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The changing face of franchising

Wednesday, 27 April 2011 | By Michelle Hammond
Australia’s $130 billion franchising industry managed to haul itself through the GFC without serious damage, but it has emerged the other side a different looking beast and now faces several key challenges.

 

For any budding business owners pondering a franchise purchase, the opportunities in a handful of growing sectors are increasingly being offset by a lack of cash and skills.

 

According to Natalie Forte, a senior manager at business advisory firm WHK, the forecast for the industry is mixed.

 

According to Forte, strong sectors in the franchise industry continue to include those in the food industry, such as fast food and coffee.

 

Service industries, such as gyms or fitness groups, cleaning providers and pet professionals, are also exhibiting high levels of enquiries.

 

However, Forte says many challenges continue to plague both franchisees and franchisors.

 

“Franchisees continue to require access to funding and a deeper understanding of the franchise system,” she says.

 

“For a franchisor, it is finding the right franchisee and having the ability to benchmark through comparative reporting on performance or potential across their organisation.”

 

A recent survey, conducted by the Asia-Pacific Centre for Franchising Excellence, shows the total number of franchise systems operating in Australia has decreased slightly, from 1,100 in 2008 to 1,025 in 2010.

 

Jason Gehrke, director of the Franchise Advisory Centre, says: “Given the steady growth in system numbers up to 2008, the decrease in 2010 could well be attributed to the flow-on effects of the GFC.”

 

Given the uncertainty surrounding the sector, Gehrke says it is imperative for entrepreneurs to do plenty of research before deciding to become a franchisee.

 

Where is the growth?

Rod Young, founder and executive director of franchising specialist firm DC Strategy, says that certain sectors are performing better than others.

 

“We are seeing growth in service and food businesses, and year-on-year comparative sales are quite positive, with many DC Strategy clients seeing average unit sales increase by about 6% in the last quarter,” he says.

 

Simon McNamara, co-founder of franchise investment fund Inkuberra, is also a founding shareholder in healthy burger chain Grill’d and former chief executive of Boost Juice.

 

McNamara identifies the casual dining segment as the strongest area of food retail in the current economic climate.

 

“This is the segment that sits below a restaurant,” he explains. “They’re restaurants that are very quick and convenient. You’re getting restaurant-quality food and you’re getting it in a nice environment but you’re only paying 12 to 15 bucks.”

 

“That segment has been doing well because people post-GFC are more dollar-conscious and more value-driven.”

 

According to Gehrke, any business involved in asset management and enhancement, such as auto accessories and home improvements, is also benefitting from cost-conscious consumers.

 

“Consumers are beginning to reconsider buying or upgrading their cars or homes as a result of financing or affordability issues, and are deciding instead to renovate or improve what they already have,” he says.

 

Recruitment drive

 

While there are areas of growth, however, challenges remain. A recent report by PricewaterhouseCoopers reveals 97% of franchises identify franchisee recruitment as one of the biggest issues they face in 2011.

 

To combat this, franchisors are being encouraged to broaden or remarket their offerings in order to appeal to a wider talent pool.

 

Generation Y has been identified as a particularly important target market, yet the PwC report reveals 62% of franchisors have not adopted any specific initiatives to attract this demographic.

 

In a direct response to the PwC statistics, bakery franchise Bakers Delight has stepped up its recruitment drive, with an ambitious plan to acquire 100 new franchisees under its Fresh Franchisee program, aimed primarily at Gen Y.

 

Gabby Kelly, who oversees the national training and recruitment programs for Bakers Delight, says franchisors are under increasing pressure to keep their brand relevant.

 

Kelly says while her company’s current campaign is geared towards Generation Y, there are plenty of older people also looking to become a franchisee.

 

“I certainly think there’s a lot of people out there looking for security and perhaps have become a little bit jaded,” she says.

 

“They’ve worked hard and they get to a point where they think, ‘Why aren’t I doing this for me? I’m doing all the hours and putting in all the work but I’m not actually reaping the benefits at the end of the day.’”

 

Kelly says the most important part of franchising is finding a good fit for both the franchisee and the franchisor.

 

“We’re looking for people that are going to fit our organisation, and that’s really more behavioural than ‘you must have this degree’ or have worked in this particular field for 20 years,” she says.

 

“When people are assessing a business model, it’s important they find what’s going to suit them, their lifestyle and their expected return on investment.”

 

Multi-mania

Dr Stephen Bennett, a researcher at the Asia-Pacific Centre for Franchising Excellence, believes franchisors need to alter their recruitment strategies.

“Instead of only considering single unit suitability in the initial franchisee recruitment process, franchisors should consider suitability for multiple unit ownership from the outset, and target their recruitment strategies accordingly,” Bennett says.

 

“Often, senior managers from a corporate background make ideal multi-unit franchisee candidates as they have the skills required for multi-unit franchise success as well as sufficient capital to establish multiple businesses.”

 

Bennett says franchising can provide an investment vehicle for growth and expansion, regardless of whether the franchisor has industry-specific experience or not.

 

He says while franchisors are beginning to focus more on multiple unit ownership for expansion, they are still taking a reactive approach.

 

“Most franchisors are looking within their franchise systems to offer multiple units to successful franchisees, due to a lack of suitable franchisee candidates, rather than targeting potential multiple unit owners,” Bennett says.

 

The risk factor

Phil Blain, principal of franchise systems at the Business Development Company, claims that buying a franchise is still 10 times less risky than starting your own business, despite the GFC dip and recruitment woes.

“Franchising is an excellent way to get into a small business because a lot of the risk of developing a business from scratch is eliminated,” Blain says.

 

“The key is to find the right system for you and [one] that is well set up to help its franchisees be as successful as they can be,” he says.

 

Blain says when deciding on a franchise, people need to ask themselves what they enjoy doing, and whether they are prepared to follow an existing system.

 

“We find that often people who have come from a more structured work environment, such as the armed forces or policing, do really well in franchising [because] they are used to following systems,” he says.

 

Blain says people should ensure they speak to as many franchisees as possible, and look at more than one franchise system.

 

“You should have unrestricted access to every single one of them; even speak to overseas franchisees,” he says.

 

“If 70% or more of the franchisees say they are reasonably happy and contented, you have probably found a very good franchise system.”

 

Assume nothing

McNamara believes some people enter into franchises undercapitalised, wrongfully assuming that the franchisor will pay their way.

 

“I think some franchisees may expect that they’re going to get their hand held a lot. My general philosophy is that it’s your business,” he says.

 

“I think some franchisees say, ‘I’ve got this problem – what are you going to do about it?’ And I say ‘What are you going to do about it?’”

 

“We’re very happy to be a sounding board and even give some guidance but at the end of the day, you’ve got to take ownership and responsibility for your own business.”

 

Gehrke says prospective franchisees should never rush into anything, regardless of how much or how little they are looking to invest.

 

“Too many times, I see people who get a rush of blood to the head and recklessly proceed without advice into a franchise and then come to me for help to sort out their problems, which almost always result from a failure to understand what they were getting themselves into,” he says.

 

“To overcome this, here is a simple formula: spend one hour on background research for each $1,000 to be invested in the business before committing to the investment.”

 

“Yes it might take some time, but it will be time well spent considering what could be lost if the business fails. Better to have a long engagement than a messy divorce.”

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