DC Strategy and Australia’s top franchises

The Australian franchise boom seems unstoppable. More than 150 new franchise chains have emerged in the past two years and the number of new franchisees joining the sector has soared. The industry’s turnover is $80 billion a year — and rising. But franchising risks becoming a victim of its success. Rapid growth in retail franchises is pushing up shopping centre rents, and demand for new franchisees is unprecedented. Smart franchises are responding to the new challenges by expanding internationally, encouraging the rise of the super franchisees owning multiple stores, and many are considering listing on the stock exchange. Australia’s franchising sector is being transformed.

The number of franchise chains has jumped from 700 to 850 in the past two years, according to research by Lorelle Frazer at Griffith University. Existing franchises have expanded: the average chain grew from 20 to 26 franchisees, and the number of franchisees increased by 14% to 50,600.

Franchising is cementing its reputation as the sales distribution method of choice, and not only for fast-growing retailers and home service providers. The banks franchise operations are also growing. ANZ Banking Group , for example, is rapidly expanding its mortgage-broking business by franchising mobile brokers. By November 2004, it had 72 franchisees signed on and the 43 franchised brokers already on the road had written $160 million in loans.

The trends sweeping the franchise sector are highlighted in BRW’s annual survey of the franchising sector. As part of the survey, more than 70 of Australia’s largest franchises provided information about their goals, strategies and big issues. BRW has ranked the fastest-growing franchises according to their average growth over the past tree years, in revenue and store numbers.

The foundations of success

Most of the fast-growing franchises were established in the 1990s and more than half are still being managed by their founder. Many say they were created to fill a niche (41%) and one-third of the founders started with less than $200,000. Half the franchises are in retail trade, 16% in the accommodation, cafe and restaurant sector, and 12% are in property and business services.

Many of the fast-growing franchises were born to franchise; 42% of respondents to BRW’s survey were operating for less than three years before they began franchising, and 80% began franchising before their business’s tenth birthday. New South Wales (41%) and Victoria (31%) are home to the majority of franchises.

Most franchises (90%) are private companies but there are some notable exceptions.

The mortgage broker Mortgage Choice listed on the Australian Stock Exchange in 2004. The barter franchise BBX has announced plans to list on February 4. The childcare provider ABC Learning Centres is a listed company, as is the retail seafood franchise Sam’s Seafood.

Most respondents to BRW’s survey have franchised almost all their outlets: 65% have more than 80% of their outlets franchised, and 12% have 81—90% of stores franchised. Despite the risk of diminished control, the fast-growing franchises are not afraid of keeping the franchise proportion high; 76% say the proportion of franchises to company-owned stores has increased, not decreased, in the past two years.

The 10 fastest growers

The fastest-growing franchise in Australia is the juice and smoothie bar chain Boost Juice . Boost Juice, founded by the entrepreneur Janine Allis in 2001, has ridden a colossal wave of juice and smoothie popularity to become a network of 150 bars turning over nearly $100 million a year. Allis’s company, the franchisor, earned $6.8 million in 2003-04, and grew an average of 226.2% each year over the past three years. Allis got in on a trend early and was able to establish a national brand while competitors were still struggling. She is expanding internationally, with a master franchise in Singapore for sale and plans to open a store in Dubai early in 2005.

Cartridge World , the second-fastest-growing franchise, is less well-known than Boost Juice but no less noteworthy a phenomenon. It is a 746 store chain of computer printer cartridge stores founded by Bryan Stokes in Adelaide in 1988. After Stokes was injured by a circular saw, he began franchising so that others could do the manual work. Stokes and his partner. Paul Wheeler, have expanded their network of outlets quickly by master-franchising into 20 countries. Revenue in 2003-04 reached $123.7 million and the partners plan to double that in 2004-05.

The third-fastest-growing franchise is also relatively little-known. The kitchen refurbishment business Granite Transformations was founded by Colin Mackenzie and his business partner Bob Smith in 1996. There are now 108 franchisees installing Granite Transformations kitchens around the world. Worldwide turnover has grown, on average, by 123.5% a year over the past three years and reached $163 million in 2003-04.

The fourth-fastest-growing franchise is the blue-collar labour-hire firm Workforce Extensions. It has grown by an average of 105.2% a year for the past three years and had revenue of $17.1 million in 2003-04.

Fifth is a non-food retailer, Sleepys The Mattress Specialists. Founded by experienced entrepreneurs Malcolm Long and Nick Tsalilds in 2001, it has had average growth of 99.2% a year for the past three years and revenue of $15 million in 2003-04.

ABC Learning Centres, the private network of child-care centres founded by Eddie Groves, is the sixth-fastest-growing franchise, with average annual revenue growth of 88.4% and revenue in 2003-04 of $80.4 million. Groves set up a regional management company structure in 1997 that split ABCs network of day-care centres into separate franchised companies, each owning between one and four centres.

The seventh-fastest-growing franchise, Essential Beauty , is a fledgling chain of beauty salons. The business was started in Adelaide in 1990 by Melissa Gav and began franchising in 2000. She has 17 franchisees and salons in Perth, Adelaide and Melbourne and turned over $1.2 million in 2003-04.

Gav and others in her industry could be the next big thing in franchising. Some franchising industry observers believe the wellness, health and beauty sector is ripe for franchising. The skin-care products manufacturer Ella Bache is converting its distributors to franchises, and another newcomer to franchising, Endota spas, has also experienced fast growth.

Eighth on the list is one of the biggest success stories in franchising: Gloria Jean’s Coffees , It was first on BRW’s fast franchise list in 2004 and has recorded average annual growth over the past three years of 78.9%. Revenue in 2003-04 reached $107.7 million. Gloria Jean’s Coffees is an American franchise that was brought to Australia by a former advertising executive, Peter Irvine, and his church friend and coffee expert Nabi Saleh in 1996. Last year, BRW reported that Irvine and Saleh had been so successful in Australia that the US chain was adopting their strategies.

Now the tables have turned. In December 2004, Irvine and Saleh announced they have bought the rights to Gloria Jeans brand worldwide for $16 million from their master franchisor, a NASDAQ-listed company, Diedrich. The deal, financed by National Australia Bank , will mean the US operation reports to Irvine and Saleh, who will have complete control over the Australian operations and the ability to expand internationally. Irvine says: “We now control our destiny.” He says the biggest shareholders of Diedrich, three venture capitalists, were likely to sell eventually and a new unfriendly owner could have created a problem. “The acquisition protects our franchisees and we will be able to do good supply chain deals for them.”

Irvine and Saleh’s company Jireh, will supply the Gloria Jean’s shops overseas (excluding the US) with coffee made at its factory in the Sydney suburb of Castle Hill. Irvine says new equipment recently installed at the factory has capacity to meet their growth needs for five years. Within five years, Irvine intends to expand the network of stores from 233 to 660 in Australia and 1500 worldwide. The existing network outside Australia consists of 83 stores in 11 countries, including Japan, Mexico and New Zealand. New markets will include England, China, Hong Kong and South Africa.

Bright Eyes Franchising , number nine on BRW’s list of the fastest-growing franchises, was an ailing franchise chain of 82 sunglasses stores in 2000 when Geoff Harbert and two business partners bought it for $2 million. New products and better supply deals have revitalised the chain.

Access more information about Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.