#FranStories: The Franchise Industry Is Weathering The Shutdown, But Concerns Are Growing

 

 

Entering its second week, the government shutdown continues to hurt the U.S. economy. Now, with the debt ceiling approaching, the International Franchise Association reiterates its call for Congress to pass a Continuing Resolution to fund the federal government and raise the debt ceiling. Dealing with our long-term entitlement challenges and our growing debt is critical, but the government shutdown and uncertainty over raising the current debt ceiling is hurting franchises today.

As reflected in the chart below, the Franchise Business Index, a gauge of the overall health of franchise sector, took a dive during the three-month debt ceiling crisis in 2011, falling in July, flat-lining in August and going negative in September.

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“Franchise business owners want their elected officials on both sides of the aisle to put aside the partisan rancor and negative rhetoric so we can get this economy moving again,” said IFA President & CEO Steve Caldeira. “We have seen this happen before, and without question Congress and the administration’s inability to come to agreement on long-term economic policy puts downward pressure on job growth and franchise development in the franchise sector.”

We’ve collected stories from IFA Members to illustrate the impact on the ground. For franchises, heightened uncertainty, reduced consumer power, and tighter credit conditions will be headwinds for the sector if the shutdown continues. However, franchises, as they have done throughout the weak recovery, report that they are weathering the storm, finding ways to grow and create jobs.

Share with us your stories by email or twitter. Tweet at @Franchising411 or using the hashtag #FranStories.

Franchises and the shutdown:

David Leonardo, Chief Development Officer At Wild Wing Café in Florida, Is Seeing A Boost From Furloughed Workers Looking For An Escape, But Is Concerned About Impact On Spending If This Continues. “Amid the government shutdown, people are seeking an escape at times, and Wild Wing Cafe can be that for a lot of people — including government workers. We anticipate this trend in restaurant revenues continuing, however with government uncertainty, we know that can impact spending habit. We know people could hold back from going out if they don’t know what lies ahead — but we’re doing everything in our power to support their need for an escape from rigors of everyday life.”

Fact: With the shutdown, 800,000 federal workers are furloughed without pay. That’s 800,000 people with less money to spend on travel, food, services and goods from franchise companies. Further, with these workers at home, personal services such as home and lawn care are also taking a hit.

For Jennifer Jackson, Director Of Development For Hungry Howie’s Pizza in Michigan, The Shutdown’s Impact On The SBA Has Stalled The Launch Of A New Business. “The government shutdown has greatly impacted Hungry Howie’s Pizza franchisees, as there are not any loans going through the SBA. For example, we have a development deal in the Houston area, and are set to begin operating, but due to the government shutdown, our franchisee is unable to get approval on the Franchise Registry nor get the funding to begin the process.”

Fact: Access to loans is already a key concern for franchises with an estimated lending shortfall of more than 9 percent in 2013. The shutdown compounds this existing problem as every day the government is unfunded, $13 million in Small Business Administration (SBA) loans to small business are foregone.

Matt Patinkin, Owner Of Auntie Anne’s Pretzels in Illinois, Is Concerned About The Impact Of Increased Uncertainty On Customers. “The government shutdown creates uncertainty on the part of consumers.  The longer the shutdown continues, the greater this uncertainty becomes, and that causes our customers to hold back.  We’re a consumer driven society, so if that happens we all suffer!”

Fact: Even prior to the shutdown, self-reported daily spending dropped $11 to $84, the lowest level since February.

While Franchisees Have Solid Plans And Are Weathering The Shutdown, The Impact Of Cuts To Government Contracts Can Be Felt Several Layers Down According To Jeff Connally, CEO and President of CMIT Solutions in Texas, An IT Consulting Franchise. “We have more than a handful of franchisees in the D.C. market, many of which who have clients with government contracts. When a shutdown like this occurs, the trickle down impact can be felt several layers down. Our franchisees have been in regular contact with their clients, and we make ourselves indispensable, but this certainly adds pressure that our clients did not expect for this year. Our franchisees have a solid plan in place and are weathering this nicely. Hopefully this won’t be an issue for very long.”

Fact: The ripple effects of the government shut down have extended as far as Antarctica, where scientists who were set to begin studying the area are now on hold.

