Franchising a proven model with less risk
• Franchising sector is a potential enabler to kick-start SA’s constrained economy and make inroads into addressing unemployment, writes Lynette Dicey
Small business has long been touted as one of the most effective ways of addressing SA’s unemployment problems. However, establishing a new business in the current economic climate is not without its challenges and is fraught with pitfalls. Within the first three years, almost 80% of newly established small businesses fail.
A solution to this high failure rate is to instead look to franchising, which allows for a proven business model to be rolled out at speed. “Franchising is a far less risky way of launching a new business,” says
Richard Mukheibir, CEO of Cash Converters.
The company was established in Australia in 1984 and today is a multimillion dollar international enterprise with more than 700 stores in 18 countries across the globe. The southern African arm of the franchise was launched in SA in Cape Town in 1994 and today has almost 100 stores situated throughout the country.
Mukheibir believes passionately that the franchising model is a potential enabler to kick-start the economy. Taking Cash Converters as an example, he explains that every new store the company opens mobilises a minimum R3m investment and employs between 12 and 20 people.
“There are about 345,000 people employed in the franchise industry. If each of the roughly 850 franchise brands in SA opened 10 new stores a year we would start to make some inroads into addressing unemployment,” he says.
His faith in the franchising sector is not unfounded. According to the US Bureau of Labour statistics, small businesses like franchises generate more than 60% of all jobs added annually in the US. In 2018 the International Franchise Association predicted the US franchise sector would grow faster than the rest of the economy.
Given that successful franchise brands typically provide significant administrative, marketing and training support to franchisors, the decks are stacked in favour of their success compared to new businesses that don’t have this backing.
“The success of the model relies on the fact that new businesses are supported by a holding company which makes it more likely they will be sustainable,” says Mukheibir. “It’s a very empowering model.”
Having launched multiple international franchise brands into SA, including Cash Converters, and being a firm believer in the franchising model, Mukheibir is frustrated that the franchising industry and small business sector in this country is not bigger than it is.
“Forecaster Clem Sunter advised SA to entrench an entrepreneurial and franchising culture two decades ago to grow the economy and employment opportunities,” he says. “In SA we made a mistake by not making it easier for new businesses to establish themselves, unlike countries such as Singapore which implemented incentives designed to encourage employment and the establishment of small business.” Unlike Singapore, the barriers to entry to starting a business in SA are high.
Mukheibir agrees that starting a new business in the current environment is complex, a situation which is exacerbated by a stagnant economy and constrained consumer spend.
“When I opened the first Cash Converters store in SA 26 years ago we were governed by the Second Hand Goods Act of 1954, which was less than 10 pages long. It was a relatively uncomplicated act to comply with. Its replacement, on the other hand, is much more complex and difficult for the lay person to understand.
“Today it’s almost impossible to get into this industry as a small business without the support of a larger player. This complex regulatory red tape is a big deterrent to the establishment of new businesses which today have to comply with a myriad number of laws.”
The benefit for business owners operating a franchise brand is that they have a holding company responsible for ensuring that its franchisees are compliant, explains Mukheibir.
“At Cash Converters, for example, we have a very good understanding of this industry and the relevant rules of the game. We provide franchisees with a total turnkey compliance solution so that they can get on with running their businesses.”
A constrained economy has resulted in a tough business environment, particularly for small business owners who don’t have the support of a large balance sheet to weather economic storms. Franchisees are typically able to weather these kind of storms more easily given the fact that they tend to have the support of a more substantial balance sheet.
Cash Converters has been an active member of the Franchising Association of SA (Fasa) since inception in 1994.
“I’m firmly of the opinion that all franchisors should belong to Fasa and that the association, as the industry regulator with a code of ethics for both franchisors and franchisees, has an important role to play.
“Membership of Fasa provides consumers with the confidence the business is run in an ethical manner. We firmly believe in being a responsible franchisor and in doing business in an ethical manner. If you’re making a big investment into a business, oversight and good governance should be an imperative,” says Mukheibir.
TODAY IT’S ALMOST IMPOSSIBLE TO GET INTO THIS INDUSTRY AS A SMALL BUSINESS WITHOUT THE SUPPORT OF A LARGER PLAYER
IF YOU’RE MAKING A BIG INVESTMENT INTO A BUSINESS, OVERSIGHT AND GOOD GOVERNANCE SHOULD BE AN IMPERATIVE