Opportunities for Franchising

An Expert's View about Setting up a Business in the United Kingdom

Last updated: 25 Feb 2011

Summary

The franchising sector in the United Kingdom encompasses 842 franchise systems, including 34,800 franchise units and employing 465,000 people (full and part time). The sectors covered include restaurants and catering, personal services, store retailing, property services, transport and vehicle services, and business and communications services. Although analysts estimated that the total value of the market fell to $17 billion in 2009, both the number of franchisors and the number of franchised units continued to rise, which given the depth of the recession, is considered extraordinary by some.

More than 20 new franchises were launched during 2009. Industry experts estimate that the total number of franchisors in the UK rose by 2% in 2009, the latest year for which figures are available. While the size of the franchise market remains stable, there are important shifts taking place within the market. For example, the individuals seeking franchises tend to be more mature and bring more business experience to the franchise endeavor. They are often in search of a mid-career change or looking for an occupation after taking early retirement. The types of franchises being sought today are also evolving. In the food sector, for example, the demand for healthier foods and organic products has led to the growth of a new style of food service franchise at the expense of the traditional fast-food franchises.

The key factors for franchise success are a proven concept, finding the right entrepreneur and the availability of financing. Startup costs in the UK vary widely, with initial investments ranging from $18,000 to over $350,000. While a small percentage of franchisees obtain funding from savings and family loans, bank loans account are the primary means of financing, with 85% of franchisees obtaining funds from banks. The total investment for financing a franchise is typically allocated as follows: franchiser (15%), franchisee (15%) and bank (70%). The current best prospects for U.S. franchisers include restaurants, particularly salad/sandwich shops, health care, printing, retail, and business services.

Market Demand

While the UK market for franchising is highly diverse, the food and retailing sectors have traditionally been the most successful. However, the market is continually developing as evidenced by the growth of health care, beauty, printing, and business service franchises. Industry experts at the British and International Franchise Exhibition in March 2009 indicated that as the UK shifts away from manufacturing, more service-oriented franchises are expected to become popular. Given the diversity of sectors within the franchising industry there are a number of factors that contribute to market success. These include experience, concept, and financing. As the franchising industry matures, it is also becoming more stable. Today, there is greater business experience among franchisees, many of whom enter the market at age 45 or show that many franchisees possess significant business experience, and enter the market in search of a mid-career change or after taking early retirement. Thus these groups tend to stay employed in the franchising sector longer, contributing to the industry’s stability.

The demand for franchises is driven by trends in consumer preferences. In the UK food sector, the demand for healthy foods and organic products has led to the growth of sandwich, salad and sushi bars, such as Subway, and Yo! Sushi. Sales in traditional fast-food franchises have been declining in the UK to a certain extent, though,, in 2009 McDonald’s announced plans to open 1,000 or more restaurants globally, 20 of which will be in the UK.

Lack of financing is perceived as the biggest barrier to growth by UK franchisors and, from the franchisors perspective, difficulty finding suitable franchisee candidates remains an issue. Franchisors’ initial investments range from $18,000 to over $350,000. The funds for these investments generally come from savings, loans from friends and family, and/or bank loans. In the UK, 85% of franchisees obtain funding from banks, including HSBC, Lloyd’s TSB, Natwest and Royal Bank of Scotland. Each of these banks has a specialized franchise department and most are willing to lend up to 70% of the total project cost. According to industry experts, franchise specialists at banks often make an initial determination regarding the attractiveness of a franchisor’s market concept and the reasonableness of profit projections.

Bank involvement is a key contributor to franchising viability and sustainability in the UK marketplace. Overall, while the recession has had an impact in some areas (a degree of failure at the franchisor level plus indications of a reduction in full time headcount across the industry), franchising has, by and large, withstood these challenges. Industry experts suggest that, if the worst of the UK recession is over, the future for the franchise sector looks solid and stable.

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Posted: 24 February 2011, last updated 25 February 2011

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