Hot franchises

The franchising boom is ending. The $80-billion franchising sector has experienced stunning growth over the past eight years in a strong economy. But growth for many chains is slowing. Consumer confidence has slipped and franchisors are, in part, victims of their own success as their numbers have proliferated — there are more than 850 chains and 50,600 outlets, Competition for franchisees and new sites is intense. As it gets harder to find quality franchisees and sites, and chains have to work harder and smarter for sales growth, franchisors are turning to acquisitions, exporting and new products.

The industry leaders are still growing strongly, despite the sector’s challenges. More than 70% of the fast-growing franchises that took part in the BRW franchising survey said their franchisees experienced same-store growth as well as growth of the network in 2004-05. On average, their same-store growth was just under 20%. As the table on page 35 shows, average revenue growth over the past three years for the fastest-growing chain, the health and beauty retailer Essential Beauty , was 420% — a greater rate of growth than last years winner, Boost Juice Bars, which grew by 226.2% over three years to 2003-04.

Boost Juice Bars made the top 10 again this year but with a lower growth rate —172% revenue growth over three years. It is one industry leader that is approaching saturation in a highly competitive market with plateauing demand, particularly in retail. The end of the housing boom and high fuel costs dampened consumer confidence. The latest retail sales figures show consumers spent $17.2 billion in November, down 0.1% on October, and up just 3.8% from 12 months ago.

Franchisors face many challenges in 2006. The retailers are especially worried about rising occupancy costs. According to BRW’s survey retailers have paid 22% more, on average, to renew their retail leases in the past year. Almost 30% have walked away from a site since January 1, 2005, including big brands such as Brumby’s Bakeries , Lenard’s poultry shops, and Gloria Jean’s Coffees , because the rent demanded on the renewal of the lease was too high. More are prepared to follow suit, if they have to, even though it may leave their franchisees without a site.

The chief executive of Lenard’s poultry shops, Bruce Myers, says, “lt will be a tough 12 months — retail has slowed.” The franchising director of the holySheet retail franchise, Edmund George, agrees. “It is going to be a tough year and we will have to work harder to get sales.” Eleven per cent of respondents to the BRW survey said that slowing economic conditions is their businesses’ biggest challenge in 2005-06, and one-third say that they are preparing for an economic slow-down. Many (40%) say that rising petrol prices have increased their costs; 20% believe that it has affected sales and 8% said that they have lost margin as a result of the rising price of fuel.

None the less, more than three-quarters of the fast-growing franchises plan to hire more staff in 2005-06. And for most franchisors the biggest issue is finding quality franchisees; one-third reported recruiting quality franchisees as their biggest challenge for 2005-06. Low unemployment, a buoyant economy and plenty of opportunities for workers mean franchisors are in a tight market for talent. Franchisors believe that they could expand faster if there were more like-minded people wanting to join the sector. More than half the franchisors surveyed believe the problem is getting worse.

The managing director of DC Strategy , Rod Young, says that there are too many franchise systems in Australia: “Certainly what is happening with 850 franchisors in the marketplace, it is probably over-populated with franchisors. I believe that franchise systems are looking to increase market share in highly competitive markets by acquiring their competitors.” He points to Boost Juice Bars’ purchase of the Viva chain in 2003 as an example.

There are more recent illustrations. In July, Allied Brands, the owner of the Baskin-Robbins master franchise in Australia, signed a memorandum of understanding to buy Retail Brands Group, the owner of 325 franchised Wendy’s icecream outlets and the sandwich chain Quiznos , for $26 million. The Wendy’s stores will be encouraged to rebrand as Baskin-Robbins, which means that the deal would give the Baskin-Robbins brand access to prime sites in shopping centres around the country.

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