2013
Table of Contents
1) Background to the survey
Page
3
2) Headline figures
Page
5
3) The size and scale of franchising in the UK
Page
8
4) Dynamics within the franchise industry
Page
23
5) The economic contribution of franchising
Page
29
6) Regional distribution of franchising in the UK
Page
36
7) The international dimension of franchising
Page
39
8) Franchisee recruitment
Page
42
9) Costs, fees and on-going charges
Page
49
10) Franchisor / franchisee relationships
Page
55
11) Red tape and running costs
Page
59
12) Technical appendix: Survey method
Page
64
2
Background to the
survey
3
Background to the survey
This document reports the results of the 29th annual survey amongst franchisors and franchisees in the
UK, conducted on behalf of the British Franchise Association and sponsored by NatWest.
Primary research was conducted using computer aided telephone interviewing (CATI) between June
and July 2013. Interviews were completed with both franchisees and franchisors, speaking to directors
and managers of franchise systems in addition to owners / partners of franchise units. This report
combines these primary survey results with external industry expert and statistical sources.
Undertaking the survey on an annual basis enables us to identify long-run trends on key measures
which form the core tracking element of the study, whilst the additional variable content allows the
study to be flexed to maintain relevance and interest for the franchise community taking part.
In 2013 the survey timing has moved from the end of the year prior to the ‘reporting' year to mid-year in
the year of reporting. The apparent anomaly of 2011 data being reported in 2012 (as in the last report)
has, thus, been removed. This allows us to report the present results as being 2013 data, but with it
being 18 months since the previous data collection there is the appearance of a one year ‘gap’ in the
data record, with no data point for 2012 (as the data in the 2012 report were collected at end-2011).
Within BDRC Continental, principal authors of this report are Richard Smith and Bethan Cooke, with
additional editing, input and review from Dr Crispian Tarrant, Chief Executive of BDRC Group.
The publishers use their best endeavours to ensure the accuracy of the report, but do not warrant the accuracy of the data provided nor
do they accept liability for any error contained in or omission from the report or any loss direct or indirect arising there from.
4
Headline figures
5
The contribution of franchising to the UK economy
There are 930 franchise systems in operation in the UK
− This is a net change of plus one system on 2011, and is a figure that is an 11%
increase in system numbers since the start of the recent recession in 2008
− 4 in 5 of the franchise systems in the country are now UK owned and run
− 1 in 4 of the franchise systems in the UK export their business model abroad
The total number of people employed in franchising in the UK is 561,000, of which just
under half are in full time employment
− This represents a 20% increase in franchise employment over the past 5 years
− Over a ¼m full time jobs in franchising in the UK are recorded for the first time ever
The overall contribution of franchising to the UK economy is £13.7 billion; which equates
to just under one per cent of GDP
This contribution has grown by 20% over the past 5 years, whilst the overall economy has
shrunk 2.5% over the same period
6
The contribution of franchising to the UK economy
Between them, the systems in the UK operate a total estimated at 39,000 franchised
units, which represents:
− A 7% increase over the past 5 years
− With the largest 9 systems operating over 8,500 units between them
There are reckoned to be 22,400 franchisees in total (as 1 in four run multiple units)
92% of franchised businesses are at least ‘marginally profitable’, with 49% saying
they are either quite profitable or very profitable (albeit 8% are currently loss making)
− 88% of franchisors expect improved trading conditions for their own businesses
in the coming year. Although somewhat less bullish, still 54% of franchisees are
anticipating the next 12 months to be better
Recruitment is the single biggest on-going challenge for franchisors: on average it
takes 250 leads and 25 interviews to sign up each new franchisee – but then the strong
financial performance of franchisees in the UK indicates the benefit of the franchise
system in filtering out unsuitable applicants
7
The size and scale of
franchising in the UK
8
What constitutes a franchise system?
Businesses included in the NatWest bfa Franchise Survey are based on the following criteria:
1.
Businesses that involve a trademark, a method of trading and a license to use the trademark,
which all franchisees must adopt and pay for.
2.
The franchisee is able to sell the business on to a third party with the benefit of the goodwill derived
from developing the business over time
3.
The system is actively franchising – we exclude those who have announced plans to franchise, but
do not currently operate any functioning (franchised) units, as well as those that have withdrawn
from the franchising format, but continue to trade exclusively via company owned outlets
Within unit numbers we exclude the estimated 6,500 units that are owned and run directly by the
franchisor (and therefore are not franchised)
Other sectors that display some but not all the characteristics of franchising include petrol stations
and car/motorbike dealers. These sectors generally fail on the second criteria listed above, in that it
is not possible for the business owner to sell on at a profit.
When the survey began, the dairy roundsmen component of franchising was so significant a
distinction was made between dairy and ‘non-dairy’ franchises. However, with just 1,700 franchised
milkmen working for the dairies remaining, we include these now within our overall figures.
9
There are 930 franchise systems operating in the UK
Number of UK Franchise Systems over time
900 929 930
950
850
750
650
541
550
432
450
350
379
568
597
718
671 677 695
665
642
759 781
809
838 845
474
414
373 396
295
244
250
150
50
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
13
-50
Based on the criteria previously detailed, our current estimate for the number of franchise systems
operating in the UK is 930 (including dairy franchises), a net increase of just one system on 2011.
Since the recession in 2008, the number of systems franchising has grown by 11%. The 215 systems
that have withdrawn from franchising are more than compensated by 306 new systems. With so many
10
new systems entering franchising the longer term trend suggests further growth in the sector.
