ACCESSING FRANCHISES THROUGH THE STOCK MARKET
Is a franchise an active or a passive investment? The answer to this question is critical because it will determine what you believe is a good long-term investment return. It is a bit of a crude calculation, but we tried to estimate the total size of the Taste Holdings franchise network. For the last fiscal, Taste reported R506m in total revenue. For the sake of round numbers, we took the ‘Franchise’ section of its revenue for both the food assets and NWJ Jewellers and we built in a flat 10% licensing fee resulting in a network size of about R3.03bn.
As a group, Taste made R42.9m profit on the R506m, which is about 8.5% of revenue. We took R3.03bn value of the Taste network and divided it by the 602 stores that were reported at the end of the f iscal, resulting
in an average revenue per store of around R5m, and average annual profit of about R428 000. If you are budgeting for future refurbishment costs, let’s take half of that away and you get nearer to R200 000 operating profit per store.
IS YOUR TIME AND MONEY WORTH BETWEEN 4% AND 5% PER YEAR?
If the answer to that is no, but you are still interested in participating in the franchising sector then you may want to look at buying shares in some of the local franchise operators (see table 1). We threw retailer Spar into the mix as, while it is not strictly a franchisor, it shares many of the similar ‘owner-manager’ features employed by the franchise sector. Spar averaged around 26% per annum for the last five years, a significantly better performance than the 4%-5% from working in the franchise. We are putting the salary component to one side for the moment as franchise owners need to decide whether they see themselves as active or passive participants.
Is this outperformance just a local phenomenon or is it ref lected in some of the big international players as well? As the table below shows, our big-three franchisors are outstripping global competitors but are priced on similar earnings multiples (see table 2).