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Retail has dominated the franchise industry in recent years, but Rebecca Spicer finds service industries are getting in on the action as the franchise sector becomes increasingly more diversified.

Australia’s $128 billion franchise industry accounts for 14 percent of G.D.P. and is growing, according to Richard Evans, CEO of the Franchise Council of Australia. “Australians generally want to be their own boss and they see franchising as an opportunity to go there, but with minimal risk,” he says. “Because of that, the state of franchising is quite good. It’s growing at around 14 percent in terms of franchisees entering the market and 10 percent in terms of franchisors entering the market.”

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While Adrian McFedries, managing director of specialist consulting group, DC Strategy, agrees, saying the industry is growing and maturing, he says it needs some rationalisation. “There’s still a number of businesses that are adopting franchising for all the right reasons, but I think at the same time Australia has a situation now where there are too many small systems—meaning less than 10 operations—where they’re actually going into franchising for the wrong reasons and they might be better placed to stay as a company-owned operation.

"There are a number of businesses within franchise systems that are actually stagnating in terms of their offer to the market, and lack the ability to reinvent themselves or to grow beyond a medium-sized business. Obviously you’ve got to reinvest in brands and keep redeveloping networks over time, and some don’t.”

McFedries says this often happens when franchisors become ‘pure franchisors’ who no longer have any company-owned operations. “As a result they’ve only got franchisees. And they start, over a period of time, to lose empathy for the customer because they’re one step back in the supply chain. Even if you’ve got six stores, you’re still making decisions on a daily basis about merchandising and customer feedback and rostering and those sorts of things, and with that comes some valuable information.”

Currently, he says, there are maturing franchise systems in Australia that have almost reached the end of their Australian expansion (such as Boost Juice), and as a result will either think about buying more businesses or running multiple chains, or will start to focus on international markets.

“There’s only 20 million people in Australia so there is a saturation point for any particular brand,” says Evans. “So if they want to increase their potential they have to look offshore.

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"We have lawnmowers in Canada, we have dog-washers in England, we have biscuit-makers in India and cake-makers in China. So, Australian franchising is well respected internationally, and if the brand can be replicated in another country given their culture and so on, it’ll be quite successful.”

Like any business sector, franchising is subject to trends and Evans believes consumers are in the driver’s seat when it comes to franchising. “If they want to get healthy, there will be a need in the market for healthy products such as food and gymnasiums,” he says. “I think you’ll find baby boomers are still driving the market, which is why you’ll see a trend towards aged-care and those sorts of things.

“Women are driving the market in terms of franchising, which is why we’ve seen a growth in women-specific products or brands such as Fernwood or Ella Bache, or even massage or beauty centres—they’re growing and becoming more of a franchise opportunity.”
And while Evans says the popular brands are always going to be there because we see them regularly in shopping centres, there’s been a shift away from retail towards service-based franchising. “Retail has always been a popular choice but retail is seven days a week, 12 hours a day, and a lot of people are shying away from that.” In particular he has seen major growth in domestic services in the last 10 years. “

A hundred years ago, domestic service was the biggest employer in Australia. What we’re finding now is people are a bit time-poor and they don’t want to do their chores around the house, so they have people come in to wash and walk their dog, wash their car, empty their gutters, clean their pool, mow their lawn. So domestic service is the one that’s growing, and the reason why people go to a franchise rather than an individual is because you get consistency of service.

“But what we’ve also seen is the growth in business-to-business franchise systems. With the deregulation of the workforce, you’ll see growing franchise systems in that area. Bookkeeping, for example, since the introduction of GST, has been a growth area because small businesses don’t want to do the books because of BAS and such things. Coaching is another franchise sector that’s growing, as is expense analysis within businesses.”

Bill Lockett, consultant with Franchise Systems Group agrees, as more inquiries come from franchisors in service industries rather than in retail. He also believes the franchises that are successful aren’t always the ones with 100 or 300 franchisees. “There are a lot of franchises out there that are never going to get to that size because the owners are quite content to say, ‘I’m happy to get up to 25 or 30 because that suits me and the way I want to do the business’. And it gives the franchisees an opportunity to make some money because, believe it or not, not every franchisor goes into the franchising business just to make money. For example, we’re dealing with an aged-care business at the moment called Just Better Care, and they’re not aiming to have hundreds of franchisees. They just want a few quality franchisees to cover relevant areas so they can organise care for elderly and disabled people in their homes.”

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Overall, like Evans, Lockett believes services for the home and business are the key growth areas in franchising. “You’ll find other things connected with pets growing, and I can see business-to-business type services growing, such as commercial cleaning. While we’ve got the famous names there already, it’s a very fragmented industry and I think there will be a lot of rationalisation.

“Things like training and development services for business, and outdoor activities, are going to grow. Things to do with well-being and health are definitely a sector that’s growing. So you’ll find all sorts of services are going to be made more available on a franchise system than in the past.”

