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Johannesburg – The franchise sector may be an unlikely beneficiary of the economic downturn, says one expert.

This is the view of Bendeta Gordon, a director of franchise consultant Franchize Directions. Gordon was speaking to Fin24.com after the presentation of the Standard Bank Franchise Factor Survey in Johannesburg on Thursday.

According to the 2008 survey, the franchising sector in South Africa has grown sharply over the last two years. It has seen turnover climb 37% to R256bn, and has in total created about 67 000 jobs.

It is estimated that franchising makes up about 12.5% of the South African gross domestic product.

Spreading the risk

“While weak franchise brands are likely to come under enormous pressure in the coming year, strong franchisors with a solid footprint and low gearing have traditionally performed well during economic downturns,” said Gordon.

She said that this was driven by two factors: corporate businesses looking to spread their risk profiles, and an increase in the number of unemployed people looking at entering the small- to medium-sized business sector.

In terms of risk, Gordon said that when times were good companies wanted to own their distribution channels, but when the economic cycle was down businesses preferred to spread the risk by looking at the franchise model.

Gordon pointed to respected companies like retailer Pick n Pay and glass fitment operator PG Glass as examples of franchises that had spread their risk through the franchise model.

With businesses beginning to feel the pinch from the financial crisis and a global economic slowdown, many are looking at cost-cutting. This includes voluntary and involuntary retrenchments.

Ultra-low failure risk

Danelee van Dyk, an economist with Standard Bank, believes that there are some warning signs that the economy is contracting quite sharply. She said: “While the South African economy has been a net creator of jobs in 2008, there are signs that we are entering into a period of slower growth and job creation will be much harder in 2009.”

Both van Dyk and Gordon believe that with more people taking voluntary retirement or being retrenched, they are likely to be drawn to the relative security of the franchising sector.

The survey indicates that failure rates in the franchising sector are as low as 4%.

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Marc Ashton, Fin24.com