Austrade: Franchising operates like an industry

“We recognise that even though franchising is not an industry, it nonetheless acts like an industry. It is organised like an industry, it has an industry association, it has a mandatory Code of Conduct, which many industries do not, and that in many respects it operates like an industry.”

So says Cheryl Scott, franchising specialist at the Australian Trade Commission (Austrade ).

Although she is the body’s franchising specialist, Scott does not put herself forward as an expert on franchising – she is neither a franchisor nor franchisee. In 1998, however, she came to Austrade with an impeccable pedigree with regards to its heartland – small to medium-size businesses and the issues that affect them.

Scott has worked in many sectors, from private to public to spending nine years alongside her husband running the family’s newsagency. After living for a year in the US as an exchange student, she returned to Sydney to get her P-plates in sales, then studied economics, finally completing the degree while working part-time in the newsagency. She did a Diploma of Education and taught for a few years, then worked as a researcher at the University of NSW, eventually becoming a business manager in the research department of the Australian Graduate School of Management, where she remained for some five years.

“Then I left and joined Austrade. What I like here is the variety. I think the reason I left the AGSM is that it tends to become quite cyclical – somewhat like teaching – in that you finish one year and start over again. Here it is very different. I have always worked in the service exports area as opposed to merchandising, but I haven’t always had this role. I started out working on a whole range of exports and then focused on education. After that I moved into franchising, on which we have had a focus for around three years now,” she says.

Although claiming not to be an expert on franchising, Scott is very much an expert facilitator for the sector. From an international marketing perspective, she can provide an authoritative bird’s eye perspective on different markets around the globe – the overriding objective of which is to see more Australian franchise systems succeed on the international stage.

Scott is in the business of opening the channels of communication for local businesses seeking to expand offshore. This means having contacts, and lots of them.

Doors that might otherwise remain locked are pushed ajar through virtue of Austrade’s international network of representatives in more than 100 locations around the world.

“Ultimately we want more local systems to expand into foreign markets, but we want it to be responsible and strategic expansion,” Scott emphasises. “As such, awareness-raising and education are key functions of Austrade. There is no question that the systems that have had the most success overseas are those that have spent time preparing and done their homework, thoroughly researched the market and talked to the bankers and consultants.”

Interestingly, she says it is only over recent years that Australian operators have shown a real uplift in interest in international markets.

“When I became involved in franchising at Austrade the focus was on domestic operations, and that was and still is fine. If there is room to grow in the local market, pick the low-hanging fruit first. There are opportunity costs in going offshore and having the right resources is vital. Take time to prepare and adopt a strategic approach. Do not go for the wrong reasons and before you are ready,” she warns.

Unfortunately, it seems that people everywhere continue to make the same mistakes – underestimating the pitfalls of setting up in an overseas market or overestimating its potential.

“People can come here with very unrealistic expectations,” Scott says. “In the US there are systems with thousands of outlets. It is often said that we are the most franchised country in the world per head of population, but strictly speaking that is not true. It is true, perhaps, in the context of the sheer number of systems, but those systems are very small. If you instead look at the number of franchised outlets per head of population America would be a little ahead of us. Because of our small population, we have relatively small chains.

A mistake the American systems often make is thinking they are going to achieve the same growth here as in the US, with hundreds or even thousands of outlets.

“Their pricing can be a little out of kilter too, and sometimes their timing is wrong. Trend-wise they may be a few years ahead of us, and therefore they can establish here prematurely. Everyone makes similar mistakes. Australians do and the Americans do. They do not do their homework to obtain a realistic sense of what can and can’t be achieved.”

Another key issue in any expansion program should be the protection of intellectual property. In this respect some Australian franchises have fallen foul of unscrupulous practices in foreign markets – a fact not lost on Scott.

“Before actually going offshore you need to think of ways of separating IP out of the business. You can, for example, put your IP into another entity and in so doing avoid selling it off. However, it is not just a matter of protecting IP. In the first instance you have to work out exactly what it is that you have, and this means conducting an IP audit to have it valued, and then written into the agreement. I think people tend to underestimate what it is that they have and give it away too quickly,” she says.

“The franchising model is in itself a good way of protecting IP because it is bound by agreements. Having said that, it all depends on to what extent those agreements are honoured in the other country. In China, for example, contracts are looked on more as a memorandum of understanding, even though there is now specific legislation in franchising to do with IP. Still, it’s one thing to have legislation and quite another to enforce it if it’s breached. In other words, how diligently are they going to go after offenders? Under the WTA the Chinese have now agreed to bring their framework in line with world standards. Regardless, unless you had a very good understanding of the market and excellent connections there I would not at the moment be going into China as my first export market.”

Clearly China is a market for the experienced and very switched on, and in many respects these are the traits of ‘blue chip’ systems that have already reached critical mass in Australia and are primed to fuel further growth overseas. Austrade specialises in assisting the small to medium-size sector but also works with the ‘big end of town’, even though the players are generally well placed to help themselves.

“They generally have established networks, but having said that we have also helped some very large systems with contacts in-market,” Scott says. “We have often used our contacts to make VIPs and the right media people available at launch. We have assisted Jim’s Group and Bartercard in the UK to gain extra profile, and in Hong Kong some of the big building contractors we have worked with have been able to generate business through our contacts.”

In other words, Austrade deals with the full spectrum of the Australian franchising community.

“You get people who are just starting out, or perhaps have three or four outlets and think they are going to conquer the world, right up to some very sophisticated systems where the franchisors are quite savvy, switched on and know exactly what they are doing,” Scott says.

