New Zealand franchises are contributing roughly $20 billion to the economy each year but there remains considerable scope for innovation, according to a new report.
Massey University's Franchising New Zealand 2012 survey found there are about 22,400 franchisee businesses operating in the country, employing 101,800 people.
Their combined turnover is estimated to be somewhere between $19.4 billion and $21 billion annually.
Since the last survey in 2010, the franchise sector has seen turnover levels increase but size and profitability fall slightly, said Massey University's Dr Susan Flint-Hartle.
"That is a reflection of the economy - the effect of a very high dollar, rising commodity prices, and the ongoing impact of the global financial crisis and the Canterbury earthquakes.
"But around $20 billion in turnover is still a significant contribution to the New Zealand economy."
The overall number of franchise brands has grown slightly in the past two year to 446, of which nearly 90 per cent are 'home-grown'.
Franchise businesses make up five per cent of the country's small and medium-sized businesses but the number of actual franchisee units has fallen marginally since 2010, the report shows.
Retail sector franchises have been particularly hit hard.
Flint-Hartle said more than half of those surveyed reported increased sales but a quarter said their overall profit margins had declined.
"It's an extremely competitive environment at the moment, and 60 per cent of franchisors said they were forced to spend more on marketing to attract dwindling levels of business.
"Although 80 per cent said their franchisees were operating profitably, that still leaves a significant number of strugglers."
There are a number of areas the sector can focus on to improve performance, such as the way franchisees are selected, she said.
"Franchisors are always complaining that their major issue is getting good people as franchisees, but they don't always appoint suitable people with at least some proven business skills and management experience.
"They choose people for their passion, or their integrity, which is understandable, but it doesn't always translate into running a business successfully."
Flint-Hartle also said franchisees are too often chosen for their ability to conform.
Instead, franchisors should be encouraging businesses to innovate in areas like online sales and social media marketing.
She also said franchise companies seemed to have done little to increase their business sustainability since the 2010 report.
"At a time when businesses are really competing for custom, I would think sustainable practices could provide a valuable competitive advantage in attracting customers."
Franchising remains an effective way to growing a business and offers a chance for supported self-employment, Flint-Hartle said.
Franchising New Zealand 2012 is the second report in a biennial series and data was collected in July and August this year.