Bakers Delight franchise taking on the world

After being established as a single bakery in Glenferrie Road, Hawthorn in 1980, the Bakers Delight franchise has grown to employ approximately 15,000 people in around 700 franchises across Australia, New Zealand and Canada. Currently Canada has 14 bakeries operating under the Cobbs banner, with the intention to increase that to more than 100 over the next two years.

As a result, founders Roger and Lesley Gillespie are two of the most successful franchisors in Australia, with the group turning over some $450 million in the 2004/2005 financial year.

According to Roy Morgan Research, Bakers Delight holds a 15.5 percent share of a $2.5 billion market in Australia and a 13.8 percent share of a $600 million market in New Zealand, with figures still on the rise.

Bakers Delight has been awarded the Franchise Council of Australia ’s Franchise of the Year award in both 2001 and 2002, with the husband and wife team of Roger and Lesley Gillespie widely viewed as franchising pioneers.

They are certainly not surprised by their success. In fact, if someone 25 years ago said they would one day be running 700-odd franchises across Australia, New Zealand and Canada, Roger Gillespie says he would have responded, “Well, why not? And why only 700?”

The Gillespies have no intention of resting on their laurels, and are actively cranking up plans for further expansion.

“We see huge opportunity, not only in Canada, but also especially in parts of New South Wales and Queensland where there are quite a number of shopping precincts we want to be in,” Lesley Gillespie says. “Currently many of the sites are tenanted, so it’s something of a waiting game.”

According to Roger Gillespie, however, the single biggest opportunity for expansion in Australia is through organic growth.

“Because we expanded so quickly we have a lot of very new franchisees operating businesses, and there is huge scope for them to develop and mature within those existing businesses. Also, because we’ve been around a long time there are a lot of people who have been around longer than they perhaps should have, and it’s time for them to seek greener pastures somewhere else. In other words, it is time for us to rejuvenate the business by putting some bright sparks into some less than bright locations.”

Aspiring Bakers Delight franchisees require a 30 percent deposit to run a bakery – not an insignificant sum given franchises can range from $400,000 up to $1 million. That said, Bakers Delight franchisees turn over an average profit in the order of $100,000 per annum. The problem for most young people, of course, is where to get the money to start out.

It is an issue the Gillespies are fully aware of, particularly given that in the physically demanding role of running a bakery, youth can be a distinct advantage.

“It is not always the case, but generally speaking the younger a franchisee the hungrier and more physically capable they are. There is cash flow and profitability on offer but there is also a lot of very hard work. It’s getting up early in the morning and being able to cope with little sleep, it’s bakers ringing up sick and not being able to come to work. It’s a demanding and intense franchise, and the younger you are generally the more able and resilient you are,” Lesley says.

As such, Bakers Delight is embarking on a major push to attract more young people into the system.

“They will be financed by us or by existing franchisees who have multiple sites and want to strengthen their investment, but who also want to use their wisdom to help a young couple bump themselves ahead of where they might otherwise be,” Roger explains. “It is the 25-to-35 year olds who haven’t the financial capability to raise $400,000, $500,000 or $600,000, so we want to either link them with us, as in the corporate entity, or with existing successful franchisees.”

Although widely lauded as pioneers in franchising, the Gillespies tend not to think of franchising as a ‘sector’.

“We see ourselves as retail bakers. We could operate as a public company, as a private company or as a profit sharing, investment sharing and risk sharing opportunity, which is franchising,” Roger says. “To call franchising an industry irks me. As I said, we’re retail bakers who have decided to share the risk and rewards by franchising.

“Franchising is a method of doing business, not an industry, even though this is probably contrary to the view of many, and certainly contrary to the view of the FCA. In Canada we are not franchised at all – it is all company-owned.”

This, however, will not always be the case.

“When we went to Canada we knew we had to have a sizeable number of stores in a sizeable number of different shopping precincts before we could advertise for people to become franchisees,” Lesley says. “It is important to first establish a core number of bakeries, and we have taken the risk of doing that. We always expected it would produce a positive outcome, but we could not take people’s money without having first proved the concept in a country thousands of kilometres from home.”

According to Roger, it is in this context that the Franchising Code of Conduct has been particularly beneficial.

“It has been a great discipline for people who previously might have had an attitude that they could just go out and sell franchises and skin people. People with the wrong intentions don’t last long. The Code has sorted them out. It has seen a huge improvement in businesses that franchise, just as the stock exchange over the years has continually reviewed and tightened corporate governance among listed companies. But listed companies are not described as an industry – there is a whole range of public companies operating in everything from manufacturing to retailing to mining. That is why I do not liken franchising to an industry – it’s simply a method of organising labour and capital, just as public companies are.”

