A GUIDE TO franchising in Australia
Franchising is a bit like a rhinoceros – it is easier to see than it is to define. Franchising is prevalent in virtually every area of our daily lives; house cleaning, pool maintenance, gardening, pet grooming and training, car washing and detailing, fitness, travel and real estate agents, financial services, hotels and serviced apartments, home building, children’s development and education – and the list goes on.
There are many formal definitions of franchising, varying in length and complexity and whether from a legal or commercial perspective. However, in the simplest terms, franchising involves the owner of a business system (the franchisor) granting to another party (the franchisee) the right to adopt and apply the business system for the purpose of distributing the product or service. The business system typically consists of a business service or product, identified by a brand name and trade mark and driven by proven operating systems and marketing.
FRANCHISING IN AUSTRALIA
Franchising as we know it today emerged in Australia during the 1970s, predominantly through major US fast food franchise companies such as KFC (then known as Kentucky Fried Chicken), Pizza Hut and McDonald’s. Non-food brands such as Avis, Hertz, Budget, Midas Mufflers and 7-Eleven were also making inroads. Franchising has achieved impressive growth since then and is represented in virtually every product and service business. Australia now has more home-grown franchise systems than international systems.
A survey conducted by Griffith University in 2006 estimated that there are 960 franchise systems (franchisors) operating in Australia. It also estimated that there are over 56,000 franchisee operated units together with another 5,600 franchisor units, totalling over 61,000 franchise units.
THE ATTRACTION OF FRANCHISING
A franchise offers an attractive alternative to starting an independent small business, as the franchisor provides its expertise, initial and ongoing support and advertising. The two major advantages of buying a franchise are the value of brand awareness in the market and the economic strength that can be achieved from grouping resources, such as buying power with suppliers and advertising.
While franchising is not foolproof, there is a much lower risk of failure when buying into an established and trusted brand, as customers know what to expect from the product and service. What’s more, the franchisee has access to training and ongoing back up, together with the benefit of new innovations from the franchisor which would not otherwise be available to an independent operator.
Help from the franchisor in attracting new corporate business and the marketing of the franchise brand, in addition to the support offered by established systems, were key factors attracting Liz Ray, a franchisee of Quest Serviced Apartments, to a franchise instead of an independent business.
“Overall, we love working with Quest. Head Office is extremely supportive, the systems are good and there are procedures in place for all areas which gives us a lot of confidence”.
From the franchisor’s point of view, the biggest attraction of franchising is building the company’s brand through the capital investment and dedicated labour of franchisees, which leads to faster expansion of the business.
Franchising is not without its pitfalls, however. Like all relationships, the franchisor/franchisee relationship might not work out and a thorough and informed selection process is critical to both parties. The selection process needs to cover personal suitability and compatibility and include a financial and location assessment. Speaking with other franchisees in the proposed network is an invaluable step in the selection process. This will provide you with the “real” story of how things are travelling.
ADVANTAGES FOR THE FRANCHISEE
There are many benefits in becoming a franchisee and taking advantage of the reputation, know-how and operational skills the franchisor has already established.
Brand recognition
Rather than setting up their own business from scratch, franchisees benefit from operating under a brand that is already established and recognised in the marketplace. This recognition means that customers are familiar with the brand and can go into any outlet confident of the experience they are likely to have. The franchisee must still continue to promote the business and provide excellent service and product, however, and not make the mistake of thinking that brand awareness guarantees customers and success.
Training
Successful franchisors provide a formal training program for their franchisees – normally a mixture of class and on-site tuition covering all aspects of establishing, promoting, running and managing the business.
Training programs are usually supported by a range of other activities and resources, including operations manuals, field visits, help desks, intranets, newsletters and group meetings.
The quality of a franchisor’s training is normally a strong indicator of its commitment to its franchisees and their success.
Assistance with site selection and store design
Where sites are applicable, the site choice is critical to the success of the business. The franchisor will have years of experience and expertise about the optimum site, particularly with regards to leasing terms, traffic flows, accessibility, visibility, demographics of the local market and their match to your business. For example, a fast food operator would seek to be on the homebound side of a highway, as drivers and commuters are more likely to make a purchase on the way home. The franchisor’s site selection support will normally extend to the design and building of the franchisee’s store. This helps ensure consistency in design and presentation, as well as maximising merchandising and operational efficiency.
Large franchisors often have a dedicated store building team. Importantly, experienced store building teams can usually complete a new store weeks – in some case even months – earlier than an inexperienced person. This will enable an earlier opening and save on costly rent and wages.
Information and operating systems
The importance of a robust management information system cannot be overemphasised.
A well-structured and finely-tuned system can be a powerful driver of a franchise system by allowing the measurement and comparison of key performance indicators (KPIs). It will assist with customer follow-up procedures, provide the ability to monitor trends and react quickly to both positives and negatives and enhance communication between franchisor and franchisee as well as franchisee and customers.
