Absa Business Banking - Smart Procurement World · Business vs. Product Franchise Format Business Format ... South Africa and employed ±478,000 people in 2010 (Fuel Industry ±78,000)

Smart Procurement Conference

Absa Business Banking

10 September 2013James Noble

IS FRANCHISING THE RIGHT BUSINESS FORMAT FOR YOU?

UNDERSTANDING THE FUEL RETAIL INDUSTRY…….

WHAT IS A FRANCHISE?

A FRANCHISE IS AN AGREEMENT OR LICENSE ENTERED INTO BY TWO PARTIES, NAMELY THE FRANCHISOR

AND THE FRANCHISEE

BEING IN BUSINESS FOR YOURSELF BUT NOT BY YOURSELF

Business vs. Product Franchise Format Business Format

• The franchisor has set up a business and has operated it profitably for a reasonable period.

• The market segment should be of reasonable size and show a sound potential for sustainable growth.

• Franchise Agreement, Disclosure Document & Operations Manual

• The franchisor is committed to ethical franchising and has a track record of creating win/win outcomes.

Product Format

• The franchisor offers (usually non-exclusive) territorial protection, product training and some branding but neither a comprehensive business system nor extensive operational assistance.

• This is increasingly seen as a weakness by both partners and has prompted many product franchises to convert to a comprehensive business format franchise format.

Why financing a franchise ?

• It’s a proven concept with established systems, controls and processes

• The franchisor assists with selecting and securing a suitable premises

• The brand has already proven its viability and established a brand name

• Franchisees are given extensive initial and on-going training

• Franchisees are provided certain norms and benchmarks which supports financial forecasts

• A franchisor will continually analyse market trends and competitors to ensure that the brand maintains its competitive edge

• The failure rate of Franchise businesses in general is much lower than stand alone businesses

• As franchisee you are not alone and are continually supported by the franchisor

Disadvantages of franchising

• Initial and ongoing fees are payable

• Franchise Fee, Advertising Fee, Joining Fee

• Set-up costs may be higher but this should be offset because break-even should be reached sooner

• Some individuals resent the fact that they are forced to operate within a clearly prescribed framework

• Regular upgrades and revamp of outlets to conform with franchise requirements putting strain on the cash flow

• Risk associated with the network’s overall performance

• Unethical franchisors – short term vs. long term relationship – you will have to do your homework well to avoid these franchise systems

Ask yourself these questions

• Do I have excellent physical stamina?

• Do people think I’m a very straight forward person?

• Am I willing to do what it takes to make a lot of money?

• Do those close to me recognise that I'm very much a "people" type of person?

• Could I still meet my financial commitments if the franchise income was lower than expected?

• People who know me say I'm a natural salesman?

• Is my spouse or partner happy to share the risks involved in a franchise?

• In my franchise I would not have to wear a uniform at work?

• Given a bad situation, is my approach to see what good can come from it?

• Do you think you will have more free time to spend with family and friends?Source: www.whichfranchise.co.za

Franchisee/ fuel retailer assessment

• Profile of the potential/ existing franchisee/ fuel retailer

• Business experience/ acumen

• Bank and credit record

• Personal asset & liability statement

• Current lifestyle & salary

• Own contribution (and source)

• Security

• Business plan

• Comprehensive and realistic cash flow projections

Historical growth of franchised systems - SA

Source: Franchize Directions – Bendeta Gordon

Franchised systems per business category

Comments

• Fuel Retail contributed 41% of total SA Franchise turnover in 2010

• General Retail contributed 34%

• Fast Food contributed 7%

• The franchise industry provides an important source of employment in South Africa and employed ±478,000 people in 2010 (Fuel Industry ±78,000)

Source: Franchize Directions – Bendeta Gordon

Ownership transformation in the franchise industry

Comments

• There has been a consistent increase in the number of BEE franchisees over the years.

• The petroleum industry is ahead of the other franchises in terms of transformation

• There has also been a steady increase in the number of women franchisees

37%

63%

2010

Non BEE Owners

32%

68%

2008

BEE Ownership

BEE Franchise Ownership (including Petroleum )

11

33%

67%

2010

Non BEE Owners

25%

75%

2008

BEE Ownership

BEE Franchise Ownership (excluding Petroleum)

23%

77%

2010

Non BEE Owners

20%

80%

2008

BEE Ownership

Women Ownership

Source: Franchize Directions – Bendeta Gordon

Fuel Industry Overview• South Africa utilise 26% (more than

600k bpd) of all fuel in Africa (2.4m bpd)

• R180bn turn over industry (retail) contributing close to 6% of SA GDP

• 4,500 to 4,800 fuel retailers with a total asset value of R25bn

• ± 52% of all sites are oil company owned and account for 57% of the retail fuel volumes

• CODO vs. DODO - no substantial risk

• World class facilities - Currently large focus on convenience and quick service restaurants

• Liquid Fuels Charter of 2000 – 40% of retail sites in PDA control – opportunity for BEE Finance proposals

26.0%

19.0%

14.7%

15.5%

14.8%

10.0%

Engen Shell Caltex

BP Total Sasol

Split of fuel utilization in AfricaSA 26%Egypt 18%Nigeria 15%Libya 12%Algeria 9%Morocco 8%Rest of Africa 12%

Challenges in the Fuel Industry• Regulation (developing countries) vs. Deregulation (1st world countries) –

price of fuel more expensive in deregulated countries and loss of employment opportunities

• Fuel prices influenced by exchange rate as well as international oil prices determined in dollars

• Fuel shortages from time to time due to refinery shutdowns

• Fuel price influenced by local levies and taxes

• Sufficient working capital facilities to maintain wet stock orders from oil companies (pressure on cash flow)

• Remuneration model that lags and therefore retailer not always compensated for his efforts

• High capital investment required to purchase a service station

• Long process to be approved as fuel retailer at the oil company and to obtain retail licence from the Department of Energy

Opportunities

• Liquid Fuels Charter of 2000 – 40% of retail sites in PDA control –opportunity for BEE Finance proposals

• Oil companies driving Black Economic Empowerment with strict policies to ensure that targets are met

• Finance packages from financial institutions with favourable conditions to ensure cost savings and repayment ability

• Oil company contributions i.e.

• rental relieve, consignment stock, joining fee waiver, deferred payment of purchase price, additional assistance with mentors and financial compliance programs

• Training Academy’s at Oil Companies to ensure pool of potential retailers

Questions ?James NobleFuel Industry [email protected] 350 8332082 462 3163