In the midst of the GFC, franchising is one sector still very much growing. We look at how it’s coping and the challenges ahead for both franchisees and franchisers.
Franchising is one of the most robust forces in the Australian economy. Representing more than $130 billion in revenue and employing over 700,000 people, the Australian franchise sector has outperformed the economy to date. Recent reports indicate that despite the GFC the sector has recorded positive growth over the last two financial years and expects continued growth for the current financial year.
Franchising as a business system
Franchising presents a highly successful format to develop and grow a business despite the current economic situation. Franchising can assist a franchiser to build value in their business by:
- Assisting businesses to realise a greater level of operational performance;
- Producing a higher quality customer experience in the business as the (franchisee) owner has a higher level of day-to-day involvement with customers and incentive to prioritise customer service;
- Making it easier to recruit representatives that are more motivated and focused than employees (franchisees are motivated as an increase in sales, efficiency or increased value in the brand directly impacts their bottom line);
- Allowing quick market penetration due to better access to a wider geographic area and increased resources;
- Shifting the capital demands of a business to the franchisees.
Challenges facing the sector
Steve Wright, executive director of the Franchise Council of Australia, commented earlier in the year that: “franchise systems typically respond more quickly and effectively to changed market conditions, as the dual dynamic of having franchiser and franchisees close to the market and focused on meeting changed consumer expectations produces a synergistic response.” Despite this positive outlook, the franchise sector now faces a number of challenges as a consequence of the GFC. According to the PriceWaterhouseCoopers Franchise Sector Indicator, the most notable potential impediments to franchised business growth are:
- The difficulty of obtaining finance for incoming franchisees; and
- The scarcity of suitable candidates to be franchisees.
With more than 1,100 business format franchise systems currently operating in Australia, there are more franchise systems aggressively seeking new franchisees than ever before. Competition to recruit the best applicants as franchisees during the downturn has forced successful franchisers to refine their focus to ensure that what they offer to franchisees is financially rewarding and is based on a business that is attractive to the ultimate consumer.
In a climate of economic instability, potential franchisees are typically more interested in established franchise brands rather than brands that are new to the market. They see established brands as more likely to be financially stable and successful. Despite this, franchisers with established brands have not reported any significant increase in the quantity or quality of inquiries from prospective franchisees. This is because in comparison with previous periods of economic downturn, the current recession has not resulted in the same number of capable workers being made redundant, armed with redundancy payouts, ready and eager to invest in franchise systems.
Coping with the financial crisis
The franchising sector has not escaped the reach of the GFC though. A number of high profile franchise systems have collapsed in the last 12 months including Kleins, Kleenmaid, Samsara and Beach House. Commentators have been quick to highlight both the shortcomings of the individual franchisers and the risks involved in business format franchises.
It has been reported that it is the action of the Australian franchisers that have enabled the majority of the sector to both survive and thrive in these difficult times. Instead of reducing marketing budgets, cutting staff numbers, delaying critical capital expenditure or passing on costs to franchisees, franchisers appear to have taken a hands-on approach to help their franchisees. In stark contrast to the typical cost-cutting attitude of the less stable non-franchise small business models in Australia, franchisors are helping their franchisees navigate the economic downturn by:
- Assisting franchisees to increase consumer demand;
- Closely monitoring franchisees for signs of financial distress;
- Increasing marketing expenditure where possible;
- Negotiating better deals from suppliers (including landlords); and
- Focusing on improving franchisee recruitment.
Norm Hunt, co-founder of the Cold Rock Ice Creamery franchise, which had revenue of $27.54 million for the 07/08 financial year, believes the formula for franchising success is based on a franchiser’s relationship with its franchisees and commitment to keeping everyone happy. This sentiment is echoed by Simon Crowe, whose Grill’d burger franchise entered the BRW Fast Franchise List 2009 at number six, demonstrating an impressive 87.55 percent growth spurt over the past three years. Crowe is reported to have revealed that the secret to franchising success revolves around the people, the brand and the product. Crowe says that his achievement stems from his careful approach to franchisee selection and his subsequent provision of franchisee support through good branding and services.
While franchisers are not recession-proof, franchised businesses are universally considered less risky than start-up businesses. This is because in a franchised business the franchisee has access to a well established brand, training, ongoing support and a tried and tested method of operating the business.
The franchising sector continues to evolve and improve. Recommendations borne out of the recent state and federal inquiries into the sector calling for the Government and other industry participants to develop and fund a comprehensive pre-franchise education program, provide evidence of the sector’s effort to minimise its risks. These inquiries have brought greater attention to the franchising sector and will ultimately result in better protection for franchisees.
Plans for expansion
Franchisers expect their profits to increase by up to 24 percent over the next three years, and that they will need to employ more staff to keep up with expected demand. Current surveys suggest that franchisers will focus on domestic growth and development through franchisee recruitment, multiple unit franchising and expanding their product and service range, rather than international opportunities and acquisitions which typically gain momentum in times of economic boom.
Previously, strong performing franchise systems regularly tried to buy similar networks as a means of expansion. BRW reported that while 69 percent of franchisers have been approached by potential buyers, only six percent of the franchisers approached planned to sell in the next 24 months (the majority basing their decision on the global financial crisis). The preferred approach is to outlast the economic downturn and maximise the projected growth in the foreseeable future.
There have been some voluntary sales and acquisitions in the franchise sector. Franchisors hoping to acquire other franchise systems at a bargain price, as a result of the economic slowdown, will need to reconsider the price they are prepared to pay to attract interest from mature, successful systems or shift their focus to newer, smaller systems.
Looking to the future
Despite the global financial crisis, the outlook for Australia’s franchising sector remains upbeat as it continues to make a vital contribution to the national economy. The franchising sector is confident that the Government position is relatively supportive. Short of any unforseen significant change to the current regulatory environment, franchising is set to carry on this upward course.
–Chris Nikou is the National Franchising Partner at leading Australian law firm, Middletons (www.middletons.com), with offices in Melbourne, Sydney and Perth.
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