Franchise Association of South Africa (Fasa) CEO Freddy Makgato warned the current operating environment the sector was facing, amid the power crisis, was not conducive to doing business.
The franchise sector in South Africa consists of a variety of categories, with the three largest categories being fast food and restaurants, retailing, and building office and home services.
In December last year, KFC had to temporarily close some of its fried chicken outlets in South Africa due to power cuts imposed by state electricity provider Eskom, which led to supplier problems.
However, Eskom this week warned that there is a great likelihood that it could implement Stage 8 load shedding this winter as the demand for electricity increases due to the cold weather.
The Stage 8 power cuts would require up to 8 000 megawatts to be shed from the national grid, and could mean even longer hours without electricity.
This is a major headache for franchisors and franchisees.
And while bigger businesses are seeing billions of rand shaved off their turnover by the power crisis in South Africa, they have been steadily buying into alternative power solutions to keep their door open. But this comes at significant cost.
However, smaller businesses and start-ups don’t have the financial clout of bigger businesses, leaving many unable to survive. And in the franchise sector some business are well established, while other newbie owners are struggling to get off the ground.
Commenting on the impact of the power crisis on the franchise sector, Fasa’s Makgato said the sector in South Africa had been around since the 1960s and despite socio-political and economic hardships, had continued to grow. It is now contributing 14% to the country’s GDP – more than agriculture, mining and manufacturing.
“More importantly, it has been the catalyst for encouraging entrepreneurship, skills development and job creation through its more than 800 business systems, over 48 000 outlets and employing close to 500 000.
“All that is at risk of collapsing as the current operating environment is not conducive to doing business at the moment. If it is not addressed, this could spell the demise of all the hard work that has gone into one of the most vibrant of business sectors – franchising,” Makgato said.
Richard Mukeibir, the managing director (MD) of Cash Converters, which buys and sells second-hand goods and is a franchisor, said load shedding was proving to be another barrier to entry in starting a new business that spells disaster for South Africa’s economic growth.
The perpetually higher stages of load shedding were affecting various franchises differently since they were all in different life stages – from brand new to fully established.
“However, the pressure is felt across the board. The more established stores are likely to be under slightly less pressure as they have the balance sheets to support more expenses, while the newer businesses are feeling the pressure of trying to establish a business while having to pay for unexpected, and significant, extra costs,” Mukeibir said.
Cash Converters said the costs of not investing in any alternative power was too high as businesses simply could not run with the lack of consistent Eskom power supply.
Overall demand for these alternative energy solutions was so great that supply was an issue and the costs were high.
“The funding for this power comes straight out of the bottom line, and they are significant costs. We estimate each of our stores is spending an additional 50% on power generation,” Mukeibir said.
“We need a plan of action, with clear milestones and deliverables, and commitment to end the power crisis.”
Another small business owner, Tony da Fonseca, the MD of OBC Better Butchery, which is also a franchisor, said South Africa’s higher stages of rolling blackouts were financially devastating.
Brands had to deal more and more with distressed units in their business model and had to work harder to maintain viable business clients and keep them open across their network.
“Generators have had to be installed in every outlet. Smaller quick service restaurant businesses can expect to at least have to spend R10 000 on fuel, mid-sized businesses R50 000 to R100 000 per month, depending on the stages of load shedding. Larger supermarket groups have budgeted up to R500 000 per store per month for this. There is little option if one is going to maintain the cold chain and the integrity of the food the industry serves or provides to the public.”
Meanwhile, OBC Better Butchery’s MD said the signs of businesses in stress were everywhere. They were already struggling to operate amid a depressed economy, after the financial decimation caused by the Covid-19 national shutdown, but had sadly reached a point where they could no longer withstand load shedding.
“Although we maintain a positive attitude that we will ride this out and we are doing our all to support our members, we continue our expansion cautiously,” Da Fonseca said.
“However, there has never been a time that I can recall that we have been offered so much second-hand equipment that has become available. Although this does open up opportunities to set up business units for less, it is sad that this is as a result of a declining economy and the knock-on effects of this, such as on new equipment manufactures, has yet to be seen in our economy,” he said.
The various components of the franchise industry had to realise that they were on their own and could expect little help from the government.
“We must become less reliant on the state to provide basic services. We have to invest in these ourselves in any way we can. Of course we have to be more vocal than ever in insisting that our leadership applies the haste they say they have in resolving these issues,” Da Fonseca said.
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