Business Franchise Group on franchising in Australia

Unanimously regarded as one of Australia’s premier franchising practitioners, Errington principal, Matthew Penfold, has this month re-branded his leading edge Kwik Kopy , Signwave and Express Personnel Services operations under the BFG – Business Franchise Group – banner. In this far-reaching interview with Mark Phillips, the one-time rock ‘n’ roll group manager turned franchising entrepreneur discusses his life, love of franchising, and the lure of the business-to-business market.

What have been the life and career milestones that have brought you to where you are today?

I’ve been involved in franchising since 1987 and came to it with a long background and history with the family business. The Penfolds have been in printing and stationery for years, and although my branch of the family separated from the WC Penfold company a generation ago, it is still sad to see an iconic brand like that lost from family ownership. I grew up as the fifth generation of Penfold in Australia, with each generation having a very proud tradition of family business ownership. As such, I was inculcated with a view that the opportunity to participate in the family business would be a valuable and exciting one. As it happened, however, I really wasn’t terribly excited by commercial stationery, retailing or commercial printing, which was, and still is, very much an industrial process.

In 1982 WC Penfold acquired the master license rights for Kwik Kopy as a mechanism to assist the company grow a fledgling quick printing business. In fact, in the late 1970s WC Penfold had started a quick print business of its own called Hot Spot Instant Printing, which was one of the first instant printing businesses in Australia. However, it wasn’t terribly successful. So, around 1980 my father visited the United States to review trends in stationery and printing and came across the Kwik Kopy brand, which at that stage had been established for 13 years.

It was a well-respected brand and WC Penfold acquired the master license rights and in 1982 converted the five company-owned Hot Spot shops to Kwik Kopy franchises. I think that was the first time I really became excited about the opportunity of working in the family business. As a young university student studying for an arts/law degree there was something about the egalitarian nature of franchising that attracted.

The marketing concepts around franchising were exciting and it seemed to me a business opportunity for the future. I decided that if I was ever to join the family firm it would be through the Kwik Kopy division. However, I had other things to do with my life.

While studying I had started booking bands to play at the Macquarie University bar. I quickly became the booking agent for the bar and soon after that manager of a couple of the bands that played there regularly. Around 1983/84 I started a business called Generic Management, which became the manager of about a half a dozen of Sydney’s independent bands, the most prominent of which was probably one called the Celibate Rifles. In terms of the alternative music scene in Australia, and particularly in Sydney, they were one of the legendary ‘80s rock bands. It was a small business, but we were licensing their music in Australia and overseas, touring them internationally, along with a number of other acts, and my first few years outside university was spent running that business. Along with a partner I was involved in that through to about 1987. It was terrific, but obviously not exactly what my parents had had in mind for my career.

I still have all the financial records for the business, and while it was occasionally a little bit hand-to-mouth, overall the revenues and profits were pretty damned good for a young fellow. Only thing was, I don’t think I’d heard of reinvesting in those days. Profits were taken as dividends in the week they were earned!

In 1987 I was touring with bands in Europe and I just looked at myself and realised that while I loved the music business, and while it was reasonably profitable, I was never going to achieve the income that I felt I wanted to have and the lifestyle I wanted to achieve as a manager of independent bands. I realised that unless I was prepared to go ‘gold chain’ for a major record label, which I wasn’t interested in doing – my interest in music is more heart-felt than that, I guess – I needed to find other opportunities.

It was then that I came across the Kall Kwik business, the sister company of Kwik Kopy in the UK. I approached the owner and he gave me a job as a sales rep in one of the stores.

How did that feel? You obviously went through a sea change before it became a popular part of the vernacular.

I’d had a terrific time doing what I was doing for several years and had made some great friends. Even so, I understood that a phase in my life had ended, and besides, the lure of the family business was still there. Of course, I didn’t understand that franchising was to become my life. I thought it would simply be an entrée into the family business. But the founder of Kall Kwik in the UK, Moshe Gerstenhaber, was a magnificent entrepreneur and I loved selling printing. My Australian accent allowed me to have a point of difference in the marketplace and be remembered by clients, and we turned the local branch around. It was a great starting point.