For Roger Murphy, CEO And President of Murphy Business & Financial Corporation in Florida, A Business Brokerage Franchise, Increased Uncertainty Reduces Business Transactions. “When there is uncertainty in the air, business transactions take a hit. This event, coupled with other factors at play now, i.e. the Affordable Care Act, make planning for buying a business even more difficult.”

Fact: From September 30th to October 6th, Gallup’s Economic Confidence Index experienced its largest drop since the week of Lehman’s collapse.

Stephen Dixon, Chief Development Officer Of Childrens Lighthouse Learning Centers in Texas, Hopes His Company’s Education And Child Services Help Furloughed Government Employees In Their Time Of Need. “Our franchisees across the country build deep, meaningful relationships with the families they serve. Franchisees certainly know when stresses such as government shutdowns keep people from working. Uncertainty is amidst, but we are always there for our families, helping when we can to make certain that our education childcare is available to them. Our franchisees appreciate their loyalty and return the favor in unforeseen circumstances such as these.”

Fact: In addition to the 800,000 federal workers furloughed without pay, another 1.4 million government workers may see paychecks delayed.

Call your Senators and Representatives and let them know how the government shutdown is impacting YOUR business and the franchise industry. Call (202)224-3121 and ask for your Members’ offices. Don’t know who your Members of Congress are? Find out here! Share with us your stories by email or twitter. Tweet at @Franchising411 or using the hashtag #FranStories.

Franchise Trade Mission enters the Urban Safari

 

 

Our third day of the trade mission was billed as the Urban Safari, site visits to retail outlets in surrounding areas of Johannesburg.  The group was joined by Mark Ruffley and Danisa Shetlele of the Pareto Group, which is one of South Africa’s premier shopping center investors and a leading retail property industry player.  We would be visiting  Southgate Mall in Soweto; Cresta Shopping Centre in Randburg and Sandton City Shopping Centre.  Mark and Danisa wanted to show the diversity of the malls in the areas which serve the diverse communities in Johannesburg.

Before we arrived at the first stop in Soweto, our hosts offered a surprise stop at a truly significant landmark in South Africa.

The Mandela House, at 8115 Orlando West in Soweto, a modest four room home was Nelson Mandela’s first home which he and his first wife Evelyn moved into in 1946. After he and his first wife were divorced, he was joined in the house by his second wife Winnie.  The home serves as a visitor attraction to tell the story of Former President Nelson Mandela and what he stands for: human rights, democracy, reconciliation, mutual respect and tolerance among the people of South Africa.

I was struck by one sign on the wall of the home that stated:

“In judging our progress as individuals, we tend to concentrate on external factors such as one’s social position, influence and popularity, wealth and standard of education…but internal factors may be even more crucial in assessing one’s development as a human being: humility, purity, generosity, absence of vanity, readiness to serve your fellow men – qualities within the reach of every human soul.” Nelson Mandela in a letter to Winnie Madikizela Mandela, 1977

Nelson’s home was a truly moving experience and captures the soul of a life committed to helping others and equality – a place not to miss when you are in South Africa.

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We then proceeded to Southgate Mall to see the first of three malls for the day.  Southgate was built in 1990 and has 170 stores and has served the Southern Johannesburg communities for more than 20 years.  It represents the lower of the demographic scale for South African customers with 61 percent falling within LSM four-ten categories.

Cresta was the next property the group toured.  It was built in 1976 and currently has 270 stores.  They are currently developing a new food court which will greatly expand the number of food choices the centre has to offer.  75 percent of the shoppers fall within the LSM four-ten+ categories.

Finally, Sandton City was the last stop on the tour, originally opened in 1973 and includes five levels and 328 stores.  This centre rivals the finest malls in the world for luxury goods and services with top fashion retailers and a full complement of food and beverage available.  This center should be on the list to check out for any American franchisors wanting to build market share at the top of the market in South Africa.

The day ended with a group of the delegates heading to a local Lion Park to experience what many who come to South Africa crave-lions, giraffes, leopards and baby lion cubs that the delegates had the opportunity pet (before they get too big!).

Next Stop Nairobi, Kenya!

