AC­CESS­ING FRAN­CHISES THROUGH THE STOCK MAR­KET

Finweek English Edition - - COVER STORY - Marc Ash­ton marca@fin­week.co.za

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).

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