Franchising – An Engine of Economic Growth and Transformation

In all countries of the Organization of Economic Cooperation and Development (OECD), the franchising industry serves as a powerful engine for skills transfer and entrepreneurship. Franchising is like a conveyor belt rapidly introducing new or improved technologies, business models, brands, services and products. The franchise model refreshes and improves the dynamic eco-system of the modern economy.

Franchises are born and die every day. Those that offer the consumer a better deal, or better meet consumer needs, will spread rapidly throughout the economy. In a lightening-fast evolutionary process, successful franchises will quickly supplement or replace their less efficient predecessors, thereby improving overall customer choice and economic efficiency.

In the case of South Africa, franchising is a particularly compelling economic model that directly addresses some primary objectives of the democratic government. Specifically, franchising is an excellent vehicle for Broad-Based Black Economic Empowerment (B-BEE). Franchising will directly contribute to the Joint Initiative in Priority Skills Acquisition (JIPSA) policies. Further, franchising is a useful business tool to knit together the diverse regional southern African economies.

Economic Empowerment

In the South African context, franchising is a particularly good method to encourage entrepreneurship and wealth creation for historically disadvantaged communities.

A franchise can be considered a “business in a box.” It is the “plug and play” model of company formation at the local level. With the acquisition of a franchise, aspiring entrepreneurs are able to quickly and efficiently set up a complete and sustainable operation within months. While the franchise operates at the local level, each individual operation enjoys economies-of-scale by centralized marketing, training and materials supplies. Each operation is managed locally. But it enjoys the benefits of being and integral part of a national – or even global – network. Many franchisees have described the experience as, “being in business for yourself, but not by yourself.”

The South African government and financial sector effectively supports franchise development by the historically disadvantaged by offering inexpensive financing and support. Commercial banks or the National Empowerment Fund and the Development Bank of South Africa can arrange this financing.

Trudi van Niekerk of Absa Franchising recently said in FinWeek that, “Statistics show 80% of new franchisees succeed whereas 80% of small businesses started from scratch fail.” She also related that, “Black townships offer increasing growth potential for new franchises. Absa has put in place a number of financing instruments to help township franchisees get started.”

Private and public programs such as these have been extremely effective at helping the historically disadvantaged to establish sustainable businesses. Standard Bank’s Franchise Factor (a survey compiled by Franchize Directions) says that 32 percent of franchise owners are black, up from 23 percent in 2004.

Training

In South Africa, franchising has been a primary engine for job creation. Formal employment in the franchise sector jumped 77 percent from 2004 to 2006 (Franchise Factor Survey). Moreover, all successful franchise operations dedicate large percentage of their resources to training and skills development.

Within OECD countries, teenagers often begin their professional lives with part-time jobs at a local franchise operation. This initial work experience usually serves as a vivid introduction to the skills necessary for the modern world. For the first time in their short lives, millions of teenagers have become a part of a disciplined business model to which they must adapt.

Entry-level workers at a typical franchise will quickly rotate to numerous “stations” within the operation. In the case of an entry-level worker at a typical food franchise, for example, the youngster is quickly introduced to all the basic principles of business governance: paying taxes, quality control, customer service, cleanliness, timeliness, following written instructions, team work, inventory control and basic accounting.

At the very least, entry-level work in a franchise is a thorough and complete introduction to the formal economy – and it also puts spending money in the pocket. Some entry-level workers continue to build their careers in the franchise sector while others move to non-franchised businesses -taking with them the expertise and experience gained via working in a franchise.

In the South African context, franchising can dramatically boost employment and skills development. As in every other country, entry-level employment in a franchise operation is a “first rung” on the ladder of personal economic empowerment – especially for rural-to-urban migrants, youth and women.

Regional Economic Integration

Finally, franchise can be used as a model for regional integration. Already, many South African franchise operations have successfully migrated to neighboring countries. There is no reason why these networks cannot expand throughout the African continent – bringing much needed technology, brands and superior customer service to the region.

Nando’s expanded rapidly in southern Africa using the franchise model, and can now be found in 13 African countries. Now, Nando’s is introducing Southern African cuisine to hungry customers in the Middle East, Europe and North America.

While South Africans might be familiar with the benefits of franchising, other African countries are anxious to welcome new franchise concepts and the benefits that franchising can bring to their economy.

In early May, the U.S. Embassy and the Franchise Association of Southern Africa (FASA) are bringing together government officials and entrepreneurs from Southern African Development Community countries to participate in seminars and activities associated with FASA’s International Franchise Exhibition (Sandton Convention Centre, May 3-5). At the same time, a number of new U.S. franchise companies will be visiting South Africa for the first time, seeking appropriate partners to expand in the booming Southern African economy.

South African investors who might be interested in meeting these U.S. franchisors should contact: Alison Notley, Conference Co-ordinator, email: hoghill@telkomsa.net or Tel: 028 840 0158.

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On May 2, 3 and 4, the U.S. Embassy and the Franchise Association of Southern Africa (FASA) will be jointly hosting a series of activities to promote the franchising industry in the region.

These activities will take place against the backdrop of the 24th International Franchise and Entrepreneur Exhibition, taking place at the Sandton Convention Centre from May 3 to May 5, 2007.

Economic and regulatory officials from SADC governments will travel to Johannesburg for technical training by the International Franchise Association (IFA) based in Washington, D.C., FASA and other franchising experts. This training will highlight the role of franchising in sustainable economic development and will focus on the creation of an enabling environment for franchise to thrive.

For example, SADC regulators will meet with American and South African experts of intellectual property rights, financing and human resource development. In addition, they will interact with representatives of the international development organizations who will discuss franchise from a macro-economic development perspective.

The meetings in May will also be attended by a delegation of American franchise companies organized by the IFA. These companies are all well established in their fields in the United States and beyond. They are each offering fresh economic models to potential South African partners. On May 3, these companies will present their business models to potential partners in the Southern African region. In most cases they are seeking master license candidates for South Africa and other SADC countries.

The U.S. franchise owners who will be traveling to South Africa for this event represent a number of industries, including professional cleaning services for offices or institutions, home repair, restaurants, business management, personalized printing, batteries and pet grooming franchises. All have proven business models that are transferable to this region.

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