Franchising systems in the UK are increasingly UK owned and run
Ownership of Franchise systems
Excludes dairies
% based on 3 year rolling averages
2007
2008
2009
2010
2011
2013
Ultimate owner of the system
604
75%
626
75%
648
77%
700
78%
710
77%
760
82%
Subsidiary of parent company
that owns the system
89
11%
100
12%
101
12%
107
12%
117
13%
87
9%
Master Licensee of another
company that owns the
system
113
14%
109
13%
93
11%
90
10%
99
11%
80
9%
Source: Q1a Base: All franchisors
The vast majority (82%) of franchise systems in the UK are UK-owned. This was far from the case 25
years ago, when the majority were imported from the US. The ownership of the remainder of the
systems is equally split between those that are a subsidiary of the parent company (9%), and those
that are master licensees of another company that owns the system (9%).
11
There are now reckoned to be 39,000 franchised units in the UK
Number of franchised units ‘000’s
50
45
40
35
26.4 25.7 26.8
24.9
30.9 31.2 30.5 30.8
24
15
15
10
7.9
9
10.9
16 16.6
18.3 18.6 18.1
19.4 19.7
36.9
38.4 37.3
34.2 34.6 34.8
32
25
20
40.1 39
33.5 33.9
31.3
29.1 30
30
5
36.2 36.6 36.5
35.2 35.6 34.5 34.4
33.8
38.6
30.8 31.6
28.5
25.5
21.5
16.9
All units (excl. dairies)
All units (inc. dairies from 1993)
0
The reason for the decline in the overall number of units over the last year is largely that those systems
entering franchising, as one might expect, tend to have fewer units (360 in total) than those leaving
(1,370 in total). Later in this report we discuss churn in franchising and the reasons for this.
N.B. From 1993, Dairy Franchisees listed separately
N.B. In 2004 Zurich business model changed, removed from sample (4000 Units)
12
We monitor six business categories within franchising
For the past 12 years, we have classified franchised businesses according to categories developed by
the European Franchise Federation (EFF). Whilst we observe that that EFF are (experimentally)
moving towards the adoption of the NACE classification system we do not think there is a good fit at
this time.
The categories we use are as follows:
Hotel & Catering: which includes hotels, coffee houses, fast food chains etc.
Store Retailing: everything from travel agencies to shoe shops to bathroom centres
Personal Services: entertainment and tutoring for children, personal trainers, pet services etc.
Property Services: including estate agencies as well as plumbing, cleaning and gardening etc.
Transport & Vehicle Services: couriers, car rental, vehicle repair
Business & Communication Services: printing, office supplies, training, recruitment, accountancy
The dairy franchises are assessed outside this structure, although in future years the intention is to
include them within the (non-store) ‘retail’ category. In this document we frequently refer to the
differences between these categories in terms of performance, structure and other characteristics.
13
System number changes vary considerably by category with personal, property and
business & commercial services recently having more entrants who trial franchising, not all
who continue
Number of Franchise systems by category
%
Change
since
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
2008
Hotel &
Catering
116
114
113
117
112
109
108
115
125
123
127
130
132
+6%
Store Retailing
91
86
86
89
91
97
101
101
100
97
104
107
105
+5%
Personal
Services
114
113
111
110
131
144
153
159
171
181
197
197
213
+25%
Property
Services
125
140
147
152
165
182
189
202
205
203
215
237
228
+11%
Transport &
Vehicle
Services
75
76
72
76
64
66
70
73
71
68
68
65
65
-8%
Business &
Commercial
Services
141
140
145
152
152
158
157
156
163
170
186
190
184
+13%
TOTAL
662
666
674
692
715
756
778
806
835
842
897
926
927
+11%
N.B. Dairy Franchises excluded
14
Reflecting system level changes, property services sees the largest year on year
drop in unit numbers
Number of UK Franchise units by category
Survey data (3 year
rolling average) plus
known franchisors
(500+ units)
Data from list of franchisors
Data from list of franchisors
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
Hotel & Catering
5,800
6,395
6,380
7,050
7,450
8,100
7,000
8,200
8,400
8,400
8,300
Store Retailing
4,260
4,390
4,580
4,785
4,860
5,100
3,700
4,400
5,300
5,600
5,400
Personal Services
4,125
4,540
4,280
4,740
4,950
5,900
6,000
6,500
8,200
8,900
8,700
Property Services
5,260
5,545
6,175
6,535
6,575
6,650
8,200
7,200
6,200
6,900
6,500
Transport &
Vehicle Services
2,700
2,545
2,410
2,575
2,560
2,925
2,700
2,200
2,900
2,500
2,500
Business &
Commercial
Services
8,650
8,590
4,740
5,075
5,205
5,525
7,000
6,300
5,900
6,100
5,900
TOTAL
30,795
32,005
28,565
30,760
31,600
34,200
34,600
34,800
36,900
38,400
37,300
N.B. In 2004 Zurich business model changed, removed from sample (4000 Units) – impacts Business & Commercial Services figures
15
Overall it is the personal services category that has seen the largest growth over
recent years
There are some substantial variations in franchise system numbers depending on the category.
The majority of franchise categories have seen only modest movement at a system level year-onyear, with the exception of Personal Services. This category has an additional 16 franchised systems
compared to 2011, with the sector increasing in size by a quarter in the last 5 years
The number of franchised systems in the Property Services category has reduced by 9 systems over
the past year, although the net 5 year position remains positive at +11%
The only category not to have grown in the last 5 years is the smallest of the sectors, Transport &
Vehicle Services. A reduction of 6 systems over the last 5 years, is an 8% contraction in the number of
systems operating in this sector
At a unit level, Store Retailing, Personal Services and Business & Communication Services all have
approximately 200 fewer units than last year, whilst Property Services shows a net loss of around 400
units over the past 12 months. The contraction in Property Services units simply accords with the
number of systems withdrawing from franchising in this sector
Taking a longer term ten year view it is clear that Personal Services has been the engine of growth for
franchising in the UK, followed by Hotel & Catering
16
The nine largest franchise systems account for just over 8,500 units;
that is over one in five of the total
Scale of systems by unit number
500+
200 – 499
101 – 199
61 – 100
41 – 60
9
23 e.g. Snap-on Tools (421)
45 e.g. Home Instead Senior Care (150)
76 e.g. Revive! UK (75)
Dairy Crest
Subway
Scottish & Newcastle
Domino’s Pizza
Travel Counsellors
McDonald’s
Kumon Maths
Bargain Booze
Stagecoach Theatre Arts
59 e.g. Water Babies (53)
21 – 40
156 e.g. Urban Planters (22)
11 – 20
151 e.g. Antal International (17)
6 – 10
Up to 5 units
1632 units
1540 units
1136 units
820 units
750 units
750 units
681 units
650 units
625 units
135 e.g. Wagging Tails (7)
276
Base: All franchisors
17
Franchising is wide ranging and diverse
When we look at the distribution of franchise systems according to size, it allows us to understand the
breadth and range of businesses who use franchising as a business model.
