SPRING IN THE ECONOMY

The change of season signals hope ahead, so why is now a good time to buy a franchise?

The shock Official Cash Rate interest rate drop announced in mid-August signaled a change of season for the economy. The Reserve Bank’s reduction of the OCR by 25 basis points to 5.25% blindsided most economists and banks. Yet, it was as welcomed as the early, fresh shoots of spring.

However, with the country awakening from winter hibernation, making a mindset shift from an attitude of ‘austerity’ may prove to be the most likely stumbling block to impact franchises as we make our way to brighter days – literally and metaphorically.

“Consumer confidence is the main issue at play here,” says Philip Morrison, director of Franchise Accountants. “With New Zealand currently in ‘austerity’ mode, there is pressure on household budgets and less money in the economy due to low consumer spend.”

Historically speaking

Franchising has traditionally performed reasonably well during recessions. Testing times for an economy can offer good franchisors a chance to expand; new locations can become available, old competitors can suffer, and there can be a larger market of potential franchisees and staff, as people are moved out of changing industries. The wholesale redundancies across the public sector and in the national media earlier this year are prime examples.

The cause of the so-called ‘cost of living crisis’ that has been affecting Kiwis, and many nations, has been driven by a combination of rising inflation, labour market pressures, and global supply chain disruptions. The cost of everyday essential goods and services has forced people to spend more to keep up their usual standard of living.

Impacts on business

“For SMEs, the cost of living crisis means tighter profit margins, increased operational costs, and a more challenging business environment. Consumers are more cautious with their spending, which can lead to reduced sales,” according to MYOB.

In its Navigating the cost of living crisis: A guide for SMEs published this winter, it reports, “There is increased competition for skilled labour, leading to higher wages and additional costs for businesses looking to attract and retain talent. “Additionally, businesses face higher expenses for everything from raw materials to wages, making it crucial to find ways to operate more efficiently and maintain profitability.”

Moving beyond the cost of living mindset, how will a drop in OCR and momentum shift towards a greater spring in our economy affect Kiwi franchises? Philip Morrison says the benefits are four-fold:

• The current sales contraction will ease

• Greater supply of labour in the market will help businesses to scale again

• Credit pressures will ease, making the cost of obtaining finance lower

• Increased confidence to invest / re-invest in buying franchises, equipment and stock

“Franchising will become more attractive, due to higher confidence to invest in a franchise,” says Philip. “Franchisees will have access to more support to work for themselves, but not by themselves.

“More economic power leverage will mean greater group buying power, as well as more group marketing clout. This leads to stronger brand power and increased consumer trust in a known brand. And more accessible finance means more money in the economy.”

Timing is everything

So, when will the recent OCR rate drop truly start to positively impact the economy? Some could argue that is already starting to happen, with banks beginning to instigate a creep down of home loan interest rates on the back of the Reserve Bank’s August 14 announcement.

Addressing the time lag issue, Philip Morrison says a positive impact will be felt, “When fixed interest rates come off and lower rates can be achieved. But we need to see continued OCR cuts to stimulate the economy.

“Governors of The Reserve Bank will be restrained, however, so inflationary pressures don’t reoccur. It’s a step in the right direction, yes, with more steps to take.”

Westpac economists tip the OCR to drop to 5% by the end of this year. In his presentation of the Westpac New Zealand Economic Review August 2024 in Auckland, the bank’s chief economist Kelly Eckhold was cautiously optimistic. Among reasons cited for this were New Zealand’s ‘strong population growth in the past year’ and ‘inflation increasingly under control across the world’.

Growth in 2025 isn’t expected to be stellar, says Westpac, while the global growth environment remains subdued and fiscal policy increasingly restrictive. But lower rates here and abroad will support better times ahead, it says.

“Inflation still has a way to fall to 2% - hence we don’t see the RBNZ cutting either fast or deep. But by early 2026 rates should be close to neutral levels. The pace at which we get there will depend on how rapidly inflation approaches the target midpoint over coming quarters. Almost there.... finally.”

Eckhold concluded, for his audience in Auckland, “Getting towards the second half of next year, is where we should see a meaningful bounce back in the New Zealand economy.”

With economic momentum moving in the right direction, now could be an opportune time to make a move into franchising.

Find out what’s available throughout New Zealand in our exclusive directory of franchise opportunities, in this magazine and on our website.

Read our summary of the latest quarterly Westpac New Zealand Economic Overview August 2024 online at www.franchise.co.nz