I remember calling my parents from London and telling them that they were going to be very pleased because I had finally stepped outside the music business and joined Kall Kwik. They were pleased, but my father said it was also remarkable, as WC Penfold had just decided to sell the Kwik Kopy business. The company had owned it for several years and it was only just reaching break-even, having been through all the start-up headaches that franchises always go through. The board of WC Penfold, as a public company, had simply decided that franchising wasn’t a fit. However, my father saw it as a great opportunity and despite having to sever the relationship with the grand old family firm, bought Kwik Kopy at almost exactly the same time that I joined Kall Kwik in the UK. It was one of life’s beautiful coincidences.

So from the beginning I have had a small shareholding in Kwik Kopy Australia – an imbalance I have been seeking to redress ever since. For the first four to five years my father and I worked together, but we did it in the perfect way – on opposite sides of the globe. I think when father and son work together that degree of distance is probably a helpful thing. After 12 months I moved out of the Kall Kwik branch to its head office, where I was extremely fortunate to work alongside Moshe in a business development capacity.

Was, then, Moshe Gerstenhaber something of a mentor for you?

He was a very significant mentor, a real entrepreneur, a charismatic leader but with a very, very sound financial background. He is an economist and I worked with him in a new business development role, pioneering Kall Kwik’s introduction to colour reprographic technology, as well as the introduction of digital design, which at that time was a significant technological step forward for the printing industry.

It must have been an exciting, albeit challenging time to have been involved in printing, with so many technological innovations taking place.

Absolutely. Apple Macs were really only just on the market and I think the first laser printer was released around 1986. We partnered with Apple to be the first to introduce in-house digital design in the quick printing industry. There was a lot happening on the design and product fronts, and we also took the opportunity to look at the way computing could assist both our corporate office and franchisees from a management perspective. We introduced new Apple-based management software and accounting systems into our franchises and also conducted the first benchmarking and analysis with regards to our businesses using PCs. Up until that time I was staggered to discover that it was only the accounts department that logged anything onto a computer, and that was only total sales for invoicing purposes. Nobody had thought to analyse the break-up of sales by product type or customer, or even to benchmark one franchise against another. This was a project I was able to invest in through my role as business development manager working directly with the chairman. As a result, we uncovered all sorts of new ways to assist our franchisees in understanding where the market was going and where they were positioned within their individual markets.

I spent four years in the UK, then a year working with Kwik Kopy in Canada training start-up franchisees. After that I moved to the Kwik Kopy corporate office in Houston, Texas and spent a further year again working in a business development role. I came back to Australia in 1992 and rejoined Kwik Kopy at the bottom, eventually becoming managing director in 1996.

Looking back, what would you identify as having been the key driver of Kwik Kopy? Innovation, it would seem, has been at the forefront of the company’s development.

Innovation is important in any business. However, in a franchise business in particular I think innovation through people is what it is really all about. Innovation is not something that can be driven downwards in a franchise. In my experience, most of the really successful franchisors harness their capacity to be a conduit of knowledge for franchisees. Successful operations, whether it be McDonald’s , PoolWerx or Kwik Kopy, derive innovation from their franchisees. The McDonald’s story is not about founder Ray Crock’s insights into the product, but his understanding of franchising as a way to harness other people’s great ideas, systematise them, regularise them and train them out to other franchisees. Certainly my approach to the business has been very much focused on understanding that our franchisees are the ones who are closest to the ground and who have the best understanding of customer needs. As franchisor, our role has to be to facilitate what they know about the market so as to allow us to learn the business.

And that comes back to recruiting the right people, doesn’t it?

