Franchising Market Research
Summary
The franchising sector is one of the most successful business sectors in South Africa’s diverse
portfolio. It provides a profitable business model that aids in important wealth and job creation for
South Africa. In addition, it is also the preferred vehicle for business expansion and development in
South Africa.
In 2008, the sector contributed 12.5 percent to South Africa’s GDP, and created 67,000 jobs. In
total, franchisors and their franchisees employed over 460,000 people in 2008, up from 390,000 two
years earlier. According to the Standard Bank Franchise Factor 2008 Survey, the sector showed a 37
percent increase in turnover. Also, there are currently 531 systems, operating through about 28,000
units in a variety of business sectors.
Franchising is also consistent with South African President, Jacob Zuma’s, goal to create 500,000
new jobs in 2009. As a result, the South African Government (SAG) is actively supporting investors
looking to expand into South Africa’s market. In fact, certain South African banks are devoting
personnel, and setting up franchising departments to help franchisors and franchisees gain finance,
reach agreements, and start their businesses. The 2010 FIFA World Cup is another encouraging factor
for franchise businesses in this market.
Although the economic recession has negatively affected the retail sector, with reduced
consumer sales, there is potential for innovative service-oriented concepts for this market. While there
are challenges facing the sector, further growth is anticipated. The sector may be an unlikely beneficiary
of the economic downturn as jobs in the formal sector tighten and people are forced to look for
alternative sources of employment.
Market Overview
Franchising operations in South Africa were traditionally in the fast food and/or restaurant
business. In 1961 Steers came to the country, and is now known to be the longest standing franchise in
the area. According to Franchising in South Africa, a publication in association with First National Bank
in South Africa, the first foreign food concept to come to the country was Kentucky Fried Chicken in
1971. The fried chicken restaurant now has more than 350 franchised stores in southern Africa. After
KFC, many other popular American franchises followed suite, including McDonald’s.
By 1978, franchises in agriculture, mining, industrial, automotive products and services, bakery,
building, office, and home services, business-to-business services, childcare, education, training,
entertainment, fast food and restaurants, health and body culture, Italian-style foods, personal services,
pub concepts, real-estate services, and retailing and direct marketing industries had arrived.
According to the 2008 Standard Bank Franchise Factor Survey, conducted by Standard Bank in
2008, there were 531 franchised systems in 2008, an increase of 127 units from 2006. According to
research published by Franchize Directions in 2008, the fastest growing sectors are services with 26 new
systems, followed by retail with 22 new systems. As the chart below indicates, the franchising sector is
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very diverse. While retail and restaurant businesses are the most developed categories, Building, Office,
and Home Services is a close third.
In terms of growth in business units, Real Estate Services (693), Building, Office and Home
Services (457), Automotive Services (433), and Retail (411) have grown the most in South Africa.
Petroleum retailing, once a potential franchising opportunity in the country has seen a decrease of 93
business units from 2006 to 2008, and consequently a decrease in employment. Personal Services,
Business to Business Services, Industrial Services, and Financial Services have all also seen a decrease in
business units over the past two years.
In South Africa, franchising is used as the preferred vehicle for expansion by companies active in
fields as diverse as automotive products and service, food, entertainment and leisure activities, home
maintenance and repairs, business services, and retailing. In addition, the Franchise Association of
South Africa (FASA) has been paramount in developing and expanding the business environment for
franchising in South Africa.
FASA represents franchisors, franchisees, and the professional organizations that service the
franchise industry. They are the only recognized representative body of the rapidly growing franchise
industry, and their aim is to facilitate and promote ethical franchising, and to be a resource to
franchisors interested in starting a franchise in South Africa. Its Code of Ethics and disclosure
requirements are widely seen to rank among the best world-wide.
Market Access
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U.S. firms entering this market must contend with a mature market with well-established,
indigenous competition. Around 90 percent of South Africa’s franchise opportunities are based on
locally developed concepts. Although most countries outside the USA have foreign brand domination
within the market, the majority of South Africa’s market is locally-developed brands. The advantage of
operating under a local brand is that the product has been designed from inception with the local
conditions in mind, and can continually adapt to changing consumer expectations.