Franchise Trade Mission heads into second day in South Africa

 

 

The U.S. Trade Mission to Sub-Saharan Africa began day two in Johannesburg, South Africa with the delegates ready for another action packed day.  After a promising day of one-on-one meetings with prospective candidates, the delegates began the day with a legal update from Eugene Honey, partner with Adams & Adams on the legal aspects of operating a franchise in South Africa.  Mr. Honey described Intellectual Property and trademarks  are similar to that of the U.S. The time frame tends to be about two years between application and the granting of the marks however the company marks are protected during that time. He described copyrights as slightly tricky in that the author of any work, for instance an ad agency writing copy or designing ads is the owner of the copy unless you get it in writing ahead of time that you would own the work at completion.  He commented that all franchise agreements must contain a ten day “cooling off” period where a franchisee can cancel the agreement and receive a full refund.  Agreements should also contain all authorized goods and services, the obligations of the franchisor and franchisee, description of the system, payments to the franchisor,  territorial rights, details of IP, training and duration of the contract.

He offered that master agreements tend to be ten years while single unit agreements tend to be five.  Also included should be details on the Marketing fund and how the funds are collected, handled and dispersed.  Mr. Honey reported that the Disclosure Document must be presented 14 days prior to signing any agreement.  It must also include the number of units, net profit and projections of sales, income and profits.  On the topic of Exchange Control, he reported that an application must be filed with the reserve bank which generally takes two months for a response and must be approved before you can receive any upfront fees.

The group then began their second day of one-on-one business meetings with their pre-screened candidates.

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The afternoon was filled with a session on Consumer Behavior and Urban Retail Profiles for South Africa. Dr. Dirk Prinslo, CEO of Urban Studies and Damian Hattingh, and consultant with McKinsey South Africa, provided some context on what lay ahead for the franchisors from a marketing and customer targeting standpoint.

Dirk reported that as of 2011, South Africa had a population of 51,700,000 with a breakdown of 80 percent – Black African; 9 percent – Colored; 8.5 percent – White; 2.5 percent – Indian/ Asian.

He described that the real opportunity is in the cities beginning with Johannesburg and then Durban and Cape Town.  He also described the migration of the populations to the cities.

Dirk explained that using the LSM – Living Standard Measurement, the growth was in the segment that captures the four to seven LSM which has more than four million people and growing yearly.  He also described the shopping center market as well developed in South Africa and that there are many options for franchisors and their master franchisees to locate in well performing centers for their intended markets.  He reported on the increase in car ownership for the general population which is increasing mobility and providing solid growth in the middle market for goods and services.  He also mentioned a number of international retailers entering the market including Zara and Top Shop which is proving that the people are interested in international brands. He also cautioned the delegates to understand the market and remember that their brands are currently unknown in the market and to match their product to the right centers for maximum market share.  He also stressed that identifying the right locations in the malls is key and to be prepared for the local competition that has been in the market and is very savvy.

Mr. Hattingh explained that the growth in Africa will come from consumer growth and not from resources as has been in the past.  He reported that real GDP growth in Africa is at 5.1 percent and is the second fastest in the world behind Asia.  He said the South Africa and Nigeria stand out as the two highest in consumption compared to the rest of Africa.

Damian also described Sub Saharan Africa as a young and optimistic population with an urban explosion of population – 40- percent growth in the cities.  These consumers are also looking for quality at the right price, highly digital savvy and with modern tastes.

He suggested that the keys to success in Sub Saharan Africa include:

Focus on the urban areas; anticipate explosive growth; deliver branded quality products; create a strong value proposition; understand changing media habits; understand alternative distribution channels; embrace the youth movement; and understand the art of hiring young talent.

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As the day wrapped up, the delegates re-united with the U.S. Commercial Service, IFA and Franchise Times for a press conference that brought more than ten different media personnel to the press conference to learn about the brands and to ask questions about their plans to launch their brands in South Africa.  Brent Omdahl led the press conference and introduced Scott Lehr from IFA and all of the franchisors.  The Wall Street Journal and The Global Post were among the media that attended and interviewed the franchisors after the event.

The evening ended with a fabulous steak dinner at a local favorite – Butcher’s Grill in Johannesburg.