At the same time, tried and proven operating systems, a cornerstone in franchising, help to deliver a consistent and smooth customer service, which contributes to customer satisfaction and loyalty. The opposite might be customer frustration, brand damage and lower sales.
Benchmarking
Benchmarking is the practice of comparing key performance indicators against other franchisees and industry standards. Benchmarking helps highlight areas for improvement and reveal better practices for the benefit of the entire group. The biggest benefit is improved financial performance.
Group meetings
Franchisee advisory councils, franchisee forums on the internet or conferences are some of the methods used to facilitate communication within the franchise. Group meetings can be a powerful method for generating new ideas and promoting team unity. It is well known that many of McDonald’s most enduring innovations, such as the Big Mac, Fillet o Fish, Mc Value Meals, playgrounds and even Ronald McDonald all originated from franchisee ideas.
Marketing support
One of the strongest attractions of franchising is the economic leverage of group marketing. The combined marketing contributions of each member provides for a larger marketing pool, allowing for more regular advertising. For example, the Forty Winks bedding franchise group generates an annual advertising budget of $14 million and is a nationally recognised brand because of its ongoing television, radio and catalogue promotions.
Many of the brands familiar to us belong to franchise groups with a considerable group advertising fund. Think of Subway, Harvey Norman, Autobarn, Nandos, Fernwood and Clark Rubber.
THE MONEY SIDE OF THINGS
While there is no single formula that applies to all franchising systems, there are a number of common elements in the costs involved at the three key stages: at start-up, annually and on exiting the system. These are costs required by the franchisor; the franchisee is responsible for meeting their own legal, accounting or the cost of other business advice sought before entering the agreement.
Franchise payments and fees are an inevitable component of franchising, which is after all a commercial arrangement. Contrary to some misguided views, low fees might actually be to the franchisee’s detriment, because the franchisor will be unable to match a competitor’s resources or advertising budget.
The various franchise payments and fees outlined below need to be closely examined with regard to the benefits received and the anticipated financial returns.
Initial costs
1. The franchise fee (start-up)
This is effectively a joining fee for the right to access the franchisor’s intellectual property, systems and manuals and cover the selection costs. Franchise fees can range from as low as $12,000 for a window cleaning service franchise to in excess of $500,000 for a technology-based franchise.
Market observations indicate that most franchise fees fall in the $35,000 – $50,000 range. However, the size of the franchise fee is not as important as the quantity and quality of resources the franchisee receives. For example, training might be included or excluded. If included, the training program could range from 2 weeks in one franchise to 6 months in another.
2. Site establishment fee
These fees are more common in retailing franchises, where the franchisor expends considerable time and money in searching for and securing a suitable site, as well as designing, ordering equipment and coordinating a shopfitting team.
Fees vary considerably, generally being in the $10,000 – $25,000 range.
3. Training fee
The training fee is sometimes included in the franchise fee, but it is not uncommon to charge it separately. Once again, the extent of the training is what is critical. It could require the franchisee’s entire team being trained for several months. Some international franchisors such as Kwik Kopy and MBE conduct training in the US.
Ongoing Fees
1. Royalty or service fees
The franchisor normally receives an ongoing payment from its franchisees to help pay for the costs of providing services and resources to its franchisees, as well as contributing to a profit. These fees come under various names, but are most commonly known as royalties or service fees.
The majority of such fees tend to be charged as a percentage of the franchisee’s gross sales, but they can also be applied as flat weekly or monthly fees.
Again, there is no typical fee, with the majority falling between 3% and 7% of gross sales for retail franchises, and around 10% or more of gross sales for services franchises.
Rather than being focused on comparative royalties, you should be focused on the franchisor’s support program, the satisfaction of existing franchisees and your expected financial returns.
2. Marketing fee
Most franchisees are required to make a regular contribution into a group marketing fund. As the name suggests, these funds are for the sole purpose of marketing. Under the franchising Code of Conduct, franchisors are required to bank franchisees’ marketing contributions into a separate trust account and provide proper financial disclosure of the fund.
In many cases, the franchisee is expected or required to allocate additional funds to local advertising in their immediate area.
Depending on the type of business, the marketing fee could range from 1% to 3% for a service business, and from 2% to 5% for a retail or take-away food business.
3. Other ongoing fees
In various franchises there may be special purpose fees for accounting, central invoicing, debt collection and a central call centre. An insurance or warranty fund fee, where the group makes provision for insurance or warranty claims, might also be applicable.
Franchisees will typically pay towards their attendance at a national conference, which can be interstate or overseas. Whilst a cost, this can also be seen as a reward and investment.
EXIT FEES
Franchise agreements are generally for a fixed term; it should not be assumed that the agreement will be renewed automatically and consideration needs to be given to the exit process.