Some of the differences in scale are attributable to:
• Length in business
− It takes time to build up the number of franchises in any given system
− This said, rapid growth is possible in Personal Services (where there is a virtually unlimited
potential market) and in areas such as catering (Subway is a good example of a franchise
brand which has proliferated in recent years)
• Saturation point
− The demand for car hire or garden maintenance is limited within any given territory
Also, certain businesses simply don’t want to expand beyond a certain number of units or a given
geographical region
There are a large number of franchise systems with less than three units. Within this group are those
which have just started out and are trialling this business model, along with many that are content to
have just a few businesses running parallel to those owned by the parent company.
18
Many franchisees run complex, multiple unit businesses, especially
in Hotel & Catering
Franchise Unit Ownership by Unit Status
All Units
%
Hotel and
Catering
%
Store
Retailing*
%
Personal
Services*
%
Property
Services*
%
Transport/
Vehicle
services*
%
Business
/ comms
services*
(%)
Single units
75
48
80
86
83
92
76
Multiple units
25
52
20
14
17
8
24
Mean number
of units
3.95
6.03
2.30
2.09
2.55
2.5
2.14
Base: All franchisees
*Base below 30
Three in four franchisees run just the one unit. However a quarter run two or more units, employing
managers to run each individual unit on a day to day basis. This is particularly common in hotel and
catering franchises where around half of franchisees run multiple unit businesses with an average of
six units.
On this basis there are reckoned to be around 22,400 franchisees in total
19
Outside of those sectors for which trading premises are essential,
one in three franchises can be run from a home office
Place the franchise can be run from
Franchisors
All
Excluding Store
Retail and Hotels
& Catering
A home office
28%
34%
A shop/retail premises
28%
16%
An office unit
20%
24%
A van
11%
12%
A factory unit/ business park
premises/
other business premises
13%
14%
Not all franchises require business premises. Many can be run from the home or from a van. Within
the industry there are options to suit all tastes, all budgets and all levels of ambition.
Source: Q21a, Base: All franchisors
20
The last 18 months has seen a shift from part time to full time jobs,
with over a quarter of a million employed full time in franchising
Total Number Employed in UK Franchising ‘000’s
594
561
521
480
467
465
431
407
384
363
365
323
221
219
225
223
217
224
235
256
222
222
228
2009
2010
2011
191
Full time employees only***
2001
2002
2003
2004
**
2005
2006
2007
2008
2013
As the chart illustrates, there is some volatility in the employment estimate as this is based on mean
figures calculated from the survey. Nonetheless, the overall trend is upwards, particularly amongst full
time employees. The indications this year would suggest fewer part timers and more full timers are
being employed.***
* Figures rounded to nearest thousand
**Zurich withdrawal from franchising
***Three year rolling averages
21
Although 1 in 4 franchisees employ no staff, a similar proportion
provide work for six or more full time employees
Number of part time and full time employees within each unit
Part time
11+
6-10
3-5
2
5
9
15
9
8
11
10
13
14
12
15
1
0
21
38
2006
15
11
16
36
40
2007
2008
9
8
16
14
16
10
11
18
8
13
35
41
2009
2010
Full time
13
11
11
14
12
11
10
12
10
13
22
21
19
10
13
11
16
10
14
16
9
12
14
14
11
8
8
11
21
21
18
14
14
16
16
14
13
29
31
31
27
2009
2010
2011
2013
21
10
13
15
35
39
2011
2013
11
15
30
27
2006
2007
35
2008
14
13
Despite the fall in the total number of people employed in UK franchises at an overall level, the
proportion employing larger numbers of full time employees has risen (at the expense of part timers).
Base: All franchisees
22
Dynamics within the
franchise industry
23
Current economic conditions may be encouraging businesses to experiment with
new models, such as franchising, reflected in greater system level churn recently
System Level Churn: new entrants and withdrawals
New entrants
Withdrawals
106
100
87
83
80
85
80
73
73 72
64
59
58
51
45
35
28
19
Net Position
2004
2005
2006
2007
2008
2009
2010
2011
2013
+23
+41
+32
+28
+32
+7
+57
+29
+1
The almost equal balance between entrants to, and withdrawals from, the market results in a virtual ‘no
change’ net position, although this conceals a relatively high level of new entrants and withdrawals.
24
What drives churn at a system level?
On the upside, new entrants are attracted to franchising as a business model by a combination of
factors:
• Generates an income via franchise fees and on-going share of profits
• Makes expansion possible without high levels of investment
• Consequently lower levels of risk and greater control of the business and the brand
Over time some franchise systems may cease to trade in their current form:
• Some are bought or consolidate with other brands
− Recent examples include Bairstow Eves, bought by Hunters and Dolland & Aitchison,
purchased by Boots Opticians. Both were subsequently rebranded
• For some businesses franchising doesn’t work for them as a model, for a variety of reasons:
− In some cases the change of the business model, from running a business for ‘customers’ to
focussing on attracting, training, and servicing franchisees is a bridge too far
− Some switch to other distribution models such as using ‘approved suppliers’
• Occasionally they fail
In the current market, issues around access to finance makes franchising an attractive option –
providing it’s possible to attract franchisees who can themselves gain access to finance.