 

AFC Enterprises’ Cheryl Bachelder at a Glance

Some of the best experience executives can gain comes as a result of them going through and coming out of difficult, but transitional situations.  Visionary leaders include those who are willing to share their experiences to help others advance. Bachelder, C. popeyes_5218 - may 2012

Cheryl A. Bachelder, CEO of AFC Enterprises, Inc., franchisor of Popeyes Louisiana Kitchen, provides her insights on achieving system cohesion in the November issue of IFA’s Franchising World magazine.  Bachelder, who will serve as a keynote speaker during the association’s Annual Convention in New Orleans, Feb. 22-25, 2014, will address her plans for the brand’s future and getting there.

Here are a few excerpts from the interview.

  • Revitalizing Popeyes Louisiana Kitchen

“If I had to attribute it to one thing, I would attribute it to our revitalization of our relationship with franchisees.”  Bachelder added that “It was my belief that the fundamental foundation of franchising is to have a strong, healthy and aligned relationship with the franchisee.”

  • Management Style

“I would describe my management style or my management philosophy as:   my job is to serve well those that are entrusted into my care.  And serving people well is understanding what helps them to be effective and successful and reach their goals.”

  • Leadership

“The most significant role of the leader is to seek out and understand the strengths and talents of team members and align them so that collectively, when you bring it all together, the capabilities are there for the organization to succeed.

“As a leader, whether you’re leading a restaurant, a group of restaurants or you’re a leader in a franchisor organization, I really want to encourage leaders to understand their role as being stewards of the next generation of leaders.  In our business, we essentially develop leaders for a living.”

Look for the complete interview in the upcoming November Franchising World magazine and find details on the IFA Annual Convention now. Continue reading

U.S. Trade Mission to Sub-Saharan Africa Kicks off in Johannesburg

 

 

The U.S. Trade Mission to Sub-Saharan Africa kicked off Sept. 26  in Johannesburg, South Africa.  With stops here, Nairobi, Kenya and Lagos and  Nigeria over the next week, the delegates were excited and anxious to get to work understanding the markets and meeting qualified prospects.

The trade mission, which is produced by the U.S. Commercial Service and is sponsored by the International Franchise Association and Franchise Times magazine, has become a true partnership with all the parties doing their part to create and deliver international development services to IFA franchisor members.

Participating franchisors on the mission include CKE Restaurants represented by Geoff Spear, vice president of International Relations; Curves represented by Clive Robinson; International Dairy Queen represented by Amir Kremer; Focus Brands Inc. which include Carvel, Cinnabon, Schlotzsky’s, Moe’s Southwest Grill and Auntie Anne’s Pretzels represented by Scott Chorna, director, International New Business Development; Global Franchise Group which include Great American Cookies, MaggieMoos, Marble Slab Creamery and Pretzelmaker represented by John Barber, chief development officer and John Peddar, executive director, International Business Development; Hertz Equipment Rental represented by David Riker, CFE, director, Global Franchise Development; Johnny Rockets represented by Duane Messerschmidt, director, International Sales and Support; Tutor Doctor represented by Frank Milner, CFE, CEO; and Wing Zone represented by Hair Parra, vice president, International Development.

The Global Franchising Team Leader for the U.S. Commercial Service, Jennifer Loffredo is responsible for overall coordination of the mission for the three stops.  As sponsors of the event, both the IFA, represented by Scott Lehr, senior vice president, U.S. and International Development and Franchise Times represented by Nancy Weingartner, executive editor, provided initial marketing for the mission and support throughout the mission.

As with all trade missions, the goals are to help the participating franchisors understand the markets visited from a legal, demographic, real estate and development perspective but most importantly to get them face to face with qualified master and area development prospects for one-on-one discussions.

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Deputy Senior Commercial Officer with the U.S. Commercial Service South Africa, Brent Omdahl welcomed the group to Johannesburg and introduced his team, Felicity Nagel, commercial specialist and Jean Claude Gelle who had been busy the last month setting up the qualified visits for the delegates. The country team briefing was led by Deputy Chief of the Mission, Virginia Palmer and Larry Harris, Commercial Counselor and Cory Pickelsimer, senior agriculture attaché.