When a franchisee sells their business, an assignment or transfer fee is generally payable by the outgoing franchisee to the franchisor. This fee helps reimburse the franchisor for its costs in approving and establishing the replacement franchisee, as well as associated legal and administrative fees. There may also be a goodwill component in this fee.
PROTECTION
Australia’s franchising regulatory framework is respected internationally. Franchising relationships in Australia are governed by the mandatory Franchising Code of Conduct (Code), which comes under the Trade Practices Act 1974. The Code was introduced in 1998 and new changes to the Code will be effective from 1 March 2008. The Code is extensive, and you are advised to study franchising websites and consult franchising specialists. Some of the key features of the Code include:
- provision of a disclosure document in a prescribed form to a prospective franchisee at least 14 days before a franchise agreement or any agreement is entered into
- a compulsory seven day cooling off period
- the need to obtain certain certificates from prospective franchisees during the sales and selection process inclusion of past franchisees in the disclosure document, with their contact details
- financial disclosure of the marketing fund, and a full account of the fund
- details of rebates received by the franchisor, including the amount or the method of calculating rebates requirement of the franchisor to provide copies of all associated agreements 14 days before signing the franchise agreement.
- disclosure about franchisor directors and all materially relevant facts.
MARKET TRENDS
Both new and established franchisors have responded to the community’s desire for healthier lifestyles. Probably the best-known brand to respond to the consumer’s call has been McDonald’s, which has added fruit, low fat wraps, salads and European-style coffee to its traditional offerings. Other well-known groups to have benefited from promoting healthy menu offerings include Subway, Healthy Habits, Nandos and Sumo Salad.
In addition to their interest in healthier diets, more consumers want to lead healthier lives. This interest has fuelled substantial growth in franchise systems such as personal trainers, walking groups, gymnasiums, spas, skin care and weight loss.
Even more noticeable than the trend to healthy living is the prolific growth in the services sector in the last 10 years. This ranges from home services such as cleaning, pool maintenance and gardening, car care and detailing, pet grooming and training, building inspections and maintenance to personal services such as tuition and education, finance, travel, personal training, bookkeeping and the list goes on.
Phil Ruthven, founder and chairman of IBISWorld, Australia’s forecasting and strategic services corporation, predicts the growth in franchising will continue to come from growth in service industries. In 2006, Australia spent $110 billion on outsourcing, according to Ruthven.
FRANCHISING TRENDS
In Australia we are now noticing a trend towards multi unit franchising, particularly in established franchise systems. A number of factors could be contributing to this growing trend. A buoyant economy might mean there are fewer quality franchisee candidates in the marketplace, thus slowing down a franchisor’s expansion. Also, franchising is in a more mature phase than it was a decade ago. As franchisors are maturing, so are franchisees and many are now equipped to build their own mini empires. Jack Cowin operates 46 KFC restaurants in Western Australia, four in the Northern Territory, as well as 300 Hungry Jack’s outlets around Australia and is reported to be worth an estimated $350 million.
Floats, acquisitions and co-branding are also evident. In the last five years we have started to witness the emergence of Australian ‘mega franchisors’ that have floated and continued their domestic growth through the acquisition of established franchise chains. Retail Food Group, creator and owner of the Donut King and bb’s café chains, acquired the Brumby’s chain last year and more recently, Michel’s Patisserie.
Allied Brands, another public company, has been the owner and operator of the American ice cream concept Baskin & Robbins in Australia for at least 10 years. In the last two years, the group has acquired Cookie Man and Kenny’s Cardiology. Similarly, but in a different structure, Western Australia’s Chicken Treat, Oporto and Red Rooster now share common ownership in the last year, although the three brands continue to focus on their specific market niches.
Exporting Australian concepts overseas is also on the rise and an increasing number of Australian franchisors have detailed plans for international expansion. As more companies reach a critical mass in Australia, overseas expansion will become more attractive and feasible.
Trios, the fresh wrap sandwich group have granted a franchise in the Middle East, Boost Juice is operating in Chile, Indonesia, Singapore, Kuwait and the UK, Cartridge World is now represented in 42 countries, Action International has expanded across 22 countries, Bakers Delight has stores in New Zealand and Canada and Western Australian based Helen O’Grady’s Children Drama is established in 18 countries.
LOOKING TO THE FUTURE
Overall, Australian franchising is in a healthy state. There is a plethora of sound franchise opportunities in a wide range of sectors and geographic areas, with investments commencing as low as $20,000 and exceeding $3 million. However, franchising is not a guarantee for success, and certainly is likely to disappoint anyone seeking to work fewer hours for more return, especially in the early stages of establishing the business. If approached objectively, with thorough research and planning, complemented with quality advice and an unwavering commitment, you can join the thousands of Australian franchisees that have found franchising lucrative and rewarding.
Franchise Developments track record and credibility stand out at the forefront of the industry. Since 1983 we have been applying our expertise and extensive experience to build many of Australia’s best known retail service franchises.
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