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Friday 1st July, 2022

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Franchising in South Africa: what you need to know

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Franchising in South Africa: what you need to know

Do your due diligence and research correctly, and the South African market can offer much promise for incoming brands

Do your due diligence and research correctly, and the South African market can offer much promise for incoming brands

South Africa is often overlooked by franchisors looking to expand overseas, which is a real pity, as the South African franchise scene is very strong. In fact, it boasts a franchise association (Franchise Association of South Africa) that is celebrating 40 years of being a voice for the sector and is the leading franchise association on the continent.

Franchising accounts for 15.7 per cent of South Africa’s GDP, with an annual R721bn turnover, despite the country having a major minerals export business in gold, platinum, and diamonds. There are approximately 850 franchised brands currently with 41,000 outlets, with this number growing annually.

Although the franchise sector in South Africa has struggled in the last couple of years due to the slowing of all economies worldwide, it certainly seems to have weathered the tough times well and is now coming out the other end. Now is a good time to enter the market.

What you need to know
If you are looking to expand to South Africa there are a few things you need to look into first. The most important aspect is the exchange rate of the South African rand versus other currencies. Also, the country now has a minimum wage set by the government, which is monitored very carefully by the authorities.

For food retailers, South Africa has a sugar tax which is usually shared by the suppliers and the sector – this has caused the cost of living to rise slightly, as you would expect.

For retailers, another big factor to really research is site selection, which is very important, including the demographics of the site. Also, the cost of fit-out, which is certainly a lot less expensive than most other western countries due to the cheaper labor costs across the board. For example, to set up a 300-seat steak house franchise could cost anything from R1.5m to R2.5m, which is roughly £100,000 to £140,000. It’s worth noting that most equipment can be purchased much cheaper in South Africa and is always readily available.

“There are approximately 850 franchised brands currently with 41,000 outlets, with this number growing annually”

Selection of a master franchise is a very important decision for any franchisor looking to expand their brand, but even more so in South Africa, as an incoming franchise must comply with the Black Economic Empowerment (BEE) regulations, which means that a company must have a black South African on its board. There are exemptions that can be granted but this needs to be thoroughly checked out when setting up a master franchisee. I suggest you seek out local legal advice with a reputable law firm. Companies that do not comply will not be considered for any government tenders.

The standard tax rate for companies and businesses is a flat 28 per cent top rate and is on a sliding scale, which varies between 21 per cent and 28 per cent.

Test the market
My advice to any company looking to expand to South Africa is to open a couple of branches in select areas to actually test the market for your products. This may seem onerous but will be well worth the effort and expense in market research, as most people will not contemplate buying master rights until you can prove it will work in their market. This is especially true with food products, as local taste and presentations of food need to be checked – what works in your country may need to be changed slightly for the market that you are seeking.

Another requirement is a thorough check on all credentials given to you, especially with regards to capital and assets stated by the franchisee. Many of the banks will confirm this with a written request. In fact, the banks in South Africa are very resourceful and lend to proven franchise systems – there are also some government and semi-government funding groups available.

The opportunities on offer
I was asked recently why Starbucks was unsuccessful in South Africa, and the main reason comes down to the costs of fit out and equipment, which was in many cases brought in from the U.S., which caused massive costs to franchisees. Also, the cost of product was above the local coffee suppliers.

The standard of fit outs in shopping centers in South Africa is excellent and all done locally, using local companies to carry out the work.

Other examples of U.S. brands that had trouble entering South Africa are Baskin Robbins and Dunkin’ Donuts, which both failed due to costs, especially with products and setting up. It is imperative you research this before committing to expansion.

THE ADVANTAGES TO EXPANDING TO SOUTH AFRICA:

• It boasts a very healthy franchise sector

• Most locals eat out a lot more than some other countries

• It’s very up to date with technology

• Costs of setup are cheap

• Most equipment is locally available

• Shopping mall rents are generally lower than other countries

• English-speaking population

• Labor costs are lower

• Taxes are low

• Fairly large middle-income numbers

• Tourism is major business, and tourists tend to shop with brands they know and trust

THE DISADVANTAGES TO EXPANDING TO SOUTH AFRICA:

• Crime is high but is often blown out of proportion by the media

• The franchise code of conduct is fairly rigid based on the Australian code (but unlike Australia, where it is law)

• The consumer laws are fairly tough but not a worry if you follow them correctly

• The exchange rate on imported products and customs duty – most can be sourced locally, especially in the food sector

THINGS TO CONSIDER BEFORE EXPANDING:

• Where will your brand sit in the marketplace?

• What is the size of the product market?

• Who are my competitors and what is the size of their market share?

• Why are they successful?

• Do I have the resources to build the brand in the marketplace as it stands?

• Can I get any financial assistance from my government when exporting the brand?

• Am I up to date with the local regulations, and if not, who do I seek out for the info?

• Both the legal and accounting profession are excellent and of very professional standard

• The Franchise Association of South Africa has a wealth of knowledge and can be very helpful

• South Africa is also a stepping stone into other African nations, especially surrounding countries

THE AUTHOR
John Moyes is an international franchise associate. He has over 30 years of experience in the development and selling of franchises and represents The Franchising Centre

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