South Africa, known by many as the gateway to Sub-Saharan Africa has strong financial markets and solid infrastructure which makes it an idea country for U.S. Franchisors to launch their African growth strategy.  Seven of the 10 fastest growing cities in the world are in Africa.  South Africa ranks 40th in the “ease of doing business” ranking, which is well above most of its neighbors.  More than 400 U.S. companies are in South Africa and the two countries have $17 billion in bilateral trade.  Top industries in South Africa include energy, healthcare, agriculture, technology, transportation and retail. Wal-Mart recently entered the market by purchasing a 51 percent interest in South Africa’s MassMart and the investment appears to be a paying off with strong growth. The unemployment rate is 25 percent although it is higher in some of the rural and poorer areas.

Some of the challenges for American companies in South Africa include finding skilled workers and the effects of organized labor on the cost of running a business.  While supply chain challenges can still occur, South Africa is much more advanced than its northern neighbors in this area. For food franchisors, beef & poultry can generally be sourced in South Africa. Because of high duties on imported U.S. beef and poultry, it is advised to purchase locally. Sauces and condiments can also be sourced locally but duties are a more reasonable 10 percent from the U.S.

The general migration of the population in South Africa is heading to the large cities of Johannesburg, Durban and Cape Town.  In fact it is estimated that more than 40 percent of the country’s GDP comes from the Johannesburg area which suggests that any entry into South Africa should begin in Johannesburg where the middle class is growing substantially.

Derek Smith, president of the Franchise Association of South Africa then provided the group with some statistics of growth of the market for franchising. He reported that franchising now has a legislated definition within the Consumer Protection Act and that FASA has drafted a code to submit to the National Consumer Commission and is offering to fill the role of Alternative Dispute Resolution for any complaints that may arise from the franchising sector. Mr. Smith also shared that franchising accounts for 9.7 percent of the GDP in South Africa and involves 17 different industries; 300,000 are employed directly in franchising with more than 30,000 SME’s in franchising. It was interesting to learn that of the 600 franchisors in South Africa, 90 percentare local.  The largest category within the sector is the food and restaurant category which represents 22 percent of the total. Derek reported that 50 percent of their franchisor members had been in business for more than 12 years and 75 percent at least six years. He described a few of the challenges ahead for franchising in South Africa, which include finding the right franchisee that is qualified both financially and with the skills to grow the business; increased costs such as labor, utilities and fuel. It still appears that FASA’s members are optimistic – 88 percent expect growth this next year.  He described a new jobs fund that the government is rolling out which could create 10,000 new jobs per year over the next nine years. With this fundmwhich will assist with training, mentorship and coaching, FASA hopes to create an additional 150-200 new franchised outlets which will create 2,000 new jobs in the next three years.

Of course the primary purpose of the Trade Mission is for the franchisors to meet with qualified master and areas development prospects previously set by the USCS staff.  The group quickly ran off to their scheduled appointments for the afternoon.

Later in the day the delegates reconvened for a panel discussion of franchise best practices.  Speakers included Peter Moyanga, McDonald’s Franchisee with eight locations; Eric Parker, CEO of consulting firm Franchising Plus and co-founder of Nandos and Salim Shermohammed, CEO of Impact Investments, a multi-unit Franchisee in the U.S. and now partner in new food brand in South Africa.  Mr. Parker described the local franchise market as robust and dominated by some very strong players such as Famous Brands whose brands include Debonairs Pizza and Steers Burgers and Mug & Bean; Nandos; Chicken Lickin and Wimpy.  He also cautioned the U.S. franchisors on finding the right partner and being willing to adapt to local flavors.  He mentioned a number of U.S. franchisors that have entered the market and left. The speakers discussed an important measurement – LSM or Living Standard Measurement and stressed that U.S. Franchisors need to know where their market is and target it.  They reported that the upper end of the LSM – six and above is already well serviced and that the real opportunity in South Africa is in the 4-6 range, keeping in mind that the average monthly salary is 2,500 rand (approximately $250 per month)

The evening was spent at the U.S. Commercial Counselor’s residence for a reception and dinner where the delegates met with other government and commercial contacts wrapping a very full first day in Johannesburg.

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