25
There is correspondingly higher churn at a unit level
Proportion of UK Franchised Units Experiencing Change
'Forced' (%)
3.6
5.8
3
7.1
4.1
3.4
4
3.2
5.3
5.9
5.4
5.2
5.1
6.4
7.4
'Voluntary' (%)
6.8
7.2
3.2
3.6
4.8
7
4.6
5.3
6.2
4.8
4.6
3.7
2.1
5
3.1
1.7
1.5
3.7
4.1
4.6
1.8
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013
The level of ‘forced’ change is somewhat higher than the very benign conditions seen pre-2007. These
two categories are broken down further in the next chart
26
Change driven as much by life-stage decisions as by commercial
failure which remains at a low level
Unit Changes Reported by Franchisors
Changed
Franchisee
Bought Back
Closed Down
TOTAL
% All Units
All Reasons:
2230
183
1280
3692
10.0%
Commercial Failure
227
46
576
849
2.3%
Dispute
107
12
49
168
0.5%
Realising Investment
379
0
38
417
1.1%
Retirement
651
38
212
901
2.4%
Ill health/ Domestic
513
32
144
680
1.8%
Other reasons
352
64
261
677
1.8%
The level of unit change has risen from 7.3% in 2011 to 10% this year. By looking at the reasons
behind this headline figure, we can see that taken together the main reasons are life-stage driven, with
franchisees retiring, realising their investment and leaving as a result of ill health or for domestic
reasons. Closures due to commercial failure remain relatively low and stable at 2.3% of all franchised
unit stock.
27
As the industry matures, anticipated levels of re-sales continue to rise
Predicted Level of Re-sales for the next year
Year of Forecast
2006
2007
2008
2009
2010
2011
2013
% Franchise Systems
Expecting to Offer Resales
29%
52%
53%
49%
51%
44%
58%
Average No. of Re-sale
Units Per System
4.5
3.3
5.7
4.1
3.7
4.5
4.2
1,020
1,400
2,500
1,679
1,693
1,829
2,274
Estimated Total No. of
Re-sale Units Next
Year
Base: All franchisors
A growing proportion of franchisors are expecting to be offering re-sales over the coming year. Such
re-sales are to be expected as the industry matures and in many ways are a positive indicator of value
in those units which are sold on.
Each re-sale represents an opportunity for a franchisee (either new to the industry or already
established) to take over a ‘going concern’.
28
The economic
contribution of
franchising
29
Franchising’s contribution to UK plc is calculated to be £13.7 billion
for the last year
Franchising Industry Turnover (£bn)
13.4
14
12.4
12.4
11.4
12
13.7
11.8
10.8
10.3
10
8.9
8
7
9.3 9.2
9.5 9.65
9.1
7.4
6.4
5.9
6
5.2
4.7
4.8
5
5.3
4.5
3.8
4
1.9 2.1
2
0.9
1.3
0
The total economic contribution of the franchise industry now stands at approximately £13.7 billion, up
just over 2% on last year’s figure. Whilst there has been a reduction in the overall number of units, the
rise in the mean turnover figure generates an overall uplift in the headline figure, showing that those
franchises remaining in the industry are operating more successfully than before.
30
On average, each unit generates a turnover of £356,000, but there is
a wide range in the figures recorded
Franchise Unit Turnover
2001
2002
2003
2004
Over £500k
23
22
20
16
£250 - £499k
13
14
21
%
£50k - £249k
Less than £50k
42
22
38
26
2005
2006
2007
2008
2009
2010
24
22
26
28
23
24
13
14
17
16
21
20
37
34
37
19
20
18
19
34
25
40
26
35
27
44
19
37
20
2011
2013
30
26
19
19
35
39
17
15
Mean £292,000 £299,000 £297,000 £291,000 £318,000 £323,000 £360,000 £326,000 £335,000 £335,000 £349,000 £356,500
The diversity of franchising is evident from these turnover figures, encompassing one person bands
through to sizeable SMEs which will have corporate characteristics.
Base: All franchisees providing their turnover
31
Business sector, predictably, is a key influencer on typical revenues
Annual Turnover of Franchise Units by Sector
%
Over £500k
Hotel &
catering
43
Store
retailing
44
Property
services
Transport &
vehicle
Personal
services
Business and
com. services
17
22
19
16
15
19
16
19
17
£250 - £499k
30
43
40
50
42
24
£50k - £249k
23
25
15
Less than £50k
Mean
3
£547,500
£523,000
£296,000
18
£247,600
25
£228,700
19
£228,000
Applying a 3 year rolling average, we can see that the Store Retailing and Hotel & Catering sectors
achieve the highest average turnovers, with almost half of franchisees in these sectors recording an
annual turnover of over £500k per unit.
This contrasts markedly with Business & Communications services, where just 1 in 7 fall within this
32
higher turnover bracket.
Over half of franchisees report good profitability
2013
Time held Franchise
Franchisee Claimed Unit Profitability
1990 1991 1992
Total
70
79
4
87
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013
91
95
5
8
88
92
10
8
10
93
91
90
6
6
4
89
90
8
8
91
92
4
5
89
94
4
12
38
26
33
49
44
48
-12
-9
50
39
35
37
39
43
43
48
50
-12
-8
-7
-9
42
39
37
-5
37
44
44
45
48
43
-10
-12
-10
-9
-8
28
-23
Loss making
Marginally profitable
47
44
37
27
-30
80
8
2
41
Up to 2 3 – 4 5+
years years years
Quite profitable
44
-20
39
38
43
-11
-6
Highly profitable
A key indicator of the health of the franchise industry is the extent to which each individual franchise
unit considers itself to be profitable or not. The current year sees a strengthening of claimed
profitability, as the proportion of franchisees considering themselves to be ‘quite’ or ‘highly’ profitable
increases to a level not seen since 2005. This is a positive sign that the industry is beginning to
recover post-recession. That 4 in 5 new franchises are profitable inside two years also is positive.
