had a year-on-year decline of 2,1% in 2012 while over the last quarter the decline was a little smaller at 0,2%.

“Certainly some employers have felt the strain of the wild cat strikes in the South African economy over the past year which resulted in some closures or mergers. However of major concern is the fact that the number of employers is still 10% less than the high as the global recession hit South Africa. This is also born out by tax statistics for March 2012,” he said.

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