While the Code has seen the demise of the vast majority of unscrupulous franchise operators, unfortunately the same cannot be said of unreasonable hikes in the cost of retail leases.

“Are you talking about the greed of landlords?” Lesley quips.

Roger, too, does not back away from putting the issue in such blunt terms.

“I think it should be put in those terms. Many landlords are very greedy and some are not so greedy,” he says.

“And some are downright terrific, particularly in the small strip shops,” Lesley adds. “There was a case recently at a strip site in inner suburban Melbourne where the landlord was a real gentleman. He was delighted to have a national tenant and very keen to keep us there. As it happened, that shopping centre was rapidly improving, and he could have hiked the rent like many others in that strip did by 20 to 30 percent. Instead, his attitude was that he was in it for the long-term, so he put it up in relation to CPI. Unfortunately, that is the exception. If he had increased it too much there was no question that we would have walked. We own a small number of company outlets, and that was one of them.”

Roger takes up the theme: “The disadvantage of franchised networks is that landlords know the franchisee has their house on the line. If the operation is company-owned you can simply pull out of the location and the landlord will return to their senses. There have been a number of situations where, at the end of lease, we have decided to walk. Then they come back offering the site for half of what they were asking. It has nothing to do with the value of property – everything to do with what they can screw out of individual franchisees.

“There are now some instances where franchisees are even getting to the point of walking themselves, because in paying 15 to 20 percent of turnover as rent they’re practically working for a minimum wage. They have all the risk but no upside, so it’s not worth it.”

Be this as it may, Roger Gillespie sees signs that the pendulum is about to swing the other way.

“They (landlords) have had a nice long summer, as in a great period, but it is going to turn in favour of tenants.”

As a result, he does not see retail rents continuing to be arguably one of the greatest issues to beleaguer both franchisors and franchisees.

“If we haven’t seen the worst of it we will during the rest of this year, and then it will start to taper off as the economy cools. Landlords will be chasing tenants rather than fobbing them off,” he predicts. “The economy will dictate a solution, and it will also probably be the solution to what we see as the biggest problem, which is a shortage of good people. We are desperate for more good people to run good businesses, as well as the right people to staff them. But again, as the economy slows people will be more willing to take on the challenge.”

It is certainly not the case that the available labour market is being absorbed by a host of overseas entrants into the local bakery sector.

“Basically, they don’t exist. There are no other retail franchise bakery businesses in the world of our size,” Roger points out.

“Here in Australia, Brumbys and Bakers Delight exist because I started them both. Both models have been around for a long time and that tends to stop others from entering the market.”

Despite the current acute shortage of appropriately qualified people, Roger and Lesley ironically invest more effort into deterring aspiring franchisees than selling them the concept.

“We conduct information sessions and maybe two, three or four people out of 100 will go on to the next stage, which is an interview,” Lesley says. “We try to provide as much information as possible so that people don’t think that if they spend this money they will be assured of an easy lifestyle for the rest of their lives. We paint a very honest picture and before they sign up we send them out to a list of franchisees to talk – warts and all – about their franchises. These are not the ones who are performing brilliantly, but those who might have just started and are struggling as well. We’d rather people fall in love with the business than us draw them into the business because, quite simply, if you have the wrong people as franchisees it will inevitably lead to huge problems.

“Our lawyer says that you have your franchise deed, you read it, you understand your responsibilities, you sign it and then you put it away in your bottom draw. If you have to start getting it out from that bottom draw the relationship is over. It’s there, but if you have to start using it to say you should be doing this and we should be doing that, you can stop there. We are not afraid to use it, and there have been a few times when we have got it out from the bottom draw, but it is better to make sure everyone has a clear understanding of what is involved in running the franchise before they sign.”

“And, of course, we have to be very careful to live by the Code as well, particularly with regards to the Trade Practices Act,” Roger says. “There have been many cases of misleading and deceptive conduct by franchisors but, fortunately, we have never gone to court on one. We place a lot of emphasis on the issue and our lawyers are forever talking to our staff about the way things have to work. I believe it is very important to be proactive in ensuring staff are fully conversant about where the risks are. It is not so much about risks in relation to breaching the Code, it is that the Code is there to make sure businesses run smoothly and that people aren’t ripped off. Our emphasis is on training our people to do the right thing and this just happens to be in line with the Code. Following the Code is simply good business practice and will result in the best outcome for everyone involved.”

What, then, are the key attributes of a successful Bakers Delight franchisee?