Yes, but we don’t consciously look for innovators. Rather, we look for culture and a set of values. For example, I have a personal vision for my life and a clear purpose for the business, which is all about helping others achieve their own personal vision. I call it ‘Bringing Your Vision to Life’. We have a real commitment to the belief that people can achieve whatever they set out to achieve. I believe that business is a terrific vehicle for me trying to be all I can be, to experiment with my potential, and I believe that my greatest potential is in helping others realise their potential. Franchising is a business that allows you to do that in ways that I don’t think any other business can. Prospective franchisees come to us because they have a vision to own their own business, to guide their own future, create their own success story around their own energy and also to develop a team around that energy and vision. They are looking for the assistance of a franchisor to take them towards the actualisation of what they believe they can achieve.

There are all sorts of business models that can work for all sorts of franchisees, but ultimately people make what is more than anything else an emotional decision about where they are going to place their trust in terms of actualising their ambition. We see that as a privilege and as such are committed to understanding our franchisee partners’ strengths and weaknesses and contributing to their individual needs as they go through their career in the group.

Would you agree that effective communication is essential to engendering trust among a group of people, and that as such it is an overriding requisite to becoming a successful franchisor?

I think the key skill is to demonstrate absolute commitment to understanding that your franchisees have made an important choice. Most franchisees do think very long and hard before making the decision, particularly at our level of business. One of the advantages of requiring a relatively high level of investment is the care with which franchisees approach that decision, as it is often the most significant investment decision they will ever make. It may not be of the same magnitude as investing in your own home, but from a risk point of view it is far more difficult. The success or otherwise of a property investment is largely driven by market forces, but when you invest in your own business you are investing all of yourself into that decision, and the success of the business is also your personal success, and failure is something franchisees have to wear. However, we take a great degree of ownership in the process. As such, the principal skill of a successful franchisor is in knowing how to ask questions so as to understand what a franchisee’s motivation and fears are, and to help them overcome those obstacles.

Are there any particular traits that you look for in potential franchisees?

It is important that all franchisees have people management experience. The principal skill required in a franchisee is sales ability. Any franchisor that denies this is deceiving the franchisee. Whether they are selling a vision to their own staff, to the bank if they need financing, to service providers, equipment providers, or materials providers, sales and people management experience is vital. It is also important that they be honest about their own capabilities and limitations. I think all business people come to a realisation as they move up the corporate ladder that they have to be open and trusting of those around them to succeed. This is often particularly the case with franchisees, who perhaps are stepping off the corporate ladder only half-way up, and going straight to the top of their own organisation. As such, there is sometimes a learning gap in the transition. Most people can acquire technical skills at a relatively low management level, but it is only when you reach a senior level that your frailties are truly exposed and you have to rely more on other people. Many franchisees have not had the opportunity to fully develop their general management skills.

Fortunately, our business is almost self-selective because our values and culture are so clear. People can assess what we are all about and whether they can fit in and grow in that environment or not. I am indeed lucky to have a business full of people who are exceptionally more talented than me in their areas of specialisation and who also share my commitment to openness and honesty in business.

What in your view are the biggest challenges aspiring and even established franchisors are likely to face over the medium-term in Australia?

As the number of franchise opportunities available to prospective franchisees continues to grow, I think finding people who will maintain the culture and skill sets of a business is going to be the greatest challenge. With around just four percent unemployment, the market for potential franchisees is going to be a very tight one.

Is the current rapid growth rate in the number of franchises in this country sustainable?

I certainly don’t think that the trend towards recognising the value of franchising as a business concept amongst intellectual property owners is going to slow. All businesses are at their core a piece of intellectual property, and every business enterprise is simply an effort by the shareholders and directors to establish a structure that is going to maximise the potential of that idea. Franchising is a very effective method in which to achieve this. In fact, we have not yet discovered a product or service that is not enhanced by structuring it around a franchise.

The basic concept of a corporate office focusing on brand and system development and managing innovation and communication in a group, coupled with the service ethics and customer focus of a franchisee in a local area, is unbeatable. Corporations seem to endlessly find ways to match a franchise delivery structure to their product or service. This is a trend that will definitely continue, so while there is still depth in the market, the employment and potential franchisee market will be tight for the present. There will continue to be a range of issues that face the sector, but I believe that as a sector we are becoming more professional.

Is the ever-growing burden of corporate compliance one of the main issues facing the industry?