33
Some are finding it tougher than others
When we look at profitability at a sector level we see that:
• Property Services and Transport & Vehicle Services franchises are, generally, under the greatest
pressure with 12% and 13% respectively reporting making a loss
• Personal Services franchises appear to be doing better, with 12% reporting that they are ‘highly
profitable’
This illustrates that whilst the franchising sector is robust, the dynamics across different sectors reflect
overall economic and social trends
• Until the very recent upturn in the housing market, this had been depressed for some years
• Petrol price inflation has hit the profitability of many in the Transport & Vehicle sector
• Brands such as Kumon and Stagecoach have become mainstream, with many parents feeling that
these (and others) are now required elements of the education of their children
There is also a size component to profitability.
• Logically, those with lower turnover are more likely to report lower profitability (not always; some
with turnover of less than £25,000 report high profitability). Generally though, around 1 in 6 with a
turnover bellow £50,000 are loss making
• Amongst the larger businesses with a turnover of £500,000 or more, 70% report being highly
(11%) or quite profitable
34
In line with other indices, better things are forecast in year ahead, for
the economy in general as well as for their own businesses
% Expecting Improvements over next 12 months
Business and Economic Confidence
100
90
89
80
81
75
84
95
89
85
79
80
60
84
76
75
70
%
86 90
90
86
82
60
62
51
61
53
43
39
35
31
30
22
27
20
10
55
56
62
50
40
78
81
74
76
69
68
60
88
79
79
68
92
17
23
20
12
30
55
33
35
23
34
22
63
55
16
27
21
11
15
67
52
36
31
54
43
41
19
19
13
0
Franchisors Economy Generally
Franchisors Own Business
Franchisees Economy Generally*
Franchisees Own Business
Confidence in both the economy in general, and in their own business, has seen substantial
improvement amongst both franchisors and franchisees this year. Amongst the most ‘bullish’ are those
in the Property Services sector
35
Regional distribution
of franchising in the
UK
36
More than half of all franchise units are based outside London and
the South of England
Regional Distribution of Franchised units
Indexed to UK population
Whilst franchising remains somewhat skewed towards London and the South East, when incidence
numbers are indexed to the population it’s clear that the South West, Midlands and the North also have
good distribution levels. As one might expect, it’s only those regions with large rural areas which have
relatively lower distribution levels.
37
Franchised businesses make an important contribution to the local
economy of all the regions in the UK
Presence of All
Franchise Systems
in Region
Regional Distribution of
Franchise Units
2010-2013
Implied annual
Turnover from
Franchising
£ billion
5 year %
change in
Implied annual
Turnover from
Franchising
£ billion
Average
2010-2013
%
Average
2010-2013
%
Indexed on
UK Popn.*
%
2006-2008
Implied annual
Turnover from
Franchising
£ billion
London
73%
17%
141
1.7
2.3
+35%
Other South East
82%
20%
144
1.9
2.7
+42%
South West
70%
10%
120
1.2
1.4
+17%
East Anglia
56%
7%
72
0.7
0.9
+29%
West Midlands
66%
9%
97
1.1
1.2
+9%
East Midlands
53%
6%
89
0.8
0.9
+13%
North West
65%
10%
88
1.1
1.4
+27%
Yorkshire
54%
6%
71
0.7
0.8
+14%
North/North East
44%
5%
114
0.6
0.7
+17%
Wales
40%
3%
58
0.3
0.4
+33%
Scotland
47%
5%
62
0.8
0.7
-13%
Northern Ireland
26%
3%
86
0.4
0.3
-25%
*Indices are based on the regional spread of the UK population
38
The international
dimension of
franchising
39
One in four franchisors operate outside the UK
26% of franchisors award the master licences or control the franchising of units outside the UK in
addition to their UK operations.
Export into international territories can be broken down as follows:
• 21% operate in Europe (including Republic of Ireland)
• 7% operate in the US or Canada
• 13% operate in other locations worldwide
Of those who do not currently operate internationally, one in seven (14%) would consider doing so in
future.
For the franchisor operating abroad, there are a range of structural options and it’s apparent that many
apply different models to different markets, perhaps due to their proximity, understanding and
confidence in each:
• Three in five issue a master license in one or more markets
• Half direct operations from the UK in one or more markets
• Only one in five opens an office abroad and a similar proportion have joint ventures in one or more
markets
40
Evidence of greater caution amongst internationally minded
franchisors
NB: question omitted in 2011
Barriers to Growth in International Franchised Units
Wish to expand steadily/ slowly
46
Legislation in some countries
41
Language barrier
35
Lack of finance
31
Lack of management resource in own company
30
2010
2009
2008
33
30
27
44
41
38
30
30
25
29
21
26
31
28
25
Lack of suitable franchisees
26
31
21
31
Poor economic conditions generally
26
31
22
33
The Euro
20
10
4
5
EU/EC regulations
20
11
n/a
n/a
12
8
8
12
8
12
12
17
12
10
10
15
6
4
4
Poor/ lack of professional advice
17
Static/ declining international markets
13
Competition from other similar franchises
7
Lack of suitable sites for franchisees
Lack of demand for my product/ service
6
4
The greatest barrier to growth is a self-determined desire to expand at a sustainable rate. Beyond this,
cultural factors (language and legal differences) combine with economic factors to dampen ambition.
Indicatively the Euro and EU regulations are more salient than in the past.
