Africa Franchise Report: A Study of Franchising in Africa covers the development and current state of franchising on the continent. To achieve the study’s overall objective, an in-depth analysis of 18 countries was conducted, representing all five regions of the continent (Southern Africa, East Africa, West Africa, Central Africa, and North Africa).
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The study revealed that, apart from South Africa, Nigeria, and the examples within the Northern Africa region of Arabic/French and Arabic/English-speaking sub-regions, the franchising sector on the continent is not well-developed. The study also noted the prevalence of major South African and Zimbabwean franchise brands, which have expanded beyond their borders (outbound) within the Southern Africa Development Community region and beyond.
Common challenges from a franchising perspective across the continent include:
- A weak ecosystem which serves as a constraint to the franchising business model. The countries examined in the report have a variety of constraints at both the macro and micro levels. Key aspects of the ecosystem in the countries were found to be weak for franchising, including the lack of access to capital/financing, limited skills, and policy vacuum.
- General bias towards in-bound franchising, which tends to require the importation of some goods.
- Limited and costly access to finance.
- Unavailability of competent and financially qualified franchisees to oversee franchise operations.
Conversely, opportunities exist in the region. Shifting consumer patterns offer the potential for a strong franchise market and the respective governments have expressed willingness to support franchise development. These opportunities include:
- Growing a relatively untapped market for a broad range of franchise concepts across sectors supported by infrastructure development, creating market opportunities beyond the commercial capitals.
- Using technology and leveraging diaspora communities as crucial sources of foreign direct investment.
- Emerging business arenas such as e-commerce, renewable energy, green initiatives/recycling, convenience, and technology.
Financing and Franchise Development
The study explored the link between finance and franchising development and analyzed the role of finance in facilitating franchise operations. The extrapolated market size for franchising finance in Africa was estimated at US$93.9 billion, with the total supply of franchise finance estimated at US$37.6 billion. In addition, the current size of the franchise financing funding gap is estimated at US$7.51 billion.
Evidence obtained during the study led to the following findings:
- The unencumbered cash contribution required from franchisees (a franchisee must have access to cash in liquid form, not from a bond or other loan), is restrictive. There is a need to both fund new franchise developments and assist the growth of existing franchises.
- The financing required by franchisees is used to fund activities, including the cost of property, furniture and shopfitting, inventory, machinery, and operational and expansion costs.
- Most commercial banks and other financial institutions on the continent do not offer specific financial solutions for the franchise sector.
- Commercial banks are unwilling to fund the establishment of franchises.
- Limited awareness and understanding of franchising, in general, have significantly constrained development of franchising on the African continent.
The study identified the African diaspora as a potent financial and non-financial force for franchise development for countries of origin through remittances, trade promotion, investments, research, innovation, and knowledge. The diaspora can play three distinct roles in the development of the African franchising sector:
- Africans living in the diaspora can take African-developed franchise concepts to other parts of the world where they live.
- Africans in the diaspora can develop and run businesses that may or may not have an African theme.
- Africans returning home from the diaspora stand a good chance of successfully settling back on the continent if they can bring foreign franchises that can resonate with the African market.
Notably, surveys and interviews with various respondents in the diaspora revealed the following concerns related to investing in Africa:
- Political and social instability.
- Lack of legislative frameworks and policies.
- Lack of support from the financial sector.
Institutional Landscape – Legal and Regulatory Frameworks
Franchises on the continent are regulated in four different ways. The first includes countries that have specifically provided for franchising in their legislation. The second is countries that have referred to franchising in other legislation. The third category covers those countries with no specific mention of franchising in their legislation but with laws bearing on the industry. The fourth category comprises countries that have left franchising to self-regulation. Among the key findings of this report was that only two African countries, Tunisia and South Africa, have directly regulated franchising.
African countries seeking to stimulate their economies through franchising need to comply with international data protection standards because of the information shared between franchisors and franchisees and to consider intellectual property protection implications related to inbound franchising.
Transforming the Franchising Landscape
Franchising has the potential to drive the next phase of growth for the African continent. Undoubtedly, the franchising sector is a critical yet often overlooked potential path to economic growth. With 55 countries in the African market, many and fragmented, scaling a business on the continent presents many challenges.
All stakeholders must take active charge in the development of franchising on the continent.
To transform the franchising landscape, this investigation finds it necessary to:
- Enable comprehensive operational systems for franchising: The legal and regulatory environment is inconsistent across different countries on the African continent. It is crucial to harmonize the legal and regulatory environment as part of a strategic effort to grow and transform franchising.
- Foster awareness of the franchising model for SME development: Access to information of the benefits of franchising as a robust option for business growth and development are lacking in many parts of the African continent.
Bridge financing gaps:
- The failure to introduce tailored financing solutions by the commercial banking sector is a barrier to African entrepreneurs and SMEs overcoming the challenges of the high start-up costs for franchising.
Build skills and capacity:
- Building skills and capacity within the franchising sector (both inbound and outbound) requires partnerships and collective actions among stakeholders, including academic institutions, governments, and industry groups/trade associations.
Foster engagement between franchisors and potential franchisees:
- Trust is an essential asset in business development and significantly so in an environment where franchisors and franchisees must form a business relationship.
Enact stable, forward-thinking policies:
- This is country-specific. Policies that promote an enabling environment for franchising and franchise agreements are critical and must include targeted policies. Franchising will benefit from significant government support and policy assistance.
Protect Intellectual Property:
- Franchise agreements authorize the franchisee to use the trademark, patent, or other intellectual property related to the franchise. This right of use forms the basis of the underlying value of the franchise. Intellectual property protection laws revolve around several key elements. Intellectual property must be registered to enhance the franchisor’s rights, enforceability, and better transfer technology key for African countries.
Case study : Nando’s
As part of the case study, examples of successful franchises were canvassed, utilizing the evolution and development of South Africa’s Nando’s franchise as a comprehensive thematic case study to identify critical success factors and key lessons learned and as an example of successful outbound franchising.
The lessons noted from the success of Nando’s include:
- Its effective use of the Master Franchising model, enabling expansion both continentally and internationally.
- The extensive market viability assessments and due diligence it undertakes in every country it seeks to expand.
- Use of commercial banks and private savings by the franchisee to meet financial setup cost requirements.
- The critical benefit of developing solid partnerships between the franchisor, the franchisee, and local suppliers, and recognition of the pitfalls of an aggressive expansion strategy.