I think lack of clarity is the problem, and as an example I would cite the occupational health and safety (OH&S) issue. This is an enormous burden on all businesses, but particularly for franchisors that have to manage OH&S standards across a network.

It seems the government has seen that it can leverage its position on a number of issues by bringing interest groups into the compliance regime. It’s clear that the trend is towards government feeling that franchisors can be a quick route to achieving higher levels of OH&S compliance by joining the franchisor in the liability of individual franchisees that breach such standards. In reality, the greatest impact is the burden this places on the franchisor/franchisee relationship, as the franchisor is often accused by franchisees of being the policeman.

As a result, the challenge of effective communication becomes even more acute. Communicating the corporate goals and vision of an organisation is vital in business, and the more you distract from that message with issues of compliance, the more difficult it becomes.

In your view, how sophisticated is the Australian franchising sector relative to, say, the fatherland of franchising, America?

I honestly believe that Australian franchising is the best in the world. Certainly in terms of the exposure I have had to English-speaking markets – the UK and Europe, Canada, United States, New Zealand, as well as a little work in South America and the Middle East – we are a terribly sophisticated business. Just as Australia is pioneering in the uptake of so many physical technologies, such as mobile phones, we are also pioneering intellectual technologies.

I find that our communication management systems, IT systems, franchisee relationship management systems, manuals and documents, training and marketing – in fact, every model and structure in the business – is generally ahead of the US.

We have now taken on the third master license from a third US franchise company, and as such have three relationships with three businesses that are considered at the top of their tree by the industry in the US. In many respects we have been able to reverse-engineer the relationships and we take a lot of pride in this – in giving back to our franchisors. In fact, one of the strengths of our organisation is that we are a franchisee and a franchisor – we’re a franchisee of three different systems and we’ve been a franchisee for 22 years.

With Kwik Kopy in the early days we did what many franchisees did – recognised that our local market was a little different and that we needed to do things a little differently. As an extension of that, we developed a lot of our own technology. Of course, internationally franchising was not as sophisticated in the early ‘80s as it is now, so to some degree we had no choice other than to develop our own systems.

By the time we were in a position to acquire Signwave in 1996 we had learned tremendously, and deliberately set out not to change the franchise system. If we see an opportunity or a need for innovation and development, we work intensively to make sure our partner franchisor fully understands the issue and is in a position to innovate the core system. The value for us in being right on track with the core system far outweighs whatever short-term benefit there might be in rapidly adopting something that we might perceive as being necessary for our local market. Ultimately the franchisor is receiving input from licensees all over the world, so it is in our interest to make sure the system itself develops, not just us as one branch on a tree.

That said, along the way we have given back a lot. In 1994 in Australia we developed a communication and management system around Lotus Notes. In those days Lotus Notes, a communications infrastructure tool, was really only being deployed by companies like Citibank and major international corporates. We were one of the first mid-size enterprises anywhere in the world to adopt that technology, and we adopted it because we recognised that, as a tool, it would enhance our ability to be a conduit for ideas and innovations. In 1995 I conducted seminars on the subject and a number of franchisors adopted the technology, as well as service providers that built platforms around Lotus Notes. Eventually we exported it back to our sister companies in the UK, Canada and US.

Similarly, we innovated and modernised the Kwik Kopy logo in Australia about four years ago, and that logo has now been adopted by Kwik Kopy in Canada and the Middle East and may be taken up by the parent organisation in the US.

The Australian franchising landscape is full of terrific competitors and you do not need to look very hard to see where those success stories are. Domino’s in Australia is recognised as the most successful region in the group and McDonald’s here is clearly the guiding light for McDonald’s across the world. Then there are systems like Bakers Delight, which has been at the forefront in developing new products, and most recently the Gloria Jeans purchase of its US parent. The list goes on.

What, then, would be your advice to the increasing number of foreign franchisors aiming to penetrate the Australian marketplace. Should they ‘Australianise’ their system or simply export it and work within it?