41
Franchisee
recruitment
42
Indications are that fewer females have entered franchising in the
past two years
Profile Characteristics of Franchisees
All
Franchisees
New Recruits - all held Franchise
2yrs or less
2005
2011
2013
2005
2011
2013
%
%
%
%
%
%
Up to 30
10
5
7
17
14
22
31 – 40
20
15
21
27
31
19
41 – 50
32
31
34
35
39
42
Over 50
37
49
38
20
19
17
Typical (mean) age
46
49
47
41
41
41
Male
80
72
70
84
62
82
Female
20
28
30
16
38
18
AGE:
The proportion of female franchisees has steadily increased over the past 25 years. However there
are indications that the proportion of recent female entries has fallen. Next year’s data will determine
whether this is a ‘blip’ or a trend.
It’s worth noting that on average, franchisees are in their early 40’s when they start out and that
around one in six new recruits are aged over 50.
* Too small – less than 1%
43
Lack of suitable franchisees is a perennial theme within the industry
Barriers to growth in UK Franchised Units
2011
2010
Lack of finance/ capital
57
56
Lack of suitable franchisees
45
61
Poor economic conditions generally
54
50
Wish to expand steadily/slowly
33
29
Competition from other franchises
18
20
Lack of available franchise areas
17
14
Loan guarantee schemes not applicable
n/a
24
Lack of suitable sites for franchisees
10
20
Static/declining market place
n/a
19
7
9
Prompted list
No desire to grow further
Whilst finance and capital remain high on the agenda as barriers to growth, the struggle to find
suitably ‘qualified’ (as much the right attitude as the right skillset) prospective franchisees with the
required investment is often cited as the main obstacle to more rapid expansion.
44
There are no shortage of applicants – but finding the right people
remains both a challenge and a benefit of the franchising system
Main Reasons for Not Granting a Franchise
Prompted list
Insufficient capital
68
Performance at interview
62
Applicant viewed it as a job not a business
60
Lack of business acumen
56
2011
2010
2009
71
68
73
54
49
53
42
36
40
60
61
64
Failure to turn up for appointments
40
25
25
28
Poor credit history
39
32
26
26
Lack of sales/marketing experience
39
32
28
34
17
30
27
21
17
18
10
7
8
Lack of experience in sector
31
Inability to complete application forms
Failed psychometric test
27
11
Franchisors seem adept at assessing whether an applicant has ‘the right stuff’ to make a successful
franchisee. Beyond hygiene factors such as filling in the form and attending appointments, it needs to
be crystal clear that the applicant understands the commitment required. They are applying to start a
business, not applying for a job. That franchisors are good at filtering out those who are unsuitable is
evident from the strong financial performance of those that do make it through this process.
45
The majority of those new to franchising come from employment,
around 1 in 4 with prior industry experience of some form
Working Status Prior to Taking On a Franchise
80
66
70
60
62
55
65
63
27
26
69
66
72
72
69
68
71
52
50
40
32
33
26
30
29
23
18
20
10
0
5
3
7
5
2
5
2
2000
2001
2002
5
3
2
2003
6
2
1
5
3
2
2004
2005
Employed
Self employed - a franchise
Other
5
3
2006
6
4
3
2007
21
19
6
2
1
2008
3
22
19
5
2009
16
5
3
2
2010
4
2011
7
3
2013
Self employed not a franchise
Unemployed/redundent
One in four new franchisees come from within the industry, with 13% having previously worked as an
employee for a franchise unit, and 11% having worked directly for a franchisor. They see the
opportunity at close hand and want ‘a piece of the action’. They are also more likely to come across
as credible candidates to franchisors. Only around half of new franchisees need to borrow money.
46
Franchisors use a wide range of recruitment channels
Franchisors Most Useful Recruitment Channels
2011
2010
2009
Own system’s website
80
85
78
Word of mouth
62
66
67
Social networking sites, eg facebook,
linkedin, twitter
24
22
n/a
Other franchise website
54
55
49
bfa website
30
34
34
3rd party brokers, intermediaries &
matchmaking services
21
13
16
Exhibitions
31
34
23
Franchising seminars/ open days
27
20
14
Magazine advertising
28
36
29
Prompted list
Whilst a franchisor’s own website has been the leading source of applicants over the past few years,
the growing value attached to numerous other sources shows that recruitment increasingly is a multichannel activity. Word of mouth has increased in importance this year, while social networking, first
tracked in 2010, has risen to become the third most referenced channel. There are also indications
that 3rd party brokers and other intermediaries are being more widely used.
47
On average it requires 250 leads and 25 interviews to recruit each
new franchisee
As indicated in the previous chart, 40% of
franchisors use franchising websites as a
recruitment channel. Online has grown in
significance over recent years, although there are
indications this year that some may be moving
towards a more targeted approach to recruitment
(brokers and intermediaries).
Whilst online advertising reaches a very wide
audience at relatively low cost, filtering enquiries
and applications can be time consuming.
Other than the bfa website (www.thebfa.org) used
by one in three franchisees, there are now at
least 10 other franchise recruitment sites to
choose from. Amongst these, the most used are:
One
Franchisee
25
Interviews
250+
Leads
• franchisedirect.co.uk
• whichfranchise.com
• theukfranchisedirectory.net
• and selectyourfranchise.com
The median amount spent externally on recruiting franchisees
(advertising vacancies) is £10,000, although some of the largest
catering franchises spend in excess of £100,000 annually.
48
Costs, fees & ongoing charges
49
A symbiotic relationship between franchisee and franchisor
The franchisor gives access to a tried and trusted (and branded) system for running a small business,
plus training, centralised marketing and other ancillary services
•
Training is a key element as in order to ensure success, the franchisee will need to follow the
‘formula’ for success carefully developed by the franchisor in their own and pilot businesses
Depending on the type of franchise (and sector), the franchisor might also supply equipment, fixtures
and fittings and products / stock
•
For a branded coffee shop for example this could include everything from the sign over the
door to the sugar sachets
Initially, the franchisee must have access to sufficient funds to pay for the rights to the franchise (the
Franchise Fee), and all of the necessary equipment, goods and training required.
