Franchising as SME strategy in Africa

Africa probably presents the world’s last big business opportunity. The continent however, has been trivialized and more than marginalized by global businesses. But Africa desperately needs to achieve growth. The continent offers real opportunity and prospects that are truly exciting and rewarding. But optimism and hope does not produce results.

The question then begs why Africa has until recently been isolated. The reality checks for business and investors are, broadly speaking, the following which in essence are also Africa’s challenges for future development. Economics and Politics: Africa is the only continent that continues to grow poorer. Even Africans themselves seem to doubt their own economies. It is estimated that about 40 percent of African’s private wealth is held overseas. The GDP of a typical African country is barely that of sizable town in the developed world. In fact, in global terms African economic activities are almost completely insignificant. Governance and Democracy: The continent in general does not get good press. Warfare, diseases, corruption, famine and genocide have been the dominant features of international coverage. Terms like “a hotbed of terror” followed by crippling travel advisories are commonplace directed towards Africa.

Good governance in Africa has a long way to go but a strong start seems to have been made. The rules are surprisingly simple- allow people to do their own thing. Conflict and Strife: The active warfare that has existed until recently in many parts of Africa has caused enormous social upheaval and economic stagnation. But the wars have slowly been coming to an end and in less than 10 years almost all the conflicts have been more or less resolved. Displaced African refugees now populate many parts of Africa and Europe, their absorption and relocation remaining a major challenge. Business Sector: Africa did not appear on the global plans of many western corporations until recently because many people out there simply don’t know enough about Africa.

A Strong Private Sector Required

Much of Africa is characterized by a very strong entrepreneurial spirit. If this were not the case, chances are that many economies would have collapsed entirely as a result of corruption. It therefore seems obvious that a successful nation requires a vibrant business sector. It also seems equally clear that the business sector needs to be multifaceted, encompassing every area of opportunity and every form of corporate identity.

It is in this context that small and medium enterprises (SME’s) will play a vital role. The economies of some of the most successful countries in the world have been built on the contribution of SME’s in providing employment and sustained growth. About 70 per cent of the economic output of a country such as the Netherlands is contributed by SME’s. In the United Kingdom SME’s are constantly penetrating new markets to expand the economy and to absorb labor. In pursuit of economic participation, the development of small and medium enterprises has emerged as a ray of hope and is being acknowledged worldwide as an economic power-base to stimulate growth. It is also within the SME market that a new way of doing business started gaining momentum some 50 or so years ago. This global phenomenon is franchising and a way of doing business most suited to the African scenario. To achieve success however there are some major challenges, other than the above, that need to be addressed.

Franchising as an SME strategy

Franchising in its more than 50 years history, has shown remarkable resilience to weathering the political and economic ups and downs. The very root of the concept lies in melding together of a franchisor’s brand (intellectual property) and support systems with service delivery by self-motivated independent businesses as franchise holders. In markets where the model is successful, it is this high level of motivation, combined with a rigid business format, that has allowed franchising to thrive even in depressed times. Franchising as a business model has no boundaries and no impediments to success. It is ideally suited to the SME sector; it encourages small business development in every imaginable business sector and is a great catalyst for job creation, skills transfer and wealth creation.

Franchising nurtures and develops the entrepreneurial talent in a country. This is very prevalent in South Africa and other countries where franchising has taken root. It is for this reason that franchising has been acknowledged by the South African government as an important SME strategy to contribute to the economic development of the country. Other African governments, particularly our governments in East Africa can borrow a leaf from South Africa, and the reasons are clear as explained hereunder.

Success rate: The greatest strength of franchising as an SME strategy is its proven success worldwide when compared to independent businesses. In the Philippines: 95 per cent franchise systems compared to 25 per cent independent retailers survived the 1997 Asian Economic Crisis. In Australia: franchising has proven to be 2.5 times more successful than other small independent businesses and on average, in South Africa, franchisors closed no more than one outlet during 1994 despite major disruption as a result of political transformation from apartheid to the modern democracy the country is. The majority of franchisors (87.3 per cent) did not close any outlets. Studies by the Africa Development Bank in African markets where franchising is relatively successful (south Africa, Egypt, Morocco etc) indicate that only 15 per cent of businesses started within a franchise system are likely to fold up in the first five years compared to a mortality rate of 80 per cent for those started outside franchise systems. The reason for the success is that entrepreneurs (franchisees) do not in the strict sense of the word start a new enterprise from scratch, they enter the SME market by investing in a business that has proven the concept (tried, tested and proven franchise system) whilst enjoying support from the franchisor. Consequently, financiers tend to listen to them more favorably than their green field startup colleagues, thereby increasing the chances of success.

The writer is a franchise consultant helping indigenous East African brands to franchise, multinational franchise brands to settle in East Africa and governments to create a franchise-friendly business environment.