The Impact of COVID 19 on the Franchise Industry

24 Apr 2020 3:31 pm

The disruption caused by the global COVID-19 pandemic will have dire consequences for SMME’s, especially in the franchise sector. Franchisors need to consider measures to enable their franchisees to continue trading as “smoothly” as possible once the lockdown measures have been relaxed, while franchisees need to be compliant with their franchise agreements before expecting to receive assistance.

Written by Alex Protulis, Director at Christodoulou & Mavrikis Inc, for LexisNexis South Africa.

[Durban, 24 April 2020]

According to the Franchise Association of South Africa’s latest Franchise Survey, conducted by Sanlam, it is estimated that the franchise industry in South Africa contributes approximately 13,9% towards the country’s gross domestic product (GDP).

The disruption caused by the global COVID-19 pandemic will have dire consequences for small, medium and micro-sized enterprises (SMME’s), especially in the franchise sector, as a majority of franchisees are SMME’s falling under non-essential services that would have been forced to close their businesses for at least 21 days, which will in turn impact the lives of thousands of people across South Africa.

Franchisees will be looking to their franchisors now more than ever to provide them with guidance and support to help steer them through these turbulent times.

A decline in sales

Leading up to the lockdown implemented by the South African government, franchisees would have already observed a sharp decline in sales during the month of March and may have even struggled to reach their breakeven point during this time. Adding to the mix of royalty and marketing fees, franchisees would have been burdened with additional payment obligations in respect of loans, rentals, salaries and suppliers.

The ‘Lockdown’ Regulations

Regulations concerning the block exemption for the retail property sector have already been implemented by the Minister of Trade, Industry and Competition with the sole purpose of exempting a category of agreements or practices between designated retail tenants and the retail property landlords from the application of section’s 4 and 5 of the Competition Act, thus ensuring the business survival and continuity of retailers in the clothing, footwear and home textiles; personal care services; and restaurants.

Options for Franchisors

As the aforesaid regulations only apply to a handful of franchise sectors, to further ease the burden on franchisees during this unprecedented period, it is suggested that franchisors should also consider some of the measures listed below, to enable their franchisees to continue trading as “smoothly” as possible once the lockdown measures have been relaxed.  These include:

  • waiving / implementing payment holidays in respect of royalty and marketing fees;
  • assisting franchisees with negotiating with their financiers;
  • assisting franchisees with negotiating with their landlords;
  • providing guidance with employee issues, where possible;
  • assisting franchisees with applying for emergency funding with the debt relief finance scheme offered by the Department of Small Business Development;
  • re-evaluating their product offerings and channels of distribution; and
  • reviewing their supply chains and implementing risk management steps by reviewing their personal business models to ‘safe proof’ the business from similar situations in the future; including a review of proper capitalisation, cash flow, stock inventories, marketing campaigns and customer interface.

Franchisees

As a franchise relationship is reciprocal, it goes without saying that franchisees would need to be compliant with their overall obligations in terms of their franchise agreements in order to expect their franchisors to step in and to assist them as aforesaid.

Above all, both franchisees and franchisors are advised to maintain open communication with each other.

When the going gets tough, the tough get going…

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