The question remains, however, in a country where even the largest home-grown systems are minnows by global standards, as to whether it is truly realistic for some of the smallest Australia-based operations to try to take on the world.

“There is scope, but in the main I wouldn’t recommend it,” Scott says. “It is important to remember that the value of your brand increases as you gain traction in your own market. If you do not have a solid, proven track record, what are you really selling to people who are looking at potentially taking a system to another country? There are, as I said before, opportunity costs in taking a system offshore before you need to and when there are still unexploited opportunities in the home market.

“But sometimes the timing is just right, and an interested investor may well be the trigger to start researching a particular market. In the case of Fasta Pasta, for example, a party from Malaysia came out, ate in the restaurants, loved the concept and thought they could make it work in their home market. However, it took three years before the franchise actually went to Malaysia because in that time Fasta Pasta was conducting its due diligence, assessing the Malaysian and other markets, and its likely strategy subsequent to expanding to Asia. In the end it finished up giving the interested party the master franchise for Malaysia, Singapore and Thailand.

“Dome Coffee out of WA is a similar example, so it’s not to say that it hasn’t been done and small franchises will not succeed, but in the main, as Rod Young from Deacons Consulting says, you should ideally have achieved 70 percent saturation in Australia before considering overseas.”

As reported in this issue’s In Brief section, with services now accounting for approximately two-thirds of the developed world’s economic activity, Austrade global team leader service exports, Lloyd Downey, is urging professional service providers to get into exports. In terms of the management systems currently best equipped to succeed internationally, Scott is quick to endorse the call to action by citing service franchises.

“I think there is a big opportunity for service franchises as they don’t necessarily need bricks and mortar, meaning you are not constantly having to look for sites which, in London for example, are now few and far between and very costly. Mortgage brokers, financial service providers, tuition and training franchises and professional service providers to organisations, such as Expense Reduction Analysts , are all well placed in this respect,” she says.

Nonetheless, Scott does not underestimate some of the frequently difficult issues smaller service providers, in particular, have to contend with in the export of their business.

“It is very difficult for the micro businesses, especially when what they are offering is tied to a certain personality or individual. They might not even be aware that franchising provides a potential solution to expanding their business both locally and overseas. That is why we wrote the booklet How to franchise your business. It was compiled with just those small service providers in mind -– people who were looking to replicate what they were doing and market it. You only have to look at Action International and business coaching and consulting franchises to know that, through franchising, it can be done.

“Take the case of Helen O’Grady (Helen O’Grady Children’s DramaAcademy ). She originally thought what she had was specific to her skills alone, but realised the concept could actually be packaged up and replicated. If you can provide the tools other people can apply them and produce similar outcomes in multiple locations.

“A key issue for service providers is that they tend to deliver their services on a fly-in fly-out basis, and obviously you can only be in one place at the one time. There is a need to explore other avenues, and franchising is one of them. Lloyd Downey is trying to fish out who in the services sector might have an interest in exporting and also highlight the fact that Austrade has a services division that can help.

“This is not to say we are going to be able to help every individual lawyer or accountant with an opportunity that will dovetail into all their needs, but we can show them ways to tie into networks that will generate them business. Even in certain legal circles, where a firm might not be large enough to establish a stand-alone office offshore, we can show them ways to form alliances with like-minded niche players so that instead of, say, having a branch office in London, they will have an alliance partner, with the parties referring each other business. Alternatively, you might joint venture with an offshore company and secure an investment interest as well.

“This type of co-branding makes a lot of sense, because in many cases you will not even be qualified to practise law in multiple countries. Instead, you partner with local people who already have the necessary qualifications. This is also the beauty of franchising – being able to appoint people who have the right accreditation to meet local standards. This is certainly why franchising is such a good model in India. It allows you to circumvent foreign direct investment laws because you are not the one actually conducting the business – you are just giving permission for your model to be used by others and charging a fee for that.”

With further regard to models poised for growth, Scott cites a long-time staple of the franchising mix.

“People will always have to eat, so the food franchises will always be popular, especially those with a point of difference,” she says. “Also, as a result of globalisation tastes are becoming increasingly homogenous around the world, so there are opportunities emerging in markets that previously had little desire for western-type brands. Ice-cream, for example, has become extremely popular in Asia, where once there was little appetite for dairy products.”

Again, the key to success in any market is preparation, and in this respect Scott says franchisors tend not to seek as much help as they could from government sources.

“In a way this is quite understandable, as they rely on their lawyers and accountants, and both professions certainly play a key role in franchising, especially with regard to documentation and agreements,” she says.

“However, I suspect that some franchisors are simply not aware of just how much assistance is available from the government – and not just from Austrade, but state governments as well. It is important to tap into multiple sources of assistance.”

For its part, Austrade does indeed offer multiple forms of assistance. At the 2005 Franchising & Business Opportunities Expo at Darling Harbour in April it will launch an international buyer program to deliver overseas opportunities to exhibitors. In October last year it organised a trade mission by Australian franchisors to the UK aimed at exploring opportunities for their concepts in the British and European Union markets (see the In Brief news report in this issue). The list goes on and so does the range of publications it produces to help operators understand such issues as accessing the Export Market Development Grants (EMDG) scheme.

“We are not here to run people’s franchise businesses, but when it comes to taking them overseas and providing them with the channels to find out the best ways of doing things and to prepare themselves, we can certainly help,” Scott says.

For more information about buying a franchise or help with running a franchise, there is more information available.