Thursday, 10 May 2018

SOUTH AFRICA: Fast Food Franchises Increase, But What Are The Costs Of Setting Up One

The fast food and quick service restaurant (QSR) sector has continued to show steady growth inspite of what has been a tough economic climate in South Africa.

This includes a contribution in excess of 29% which means QSR has by far the biggest share in franchising turnover, says Andre Beck, sector head of Fast Food and Restaurants at FNB Business.

According to the Franchise Association of South Africa (FASA), the franchising market is worth R587 billion Rand, which is approximately 13.3% of the South African Gross Domestic Product (GDP), says Beck.

Industry data shows that South Africa has seen more franchises opening fast food and restaurant outlets in spite of the floundering economy.

This clearly paints a picture of a sector that is competitive and lucrative, and more importantly, it shows that the franchising has sustained appetite to grow further in the local economy.

Despite this continued success, Beck said that there were also new trends worth knowing before opening a fast food franchise in the country.

These include:

Focus on healthy food: Customers are mindful of what they consume more than before; they want to know which ingredients you have used to prepare their food.

As a result, health centric franchise brands are penetrating the market.

Speed of delivery: Using technology to effectively serve customers; more fast food franchises have made it possible for customers to use mobile Apps and other digital tools to receive their orders quickly.

Free delivery: In this extremely busy environment, businesses have understood the power of bringing business to the customer’s doorstep step.

Month-end peaks: A lot of consumers tend to visit food outlets during month ends to buy or eat with their families. This has become one of the most treasured habits for most families.

Despite the intense competition for food franchising, this sector has exceptionally demonstrated that franchising remains one of the sectors that needs to be thoroughly explored to grow the economy and create job opportunities.

As a bank, we continue to support businesses in this sector and firmly believe in their potential to flourish.

Despite a weak economy and tough trading conditions, the franchising sector has continued to perform well – especially in the fast-food sector.

Over the past few decades, business format franchising has become the most successful business model the world has ever known, said Tony Da Fonseca, chairman of the Franchise Association of South Africa (FASA).

Seeing that in this fast-moving world of ours, change is seen as the only constant, it is appropriate to ask whether franchising can maintain its momentum. My answer is a resounding yes.

Survey results released by FASA in 2017 showed that the sector’s performance remains on an upward trend.

During the period under review, the sector consisted of 845 franchisors and over 40,000 franchisees.

It employed about 343,000 people and generated sales of R587 billion. This equals 13.3% of the country’s GDP, up from the 9.7% recorded in 2014.

The survey also confirmed the stability of the sector, with some brands operating for over 50 years.

Despite this success, franchisors are notoriously tight-lipped as to how well their respective restaurants are doing, making it almost impossible to say exactly which fast-food franchise is the most popular.

Instead, BusinessTech looked at fan favourite franchises recent, Top Brands awards and how much they currently cost to open.

Kentucky Fried Chicken
Despite KFC being by far the most popular fast food franchise in South Africa, it is not likely to increase its number of restaurants any time soon.

KFC South Africa brand owner, Yum International, has noted that the company is not currently looking for new franchisees.

However, existing KFC franchisees may elect to sell their businesses, and it is therefore possible to become a new KFC franchisee by purchasing an existing KFC business.

According to the latest franchise data available from KFC, new franchise owners could expect to pay close to R6 million for a new franchise.

With the only option to now buy a franchise from a current owner, perspective franchisees can expect this number to increase or decrease slightly depending on a number of factors such as location and demand.

Nando’s – from R7 million
There are two main cost requirements when looking at a Nando’s franchise – establishment costs and standard fees.

A R25,000 application fee is required to show commitment to actually wanting to acquire a Nando’s and to compensate for the costs of Psychometric testing, interviews and in-store assessment, etc.

You are also required to pay a R230,000 franchise fee (excluding VAT), to make use of and operate under the Nando’s name and concept, staff training, site assistance, and launch assistance.

However the biggest expense comes from establishment costs which include everything from setting up the kitchen to light fittings and will set you back approximately R6.95 million (excluding VAT).

Debonairs – from R2 million
According to Debonair’s South Africa’s franchising documentation, new franchise owners can expect to pay around R2 million.

Once applicants have been granted and guaranteed a franchise, Debonairs will assist you with a business banker for your application.

This includes help when applying for financing and any other general enquiries you may have about the financing of a franchised business.

Steers – from R1.7 million
One of the cheapest franchise options on the list, Steers franchisees can expect to pay around R1.7 million when starting a new franchise.

However this differs greatly depending on the type of Steers you wish to open, with standard, drive thru and kiosk options available.

The approximate set up cost for a standard Steers is R1.65 million excluding VAT, joining fee and contingency. Set up cost includes equipment, shopfitting, wet works, furniture and fixtures.

McDonald’s – from R4 million
According to McDonald’s South Africa, the cost of a franchise will vary, with actual costs only determined when an individual franchise is offered to an applicant.

The size of the restaurant, location, pre-opening expenses, inventory, selection of equipment, signage, seating and style of decor and landscaping will affect this cost.

This means that McDonald’s South Africa estimates the cost of a franchise to be anywhere between R4 million – R6 million, depending on the type of restaurant and other factors.

Applicants are are also expected to have a minimum of 35% of the purchase price of a restaurant in unencumbered, non-borrowed cash.

Chicken Licken – from R4.8 million
According to its website, a standard Chicken Licken store costs R4.8 million while a drive through (Fly-Thru) restaurant will cost a minimum of R6.8 million.

In both cases the cost will be dependent on the landlord contributions and which store you choose to build as well as which store best suits the area, it said.

Roman’s Pizza – from R2.4 million
Franchisees looking to open a Roman’s Pizza can expect to pay around R2.5 million for a new store.

This includes an initial joining fee of R90,000, while the cost of a 120 square metre store is expected to set you back around R2.3 million.

Fish and Chip Co – from R850,000
There is an average set up cost of R699,000 for a Fish and Chip Co franchise and, you can expect to pay an initial joining and set up fee of R140,000.

As it falls under the Taste holdings group, franchise owners can also expect to receive assistance when preparing finance applications, identifying suitable sites, as well as initial and ongoing training and support.

All franchisees are required to complete a five-day training program that covers day-to-day operations, staffing, stock control, marketing, and management skills.

Something Fishy – from R900,000
While franchising costs are not available on Something Fishy’s website, opening a new franchise will set you back around R900,000 according to SA Franchise Warehouse.

This includes an approximate setup cost of R850,000 (excluding VAT), and an initial franchise fee of R55,000 (also excluding VAT).

Galito’s – from R1.75 million
According to the Galito’s website, the cost of opening a standard 180 square metre outlet is in the region of R1,750,000 (excl vat).

However it notes that this cost is heavily dependent on the location, size and initial condition of the premises.

“This includes all development costs from project initiation (store design & staff training), to store launch promotions. This cost also includes a franchise joining fee of R110,000 (excluding VAT),” it said.

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