When asked about this year’s movers and shakers, McFedries wasn’t keen to single out new, emerging franchises, saying that to do so is a little short-sighted. “It almost goes against what franchising is,” he says. “If you look at those franchises that have been successful, it’s really a medium-term play for them. You don’t tend to become successful overnight by doing just one or two franchisees. To get to say 50 or 60 vehicles, most of the time that will happen over a period of three to seven years, and that’s the important thing to work out: out of all the pack, who is continuing with sustained growth, as opposed to whether there is one particular stand-out.”

Consequently, he believes groups like Gloria Jeans with a large focus on international interests, are progressing well. “We’ve got groups like Howards Storage World who have had some good growth and have also gone international,” he adds. &
ldquo;And groups like Hairhouse Warehouse that are above 60 stores now, they were Franchisee Of The Year last year, so they’ve progressed very well.”
In terms of growth trajectory and where they want to get to, he adds, a group like Healthy Habits wants to be the number one sandwich bar operation in the country. “There’s a lot more growth opportunity for them and they’ll continue very successfully this year.

“There’s also been some very good success for groups like ANZ within financial services. They were the first of the major banks to adopt a franchise model, and a lot of people have watched that over the last 18 months. So I think financial services have done well in a year that arguably could have been a little slower with interest rates and so forth—they’ve really proved the strength of their model. I know groups such as Bank of Queensland and the Bendigo Bank have also continued their growth with their community model and branch franchise model.

“What will continue to be demonstrated is the diversity of where franchising may be adopted, and the industries that it actually falls into,” McFedries adds. “And what we are seeing is what I describe as ‘corporates’ and the ‘white collar’ franchise.”
An example of this diversity is Life Resolutions, a psychology group that has recently signed their first franchisee. “Now, if you talked about franchising with psychology 10 years ago you would have been beaten up. That’s a highly fragmented industry across Australia and they’ve done the hard part of already growing to six practices in Melbourne, and have taken the last nine months to develop a business system that’s going to work and meet the ethical requirements of the profession and provide the basis for them to grow a national network.”

By all accounts, the growth and success of franchising will continue for some time yet, albeit a little differently. “The reason that franchising works is because it encourages commitment. It’s the difference between having a store manager who’s paid and looking for a job, and someone who owns an asset and has more skin in the game,” explains McFedries. “So I think the growth will continue, diversification will continue, and I think the forms of franchising—in terms of the different types of franchise—will evolve. We’re already seeing that now.

“We’re seeing multiple unit operators, rather than single-unit operators. That means there will be a lot of franchisees becoming quite significant businesses in their own right under the banner of some of these larger groups. But I do think it’s going to be harder and harder for some of the very small systems to survive.”

Evans believes people who want to own their own business will always be attracted to franchising because of the lower risk factor. “And we’ll also see an increase in women being attracted to franchising as well. Generally, corporate life is a very difficult thing for women because they find it hard to break through that glass ceiling, and franchising is a greater opportunity for them to move in and be entrepreneurial.”
Overall he predicts the sector will continue to grow and contribute an increasing amount to the Australian economy. “I suspect you’ll see franchising grow in turnover terms to about 20 percent of GDP in the next five to 10 years.”

Winners are Grinners

A good indicator of which franchises are putting their mark on the industry is the results of the annual Price Waterhouse Coopers Excellence in Franchising Awards. Among those to receive top honours this year are:
•    Franchisor of the Year: Clark Rubber
•    Franchisee of the Year: The Lane Family, The Coffee Club (Queensland)
•    Franchise Woman of the Year: Diana Williams, Fernwood Women’s Health Clubs
•    Franchise Media Campaign of the Year: Lenards
•    Franchise Export Award of the Year: Gloria Jeans Coffees

Franchise Facts

Australia’s franchise industry continues to grow and contribute a significant amount to the Australian economy, according to the Franchising Australia 2006 report released in October.

Compiled by Griffith University and sponsored by the Franchise Council of Australia, the report outlines the current state of franchising, revealing some key facts about the industry:
• There are currently 960 business-format franchise systems in Australia. Of those, 93 percent are Australian-based.
• The growth rate of franchise systems over the last two years is 12.9 percent, and growth in the number of franchise units is at 14.6 percent.
• There’s an estimated 61,860 total franchise units in business-format franchise systems, and the total sales turnover of these units is estimated at $67 billion. By adding motor vehicle sales and fuel retail sales, the franchise sector has a total sales turnover of approximately $128 million.
• Business-format franchises employ an estimated 426,500 people.
• The majority of franchising takes place in the retail non-food industry (29 percent of franchisors), and the property and business services sector (21 percent of franchisors).
• The majority of franchising activity occurs in NSW (34 percent of total units). Victoria represents 24 percent, and Queensland 20 percent of franchising.
• Just over a quarter of Australian-based franchise systems are currently franchising internationally. Franchisors continue to target New Zealand, Singapore, Malaysia, China/Hong Kong, the UK and the US. International expansion is relatively new for most franchisors with most venturing overseas in the last five years.

For a full copy of the report visit www.franchise.org.au

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