“They’ve got to be hungry. They’ve got to love working in a bakery, love dealing with bread, love customer service and be good at leading a team of people. The people have come from all walks of life – from trades to lawyers through to accountants and schoolteachers – and decided that a Bakers Delight franchise was the best option for them at their time of life,” Lesley says. Base training takes four to six months and then, as Roger puts it, “they start really learning” in their own business.

“I liken it to getting a driver’s license,” Lesley says. “It’s only after you get your license that you really start to learn how to drive a car. After all, there are just so many things that you can’t train for, such as when three people don’t turn up for work or when a truck drives into a pole and knocks out the power. It is impossible to have a manual for everything, so you must learn by experience – just as you do when driving.”

Particularly with regards to the off-shore expansion of Bakers Delight, the Gillespies themselves have also learned by experience.

“The first thing we learned is that it costs a helluva lot of money, and more than what most people think,” Roger says. “It also takes you longer to make a profit than what you think. When we opened in New Zealand eight or nine years ago we didn’t take enough experienced people there to really set the foundations. With Canada we took 12 people and relative to the time period, that market is performing much better.”

Just as Bakers Delight recognises the importance of good corporate governance in business, it has also been proactive in positioning itself as a good corporate citizen.

Indeed, it recently topped a list compiled by Woolcott Research of leading corporate citizens, out-performing a number of large reputable companies in a range of industries including aviation, telecommunications and major financial institutions.

The study measured the response of over 1000 Australians on where they viewed the position of a cross-section of organisations in terms of corporate citizenship. Key attributes in the measurement encompassed the extent to which an organisation demonstrates not only corporate social responsibility, but also economic and ethical issues at both an organisational and community level.

According to Woolcott Research, one of the most important attributes in measuring an organisation’s corporate citizenship is its contribution to the community, with results indicating that 76 percent of Australians prefer to purchase goods and services from an organisation with good corporate citizenship. Further, 87 percent of investors also prefer to invest in a company that is a good corporate citizen, and 83 percent of workers would prefer to work for an organisation with such an ethic.

The Corporate Citizenship Study highlighted Bakers Delight’s recognition by the public of its significant involvement with the community on both a local and national level. Included in this involvement is the franchise’s partnership with Breast Cancer Network Australia (BCNA) over the past five years. Bakers Delight and its bakery network continue to play a major support role to BCNA, housing its national office, hosting its website, conducting fundraising activities and providing project support. The partnership has raised $740,000 in just five years.

Additionally, through its bakery network Bakers Delight donates over $25 million in bread each year to various community organisations, including the Salvation Army, while encouraging its franchisees to actively support charities and community-based organisations in their local areas.

Woolcott Research notes that the trend worldwide among customers, investors and employees is to demand a high level of corporate citizenship from organisations. In some countries governments are considering legislating that companies provide citizenship reports in the same manner in which annual reports are provided.

Despite this, Roger Gillespie comments: “I really don’t think the role of good citizenship is recognised in corporate Australia. It is, however, certainly recognised in ‘mum and dad land’ – where it is something far more valuable than corporate Australia thinks it is.”

Bakers Delight cannot quantify in bottom-line terms what its philanthropy returns to the company, but in terms of community goodwill there is absolutely no question it is a sound and very worthwhile investment. Regardless, he and Lesley have a very pragmatic view on the issue.

“If they found a cure for cancer tomorrow and BCNA no longer needed to be, so to speak, I don’t think we’d rush out to find another charity. If something came up we might get involved or we might not. Cause-related marketing is, of course, worthwhile, but if you go out actively looking for a cause to make you a good corporate citizen, somehow I think something is amiss and it would be hard to make it work,” Roger says.

So, having in 25 years progressed from a single outlet in inner-Melbourne to a multi-national bakery retailer, where to for the next 25?

One thing is certain – there will be no investor ownership of the bakery franchise operations.

“We are happy to have multi-site ownership with the right people and already have around 100 people with more than one store, probably 50 with more than two, 20 with more than three, a couple with five, one with six and one with seven,” Roger says. “But when it comes to investor ownership, what would be the point? The secret of franchising is that you have owner-operators on site every day. If we were going to have investors, we might as well be the investor.

“Instead, in our established markets of Australia and New Zealand we will continue to get better at what we do and explore and develop other markets around the world. We have had to make a decision – and it is not cast in stone – as to whether we stay as one brand and go global or stay in Australia and go multi-brand. At the moment we are concentrating on international development, but if we don’t get enough traction with that to justify the expense and the headache we are more likely to go multi-brand here.

“How far we go will depend on who else gets involved and how far they push it – in the end, it is all about people.”