Only a small minority of U.S. brands are represented in South Africa. Although those that are
here have reported successful expansion and several new entrants into the market, South African
franchises are entrenched into the local market. However, respect for and awareness of many U.S.
brands is high.
The current South African Government (SAG) is very supportive of the franchising industry for
several reasons. First, one of President Jacob Zuma’s pillars of growth for the economy is to create
500,000 jobs in the second phase of the expanded public works program in 2009. Since less-skilled
workers without a high-school diploma remain the hardest hit with unemployment, franchising is a
viable option to create jobs specifically for this unemployed sector. Second, franchising is an ideal
vehicle to promote entrepreneurship and small to medium enterprises, which the SAG has prioritized to
also combat the high unemployment rate in South Africa. Third, franchising is ideally suited to
implement sustainable Black Economic Empowerment (BEE) initiatives, which all firms must consider to
do business in South Africa.
*Black Economic Empowerment
Black Economic Empowerment (BEE) is a key policy and growth strategy of the South African
Government, aimed at redressing the inequalities of the past. The government program targets South
Africa’s inequality by giving previously disadvantaged groups economic opportunities previously not
available to them. It includes measures such as employment equity, skills development, ownership,
management, socio-economic development and preferential procurement. More information on BEE
“codes of good practice” is available on the website: http://www.thedti.gov.za/bee/codes2005.htm.
Franchising, with its components of skills transfer, initial and ongoing support for managers and
franchisees, and network-wide purchasing initiatives, is an ideal vehicle for the implementation of
sustainable BEE initiatives. As a result, franchising has risen as one of the key economic sectors for
starting and growing a successful business.
*Note that in BEE legislation, the term “Black” is used generically to refer to South African citizens of the following racial/ethnic
groups: (black Africans, Coloreds, Indians and Chinese (declared to be Black in June 2008[1]) who are SA citizens) Blacks (those
whose ancestry is exclusively/almost exclusively African), “Coloreds” (those of mixed European/African or European/Asian
origin), or Indians (those whose ancestry originates in the Indian sub-continent).
Legislation
There are three pieces of legislation that significantly impact the franchising sector in South
Africa, and affect how business is done within the sector. The Consumer Protection Act, the National
Credit Act, and the Competition Act have strict guidelines for doing business in South Africa, and have
important implications for the franchise sector. These laws are not intended to discourage the franchise
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industry, but are in place to promote fair business practices within the industry. When followed, these
laws should have little effect on the business.
The Consumer Protection Act – The primary purpose of the Act, which was signed into law on April 24,
2009, is to prevent exploitation or harm to consumers, recognize their rights, and establish effective
mechanisms to enforce these rights. The Act deals with the following franchise issues:
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Information that must be disclosed to a franchisee before an agreement is reached;
Information that must be contained in the franchise agreement;
The circumstances under which a franchisee may cancel the agreement;
Limitations on the rights of franchisors to levy an upfront fee for future services;
The franchisee’s right to choose its sources of supply of products and services outside the
franchise agreement.
For the purposes of this Act, franchisors are seen as the suppliers, and franchisees are viewed as the
consumers. In this context, specific obligations will be applied to franchisors, as suppliers of goods and
services. The Act will operate from October 24, 2010, to give companies time to comply, and to
establish the National Consumer Commission, an enforcement /investigative body on consumer
protection issues.
Failure to comply with the Act could void the franchise agreement and an attached penalty of R1
million, or 10 percent of annual turnover. Since there are currently no regulations (not even in draft
form) for the Act, it is very difficult to consider the implications. The regulations will be issued by the
Minister of Trade and industry within 12 months of the passing of the Act.
