What happens when overseas brands land on Australian shores? Domini Stuart looks at the reality of international trading from a franchisee’s perspective.
International franchising is on the increase, with a growing number of brands moving successfully between countries. Greater flexibility in global trade supports this level of expansion, while the internet makes it easier today than it was even five years ago to find out about businesses overseas.
Australia is a popular destination for many overseas franchisors, particularly those from the US; McDonald’s, Hungry Jack’s, Blockbuster, Pizza Hut…some of our most familiar brand names originated there. But success overseas is no guarantee of success here. According to research carried out by DC Strategy, nine out of every 10 master franchisors coming to Australia will fail.
DC Strategy Partner Adrian McFedries believes that many of these failures are the result of what he calls transactional franchising, where franchisors are focused on selling the deal rather than growing the business.
“That includes opportunistic buying of international rights from this end, and also massively unprepared groups coming to this country and selling a master franchise agreement with little regard for the Australian economy, macro and micro economics and market forces,” he says.
“Unfortunately, this is the predominant way in which franchisors go about selling their master franchise. For instance, we do a large number of projects with US groups each year assessing whether Australia is a viable destination for them. Last year we had two with a model based on tipping as remuneration, so there were no labour costs involved. As soon as you factored in wages, they weren’t profitable.”
McFedries has a strong belief that anyone buying a master franchise from overseas should establish the first business themselves as a company-run enterprise.
“You need to get the bugs out of the system – to be sure it’s profitable before you start selling franchises,” he says. “Even big groups don’t always get it right first time. It took a couple of goes for Subway to find its feet, and McDonalds had a 10 year journey to success in Australia. Even then it couldn’t have been successful without the company owned operations.
“It really doesn’t matter if it’s the largest business in the US if all of that resource and experience can’t be turned into something tangible. Sure, on paper it gives an Australian business a much better chance of succeeding, but someone still has to pick the location, stock the shelves and open the doors. Unfortunately, it’s a reflection of human nature that most franchisors are opportunistic. They buy an overseas master franchise for a couple of hundred thousand dollars and start selling franchises right away because they want to get their money back.”
Every market is different – even those that, on the surface, look very similar. Even subtle differences in culture or societal norms can have a major impact on their success here, particularly in a sector as sensitive to taste and trend as food. And there’s nothing subtle about discrepancies in the size of different markets – for example, 3,000 million American consumers compared with just 20 million of our own.
“Business here typically needs to be a lot more focused to make the same dollars,” says McFedries. “Sheer numbers mean that, if you had an Australian and an American business that were equally successful but knew equally little about each other’s markets, it would be easier for the Australian business to become successful in the US than the other way round.”
Nevertheless, the idea of being part of a global group can be very seductive, particularly if there’s a chance to travel overseas for training. And it is very tempting to presume that a business proven overseas has a greater chance of success over here.
“People can hide behind the attraction of being an overseas business and talk till the cows come home about having a thousand sites in the US and access to all this wonderful information,” says McFedries. “But unless it is a) useful and b) actually happens, it would be better to go with a well-developed local business who, generally speaking, will know more about their game. At the same time, if the initial hurdles have been overcome and if the concept is relevant to Australia, there’s absolutely no reason not to consider a franchise that originated overseas.”
Researching the destination As national director of the United Franchise Group, Mike Gallagher is responsible for two of Australia’s most successful imported brands. The
Signarama signs and graphics franchise has 85 stores in Australia and over 850 worldwide.
EmbroidMe, a full-service
embroidery and screen printing franchise service, has 18 locations across Australia and over 275 worldwide. His latest brand, Billboard Connection, has just been launched. Gallagher believes that the greatest potential roadblock for incoming franchises is scrimping on research.
“Before we brought any of our brands into Australia we did a lot of research on franchising and retail franchises,” he says. “We partnered with the top suppliers, and we partnered with top law firms as far as putting together a franchise agreement specific to Australia was concerned. We brought out some of our experts from the US who stayed here for six or 12 months as we cultivated our Australian staff, so there was extra support for the newest franchisees as they came into the system. We also invested in a full time staff for supporting our franchised network.”
The company now has 13 full time Australian employees located throughout the country providing support in everything from marketing and technology to business franchise development. “That’s a pretty large investment. A lot of companies would rather just work on the assumption that if it’s successful in Canada or the US then it’s bound to be successful in Australia. That’s not always the case.”