Additionally, they need to have somewhere to operate the business from and sufficient working capital
to begin trading.
Once the business is up and running franchisees make on-going payments to the franchisor via a fixed
percentage of turnover and/or from within the cost of the goods supplied for sale. Last asked in the
previous survey, the average on-going fee was 11.7% of sales.
•
Every business model will be somewhat different, but all will be structured to ensure that both
parties are rewarded by success
50
Start up costs include everything required to get the business up and
running
Increasingly, franchisors roll all of the start up costs together into a single package known as a turnkey
solution. This provides clarity for the franchisee in terms of the total fees required and a degree of
transparency assuming that the ‘bundled’ value of all elements has not been inflated.
Others prefer to itemise the cost of each element of the offer, and indeed for some franchises the
nature of the business will mean that the total cost will depend on individual factors such as the size or
location of premises.
Nine in ten charge a fee for the franchise itself or include this within the overall charge. The cost of this
element will depend on a number of factors including:
•
The strength of the brand, the earning potential of the franchise etc.
Most charge for training or include training within the overall charge
Working capital, stock and equipment are included as and when appropriate
A glance along the mean total cost column on the following table illustrates that average figures are
rarely ‘typical’. Clearly a hotel or restaurant will require much greater investment than a personal
services franchise teaching maths to children
•
And, logically, even within Hotel and Catering, the cost of opening a hotel will be much greater than
opening a burger bar: So there is considerable variation both within and across categories
51
Typical financial considerations in starting as a franchisee
All
Hotel
and
Catering
Store
Retailing*
Personal
Services*
Property
Services*
Transport
/ Vehicle
services*
Business
/ comms
services*
Franchise Fee
90
89
80
81
95
100
97
Equipment*
71
89
93
72
74
70
45
Stock*
64
95
60
69
64
60
42
Training*
84
95
67
78
90
90
84
Working capital*
75
79
87
78
77
60
68
Mean total start-up
cost (new unit)
£52,000
£142,000
£88,000
£33,000
£32,000
£25,000
£37,000
% of resale fee to
account for goodwill
25
26
15
34
25
12
25
**Mean total sum
invested on start-up
£64,500
£111,000
£86,000
£36,000
£52,000
£63,000
£59,000
Incidence %
Source: Q16b Base: Franchisors (excludes ‘don’t knows’) / All making each charge. *Base 30 or below.
**Q17g Base: Franchisees (excludes ‘don’t knows’ and ‘refused’)
52
Where a franchisee purchases a resale, this may take into account
the value of goodwill built up previously
Asked in the most recent previous survey in 2011, at that time 36% of all franchisees said they had
purchased a resale. Amongst those new to franchising in the preceding two years as many as 66%
said they had acquired a resale.
In many of these instances, there is a ‘goodwill’ fee included within the cost of taking over the
business, based on the assumption that many existing customers will continue to buy once the
business has changed hands. On average one in four re-sales includes a fee for goodwill. Logically
this is higher in businesses where there is either likely on-going relationships (personal services, or
business services), reputation (hotels and catering) and lower in sectors where repeat business is less
common such as retail and transport & vehicle services.
This goodwill element in part explains why on average, the total sum invested by the franchisee (the
green row on the previous table) generally exceed the total start up cost figure provided by the
franchisor.
Whilst mean figures provide a guide, it is equally valuable to look at some individual examples (taken
from the previous survey) providing a breakdown in start up costs for specific franchises.
53
Some example start-up costs from the 2011 survey
Example Costs for Each Franchising Sector (from survey data)
Hotel &
Catering
Store
Retailing
Personal
services
Property
Services
Transport &
vehicle
services
£105,000
£60,000
£14,000
£27,000
£30,000
Franchise Fee
£6,000
£40,000
£8,000
£1,000
£7,500
Equipment
£80,000
£110,000
Stock
£5,000
-
Working Capital
£10,000
£30,000
Training
£6,000
£5,000
Other
£19,000
£15,000
Total (non-turnkey)
£120,000
£200,000
Turnkey: Typical
charge
Business &
Comms.
Services
£25,000
Non-Turnkey examples
£7,000
£27,000
£2,000
£2,000
£500
£17,000
£10,000
Source: Q16b Base: Franchisors (excludes ‘don’t knows’) – 2011 survey
* Figures are rounded to nearest 100
£20,000
£15,000
£27,000
54
Franchisor /
franchisee
relationships
55
Franchisee relationships with franchisors are generally very good
Net Satisfaction with Franchisor Relationships
%
‘Definitely/Mainly Satisfied’ minus ‘Definitely/Mainly Dissatisfied’
100
90
80
70
84
74
70
80
82
82
74
76
66
60
74
66
80
74
84
70
70
86
84
72
76
76
76
68
68
66
66
66
20
38
36
28
20
10
14
14
2002
2003
80
76
69
41
46
Marginal profitability*
38
26
24
78
89
84
83
54
40
30
90
84
58
50
91
All franchisees
23
High profitability*
Negative profitability*
0
2000
2001
2004
2005
2006
2007
2008
2009
2010
2011
2013
The last few years have certainly presented some tough trading conditions. Within this context it’s
highly reassuring to see that franchisee-franchisor relationships have, on average, never been better
with a net satisfaction figure of +84%. Some of the few struggling to turn a profit are somewhat less
satisfied, but even for them the position is much better than it was a decade ago.