A local owner or manager is important, and a substantial amount of work needs to be done to understand how the society and economy is going to impact the business model in this country. Kwik Kopy took about seven years to break even, and needed the focus of a local entrepreneur, being the Penfold family, to drive that success. It took time to understand where we fitted in the market. Likewise with Signwave, which we acquired after the original licensor failed to make a success of the business. Signwave had been in Australia five years and only opened two outlets when we acquired it, and it took us another four years to get a real handle on that business as well. And with regard to Express Personnel Services, we spent two years in a strategic analysis of a variety of opportunities before even determining that HR was an area in which we wanted to invest. We then spent another two years working with Express in developing a business plan, and have had a pilot operation in place since March 2004. Our expectation has always been that we would need to run that pilot business for at least 12 months in-market before even beginning to think about franchising it.

The differences are substantial in every product category. In the case of temporary staffing, for example, the Australian industrial relations environment is enormously more complicated that in the US. It is also still in a state of change. But despite social, industrial and economic structural differences, the process is still more about massaging the product than changing the system. It is always important to ensure that the product fits individual market requirements, but at the same time adheres rigidly to the existing system and culture.

Even given your high regard for the sector in Australia, if there was any one aspect of the way franchising is conducted here that you could change overnight, what would it be?

I don’t know that it would be so much about franchising, but I do think that Australian business lacks the self-confidence to fail in the way that American business does. It is typical of American entrepreneurs that the greatest success stories usually have some pretty spectacular failures as part of their learning experience. Australia and Australians seem to frown on failure and any slip-up along the way here is often fatal for budding entrepreneurs. The investment community, the banks, peers and even family and friends view business failure as being terminal. You are in a coffin, buried, and that’s it.

For this reason I think there is a fear among Australians entering business that limits their preparedness to try new things. However, I think this is slowly becoming less endemic, that we are gradually becoming more adventurous in business and that as a society and through our legal structures and industrial relations environment, there is an awakening to the fact that entrepreneurship is not fail-safe. We are coming to realise that trying, falling over, getting back up again, learning from mistakes and moving on is a necessary part of business.

Unfortunately, though, there are still negative elements that support the notion that if you are not successful you have to look for somebody to blame. Franchising is a shared experience that requires openness and honesty and implies vulnerability. One of the greatest flaws of a leader is a failure to be vulnerable, and this fear of failure inhibits vulnerability which can in turn lead to an opportunistic casting about for someone else to blame.

It is a great shame that some in the legal fraternity and other antagonistic organisations try to bring down potentially successful franchising companies. You cannot do a personal best every time nor can you achieve with every innovation or endeavour.

There seems to be an increasing emphasis on overseas expansion opportunities among Australian franchises. In relation to their overseas counterparts, how well equipped are local operations to succeed on the international stage?

When Australians go overseas to conduct business they are, for the most part, greeted with a very open market and supportive legal or legislative environment. Franchises in Australia face some of the highest hurdles in the world in terms of disclosure and compliance standards. As such, franchisors with an opportunity to take their product offshore should be able to do so with confidence, given they have developed their system in an extremely competitive and rigorous environment. This is a great nursery school, and the rest of the world is as eager for the benefits of franchising as the Australian market, and in some ways is probably more sympathetic to it.

What, then, is your company’s strategy for future growth?

I don’t have the opportunity of taking our business offshore. We are an inbound operation and that is where our focus and vision will remain. We are re-branding our parent company, Errington, as Business Franchise Group, or BFG, which will encompass the Kwik Kopy, Signwave and Express Personnel Services businesses in Australia. Basically, I see BFG as being a small stable of business-to-business franchise companies. Currently we have 140 units across the three brands delivering an average $50,000 a year income stream on 15 plus 15-year licenses. I see BFG as an annuities operation developing within the business-to-business sector in distinct service or product markets under the umbrella of premier category brands.

We believe that by aggregating the businesses we can achieve terrific synergies in business-to-business markets. We understand the b2b segment, and if we partner with brands and systems and people of the calibre and quality that we have been able to associate ourselves with to date, our growth potential will be significant.