Gallagher does see some significant parallels. “We have a particular focus on business services,” says Gallagher. “At the end of the day, business customers seek professionalism, service, turnaround time and quality, whether that’s in the US, Australia or any of the 50 other markets where we have a presence.”
Nevertheless, of the compulsory five-week training program for franchisees, just two weeks are spent at United Franchise Group’s training facility in West Palm Beach, Florida. The rest takes place here in Australia in recognition of the variations between the two markets. Unlike most incoming franchisors, United Franchise Group did not sell a master license.
“We remain fully accountable for the Australian market,” says Gallagher. “I report directly to the president of our company, and this is a key difference.
“When you sell your business to a master licensor, who will then represent the country or represent the region, you really are putting your faith in that person’s hands. If they fall short on the resources or if they lose the commitment that really jeopardises individual franchisees. There have been some franchise networks where that master license has changed hands or the franchise system has been taken back by the franchisor, and that can mean a bit of uncertainty for the franchisee.”
Gallagher urges anyone considering a franchise to do their homework. “Don’t just speak with the franchisor,” he says. “Talk to the franchisees to get first hand accounts of what their experience has been and what support systems are in place. Are they local or do you have to call someone overseas? Do they have staff based in Australia and, if so, where are they in relation to you? Those are some of the things I think are important for anyone looking to buy a franchise.”
The world…via Australia
In 1995, Nabi Saleh and Peter Irvine decided to bring the Gloria Jean’s Coffees brand from America to Australia. They bought the right to franchise, and opened two stores in Sydney to test the concept in the local market. A year later, they sold their first franchise. Then, in 2004 and with 233 franchised stores, they purchased all of Gloria Jean's Coffees international operations except the United States and Puerto Rico from its US-based parent.
In 2006-07, the company’s export sales grew by 638 per cent compared with the previous year, bringing the total to 773 stores in 26 international markets. “Over the last year our international store numbers grew by a phenomenal 82 per cent, and we show no signs of slowing this down as we sign on more master franchise partners across the world,” says Ian Martin, group chief executive.
Meanwhile, back in Australia, the number of local franchises rose to 400 when the latest opened in Alice Springs. “We recognise the exceptional opportunity we have to grow our brand in regional Australia and bring quality coffee to the regions,” Martin continues. “We plan to open 75 new coffee houses in Australia this financial year, with a further 75 planned for next year. This equals approximately 20 per cent year-on-year growth, with a similar rate of expansion planned for the next three years.”
“If an Australian franchise is moving overseas there’s a good chance it will be a good thing for Australian franchisees as long as it’s being done properly,” says McFedries. “The only danger is that an opportunistic franchisor who sells overseas and then feels a sense of obligation to the overseas business could end up diverting resources away from the home base. But the attitude to overseas expansion generally reflects the all-round attitude to business.
“Again, you need to be very well prepared, developing the proper foundation, developing an international strategy and international business model, securing IP, looking at what needs to change in the business, bolstering management, bolstering training – a process that’s likely to take at least six to nine months.”
Once again, some people will be focused more on the transaction than the long-term health of the business. Typically, an Australian franchisor will get a call or inquiry from people in the Middle East or Indonesia who then fly in for a visit, like what they see and want to buy. Many franchisors find this level of international interest irresistible. They sell a master franchising agreement…but McFedries suggests they might be wasting their time. “All you do is get a couple of hundred thousand dollars upfront,” he says. “From there, whether the business is a success overseas is 90 per cent down to the person you sold it to, 10 per cent to the success of the Australian business.
“People who react like this are generally under capitalised, under-prepared and know nothing about the market they’re going into, which is quite extraordinary. And there are groups at the moment taking great pride in the fact that they’re selling multiple masters all the time. In reality, few get past three or four and really press on. Most just sell one or two.”
For the would-be franchisee, there’s a lot to think about – and experts and legitimate franchisors all agree there’s no alternative to thorough research.
Whether a franchise is local or from overseas, if you can’t see a proven concept, proven systems, effective training, workable systems and meaningful support, it’s probably time to look elsewhere.
This article appears courtesy of Franchising Magazine.
9-May-2008