56
It only goes wrong if franchisees feel they are not supported
Reasons for Unsatisfactory Relations with Franchisors
Lack of direct support from franchisor
69
Lack of communication with franchisor
41
Franchisor not keeping initial promises
23
Lack of franchise brand marketing/ promotions
20
10
Personal reasons
Other
2
2011
2010
2009
55
79
71
48
56
44
33
46
37
22
47
44
16
18
25
5
14
25
Around one in eleven franchisees have less than satisfactory relationship with their franchisor. More
often than not this occurs where they feel they are not given sufficient support or where
communication breaks down. More rarely personal factors and perceptions around failure to keep
promises are involved.
57
Franchisees recognise all the benefits of having a ‘brand’ whilst
running their own business
Perceived Benefits of Being a Franchisee
Quality expectation
Having a standardised product/ service
Appearing to be a larger business
Having a sustainable business
Competitive advantage
Limited financial liabilities
Being a part of a bigger brand
Franchisor support/ support and backup
No benefits
Franchisees clearly value all the benefits of what might be considered being ‘associated with’ a bigger
brand; standardisation, size, quality expectation for example. However, they do not feel ‘part of’ this
bigger brand. Clearly the independence and freedom of running their own separate enterprise is
something highly valued.
58
Red tape and running
costs
59
Franchisees say Health & Safety require the most compliance effort,
followed by Tax and Data Protection
A great deal/
fair amount
Effort required by franchisees to ensure compliance with…
Health & Safety
Tax & VAT
14%
23%
12%
2010
2009
37
51
54%
39
39
54%
24
35
20%
17%
44%
17%
Data Protection
10%
Minimum Wage
8%
16%
19%
58%
23
38
Environmental
Legislation
8%
15%
20%
57%
23
32
Equal Opportunities
8%
15
29
10
23
9
19
14%
22%
9%
Intellectual Property
6%
& Copyright Laws
8%
Company Identity Theft 5%
9%
21%
62%
16%
71%
19%
68%
Note: question last asked in 2010
A great deal
Base: All franchisees
A fair amount
Not a lot
Not at all
60
Franchisors have a greater focus on IP and Copyright, as this
directly impacts their business model
A great deal/
fair amount
2010
2009
44
32
Effort required by franchisors to ensure compliance with…
Health & Safety
Intellectual Property
& Copyright Laws
29
38
Data Protection
24
37
Tax & VAT
22
37
Minimum Wage
18
27
Company Identity Theft
13
26
Equal Opportunities
12
19
Environmental
Legislation
11
21
Bribery Act
4
n/a
A great deal
A fair amount
Not a lot
Not at all
Note: question last asked in 2010
Base: All franchisors
61
There is continued upward pressure on running costs for both
franchisors and franchisees
Net Position
(increase minus decrease)
Franchisees
Franchisors
2008
60
2009
2010
2013
36
49
48
33
35
39
29
40
33
22
8
18
17
9
2008
76
2009
2010
2013
43
52
56
59
48
50
46
33
35
39
25
34
23
18
18
18
13
Energy costs
39
Stock & Material costs
36
23
54
Staff wages
25
15
42
Your prices
Property rent/ lease charges
17
Interest/ Overdraft charges
8
18
16
Note: question last asked in 2010
Base: All franchisees & All franchisors expressing an opinion
62
Running costs strike directly at the bottom line
When running costs increase, this squeezes profit margins. The only way to counteract this is to cut
costs in other areas (where possible) or else to increase prices, which may be challenging and could
result in reduced sales.
When running costs were first investigated in 2008, it was at a time where nationally we were starting
to experience the ‘double whammy’ of increased costs (fuel, commodities etc.) and reduced economic
activity overall.
Somewhat worryingly, there are indications from this year’s survey of increasing pressure on energy,
stock and materials and wages.
On the plus side, the commercial property market remains relatively stagnant (good for those renting
premises) and whilst commercial lending rates and base rates have largely decoupled, there has been
little upward pressure (for those borrowing) in recent years.
It’s likely as true for franchising as it is for UK plc as a whole and individual households that when
business levels do start to pick up this will present challenges as well as rewards; greater upward
pressure on wages and perhaps increased property and borrowing costs.
63
Technical appendix:
Survey method
64
Calculating the size and scale of the franchising industry
In order to understand the health of the industry, it is important to have an accurate measure of the
‘total number of franchised units’. The derivation of this number is not straightforward due to the
variable availability and often incomplete nature of the unit figures published online or in franchise
directories.
In order to bridge this gap in information, the figures detailed in this document are produced by
combining our own sample database with database sources that are available for the largest
franchises. Sources used to compile our database are diverse and include the Franchise World
Directory, the UK Franchise Directory, www.franchiseinfo.co.uk, other online lists of systems known to
be operating in the UK and the proprietary databases of the bfa and NatWest.
From these sources and from information built up over previous years, a ‘long list’ is compiled. This list
is then subject to intensive review by industry experts at the British Franchise Association and
NatWest’s Franchise Section, until all parties are satisfied that only active systems are included. The
authors of this report would like to thank these sources for their assistance.
In addition to this, over recent years, we have been able to populate our own sample database with
reported unit numbers from the survey, making it the most accurate and reliable measure available of
the actual number of franchised units in the UK.
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Statistical Confidence
Note on Statistical Confidence
Much of this report is based upon the findings of survey research studies, to which statistical
confidence limits apply.
Taking the 95% confidence interval the following indicative ranges apply to the survey findings:
Survey Findings At Or About
5% / 95%
20% / 80%
50%
Franchisor survey (n=150)
+/-2%
+/-3%
+/-4%
Franchisee survey (n=330)
+/-3%
+/-5%
+/-6%
Note that the finite population correction applies to the franchisor sample. Since the sample is a
substantial proportion (16%) of the population this enhances our statistical confidence in the survey
findings.
Commissioned by:
Sponsored by:
Conducted by:
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