We were a printing company that became a franchise company. Then we became a franchise company that was in printing. Later we were a franchise company that was in printing, graphics and signs. Then we really sat down and assessed where our core strengths were and realised that they were in the business services sector. We identified HR, telecommunications and IT as three markets where there could be strong business models based on franchising to service the mid-market sector. That was a strategic direction determined around five or six years ago, with the result that we started casting around for established partners with the right values, culture and proven business models to incorporate into BFG. Express was the first and we are now intent on bringing that to market and cementing the potential of Signwave, as well as looking for future growth opportunities for Kwik Kopy. In the longer term, however, I believe there is scope for one to two additional product or service brands under the BFG umbrella. This is driven by confidence in the business-to-business marketplace and an awareness that there is unrealised opportunity for franchisees looking for a particular kind of experience.

The experience of operating a business services franchise is vastly different to operating a labour-intensive, man-in-a-van or retail-type franchise. It is a totally different dynamic and relationship that you have with a business-to-business customer base, and one that is highly attractive to franchisees who want to utilise their skills in relationship building, sales and management. However, there are also other opportunities through synergies we are building into BFG via our understanding of the business-to-business market, as well as in our back office and technology infrastructure, accounting and financial infrastructure, and the career paths we are creating for executives in franchising.

This has been a key motivator for me to expand the family business into a more corporate structure – to make sure I could provide career opportunities for the best and brightest people we can attract to the business. If it had remained as simply Kwik Kopy and I had stayed at the top of that tree, obviously there would have been little place else to go. As it stands, however, I now have three general managers running three franchise businesses who are supported by a sympathetic and understanding wholly-owned family business with a passion to develop franchise companies in Australia and the executives to run them. It’s a real honour for me that one of our general managers, Connie Mason, became Franchise Woman of the Year.

There has been considerable discussion of late regarding the Franchising Code of Conduct. Are there any aspects of the Code that you believe need fine-tuning, or is it satisfactory as it stands?

The Code has been fabulous for franchising. Kwik Kopy was the first registrant under the old voluntary Code, holding compliance certificate 001. However, whether it needed to be legislatively enshrined is open to question. Personally, I don’t think so, but that is now an academic argument.

Having said that, it has got to be improved. We have to take that system, pull it down and put it back together again. I hope that if the franchise community can say anything to government about the Code, it is that we can do better. We can learn from the constituency and improve on it.

If you look back at the operation of the Code, or the operation of franchising in the last six years, it is difficult to point to any really substantial negatives that have come from the way the Code has been used by any of the participants. Unfortunately, I think it grew from a culture of fear of failure, which I mentioned earlier, and possibly lacks mechanisms that could support and encourage excellence in franchising. It seems to be designed more as a tonic or a platform upon which to correct ills rather than encourage excellence and that, perhaps, is a drawback. It is not, however, something that can be easily rectified.

We cannot expect government to work to provide platforms for growth and innovation. After all, the government sector has never been a source for that kind of thinking, so why should we expect legislation in our industry to be any different. It is up to us in the industry to apply our minds and energy to industry issues in a constructive way, as much and as often as we can.

Are there any other key issues warranting address?

I honestly believe that franchising as an industry is blessed by the challenges it throws up to managers who work in the sector. Any manager who has had the opportunity to work in franchising has had an opportunity to learn about leadership in an environment that is unique. The passion, honesty and commitment that exist within the franchising community are absolutely unique. As a manager, line manager or even senior manager in the corporate environment you are constrained by the fact that those you are working up and down the line with have limited commitment to what they are doing. They are prepared to put only so much on the line.

In a franchise, everything is on the line. A manager in the corporate world is not stretched and challenged to anywhere near the degree as a manager in franchising. And that is why I love the industry, because every time someone tells you that you are wrong or that you can do better, they mean it. This means that they care, and in response you have to work that bit harder, listen and learn and constantly improve your business plan, communication and leadership skills.

In a nutshell, franchising has got a fantastic story to tell to anyone who wants to put meaning into their working life.

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