The Competition Act – The purpose of the Competition Act is to promote and maintain competition
among South African businesses, and to provide consumers with competitive prices and product
choices. Specifically, the Competition Act regulates activity between businesses that should be
competitors. The Act prohibits any kind of arrangement that produces a dominant market player, and
attempts to shut other competitors out. In addition, franchisors cannot set fixed prices. However, they
are permitted to set “recommended prices” but may not penalize franchisees who refuse to abide by
them. It is administrated and enforced by a three-layered structure:
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The Competition Commission
The Competition Tribunal, which investigates possible actions that eliminate competition, and
imposes fines of 10 percent of annual sales if found guilty; and
The Competition Appeal Court - Parties that are unhappy with the findings of the Competition
Tribunal have the option to take their case to Competition Appeal Court for a review.
In the case of franchise sector, many of the practices that are essential for the operation of franchises go
against the Competition Act. However, the Competition Commission recognizes the economic
contribution franchising makes and is prepared to look at each case individually. Franchisors are advised
to ask the Competition Commission to review their franchise agreements.
The National Credit Act (NCA) – This law was signed on June 1, 2007, and aims to protect the consumer
from being granted credit recklessly. In addition, two new regulatory institutions have been established
to administer the NCA:
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The National Credit Regulator (NCR) - The administrative regulator dealing with issues such as
research and policy development, registration of industry participants and investigation of
serious complaints. The NCR will take responsibility for the enforcement of the NCA.
The National Consumer Tribunal (NCT) - Conducts hearings into complaints relating to the NCA.
Market Opportunities
The sector has experienced solid, sustainable growth, and now financial and other governmentfunded institutions offer considerable support for franchises. Currently, South African banks such as
ABSA and FNB have sections specifically geared toward the franchising sector. Further growth is
anticipated based on the sector’s apparent resilience to the economic downturn. The only franchising
industry that has been hit particularly hard has been retail, which has declined 6.7 percent in April.
Despite challenges facing the sector, factors such as the 2010 FIFA World Cup is an additional stimulant
that will present new opportunities for this sector.
Direct Selling
Another important facet of franchising is the direct selling opportunities in the market. Direct
Selling in South Africa is a rapidly expanding channel of distribution that provides significant economic
and social contributions to South African families. Direct Selling is the marketing of products and
services directly to consumers in a face-to-face manner, generally in their homes or the homes of
others, at their workplace and other places away from permanent retail locations. It is a large and
unique industry that offers a wide variety of products ranging from household products, personal care,
health and wellness, fragrance, cosmetics, jewelry to educational and financial products.
Direct Selling is a growing industry in South Africa and is also rapidly expanding into other areas
of Southern Africa. In 2007, there were more than 50 direct selling companies in South Africa with sales
totaling more than $5.7 billion, up from $4.1 billion in 2005. Members include a number of global
companies with household names such as Amway, Avon, Avroy Shlain Cosmetics, Herbalife, and
Tupperware. In many of the rural areas in South Africa, and even in some regional city suburbs, not all
consumers are able to find what they need in their local stores, and little access to the Internet. Direct
Selling fills in this gap.
Service- sector opportunities
More service-sector concepts should be explored in this market. In fact, U.S. companies can
create a unique market niche by providing South Africans with expertise in a wide variety of services.
Currently, there are U.S. companies providing mobile pet care services, handyman and maintenance
services for homes, commercial cleaning services for businesses, water sanitation services, fitness and
training services, as well as spa and beauty services. More and more American companies are moving
into the services sector, realizing that they must compete with well established South African brands
specifically in the food, restaurant, and retail business sectors.
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Trade Shows/Events
International Franchise & Entrepreneurship Expo
May 6-8, 2010
Venue: Sandton Convention Center
Contact: Shereen Davids, Event Coordinator
Tel:
+27 11 615 0359
Email: shereen.davids@fasa.co.za
URL: http://www.ife.co.za/
Resources
http://www.whichfranchise.co.za/
Franchise Association of South Africa
http://www.fasa.co.za/
Franchize Directions
www.franchize.co.za/main.html
The Direct Selling Association of South Africa
http://www.dsasa.co.za/
Franchise Think Tank White Paper 2009
http://x2in5.com/Documents/THINK%20TANk%20White%20Paper.pdf
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