Mortgage Choice franchisor still a Big Mac

Think McDonald’s in Australia and, unless you are craving a Big Mac, from a purely business perspective chances are the name that will first come to mind is Peter Ritchie.

Although he resigned as non-executive chairman of the board in December 2001, Ritchie in many ways remains synonymous with the brand. This, perhaps, is not surprising given the fact that he was the first employee of McDonald’s Australia and the first employee of the McDonald’s system outside North America.

After a stint in London from 1966 to 1969 for the International Wool Secretariat and a firm of management consultants, he returned to his native Sydney and managed a property development company before being approached in 1970 to join McDonald’s and train in the US. In 1973 he was appointed managing director in Australia, and throughout the 70s and 80s played a pivotal role in all aspects of the company’s development – everything from establishing raw product suppliers to the construction of new stores and the development of training programs.

During his renowned tenure as chief executive McDonald’s Australia grew to more than 500 stores and 50,000 employees. In 1983 and 1991 he was a member of the board of the US parent company, McDonald’s Corporation, and also established the hamburger giant in most of the countries in Asia and the Pacific, including Hong Kong, Singapore, Malaysia, Indonesia and New Zealand. Indeed, he was the founding board member of McDonald’s Hong Kong, Malaysia and New Zealand.

In December 1995 Ritchie announced his retirement from an executive role at McDonald’s in Australia after 25 years with the company. However, he stayed on as non-executive chairman of the board until the end of 2001. Today he is chairman of Mortgage Choice Australia Limited , 1800 Reverse Pty Ltd and a director of the Seven Network Limited, Tennis Australia and the University of NSW Foundation.

On 9 June 2003, Ritchie was honoured with an Order of Australia award for service to business and industry development in Australia by providing employment opportunities and training for young people, and to the community through corporate, financial and material support for health and educational facilities.

Given the escalating concern over youth obesity in most western markets and corresponding push in some to limit or ban altogether the advertising of many convenience food products to children, it is arguably significant that Peter Ritchie is an enthusiastic sportsman. He has represented New South Wales and Australian Universities in water polo, Manly-Warringah in surf lifesaving, still plays competition tennis and is a keen golfer.

Since leaving McDonald’s Ritchie concedes that he is no longer as emotionally involved as he once was with the issue of fast food advertising. Even so, he retains firm views on the subject, and believes Leader of the Federal Opposition, Mark Latham’s push to tackle youth obesity by banning advertising to children is ill-founded. With a Federal Election looming, the strategy has in some quarters been criticised as simplistic and a shoot-from-the-hip grab for votes. On the other hand, MPs and health authorities in the UK are calling for similar action there.

“Unfortunately, they are wrong, but they will not find out that they are wrong until after they have loaded us with a lot more regulation that has not impacted in any way the obesity of youth,” he says. “The simple reality is that the obesity problem stems from lack of exercise – it is the result of people not moving from in front of their computer screens.”

Ritchie says he has a number of friends involved in physiotherapy, and that they express increasing alarm at the number of children coming to them with bad backs and Repetitive Strain Injury (RSI). It is, he maintains, a recent phenomenon and one directly attributable to lack of exercise.

The advertising industry has long maintained that while advertising can influence product and brand preference, it does not in itself stoke consumer demand for categories such as hamburgers, pizzas or, for that matter, even tobacco. In other words, advertising cannot make somebody want to smoke, eat a hamburger or buy a pizza, but among smokers it can influence an individual’s choice of brand, create a preference among those who feel like eating a hamburger for, say, McDonald’s over Burger King, or to buy a Domino’s pizza instead of one from Pizza Hut.

Clearly advertising plays a vital role in helping all marketers differentiate their products, create brand awareness and communicate special offers. But would the elimination of fast food and confectionary-related advertising during children’s television viewing times help solve the youth obesity problem? Obviously some believe it would, while others are adamant that it would not. There is broad consensus, however, that more exercise and less computer gaming would have a direct impact.

“But the problem for the food industry is that we sound as if we have only our self-interest at heart when we make such commonsense statements. If McDonald’s speaks out about advertising it is almost counter-productive,” Ritchie says.

He believes that if elected, Latham will probably further rationalise the issue on fast food advertising to children and in all likelihood not proceed with the implementation of a ban. From a marketing viewpoint any ban would inevitably affect some sectors of the franchising industry, but that aside Ritchie sees few trends emerging in the 2004/05 financial year to unduly alarm franchisors or franchisees.

A recent survey of private sector economists concluded that the economy will continue to prosper in 2004/05, with low unemployment, low inflation and low interest rates. Other pundits continue to forecast harder times, with steadily increasing rates and a further cooling of the housing market. Ritchie is unperturbed.

“It is in a way a good time to test a concept when things are tough,” he says. “If times are really good you can be misled into believing that anything will work. I have seen that as a problem for people who have opened in a boom and then could not understand what happened or what to do when the economic climate gets tough. In my McDonald’s experience I not quite – but almost! – welcomed harder economic times because I saw it as an opportunity to grow my business when other people were suffering.”

This, however, is not to say that he is predicting times will get tough.

“I would express it as perhaps being just a little more reasonable. The property boom as such is over, but that doesn’t mean the bottom has fallen out of property. Good real estate agents will continue to do well, but the marginal ones may fall aside. And in a way that is good for the industry,” he maintains. “The same applies to the industry I have just joined – mortgage broking through Mortgage Choice. Companies with substance and a good product offering will continue to prosper. Their rate of growth will not remain the same, but in the long-run their market share will probably increase. In a franchise situation I would look to make sure my system was maintaining or growing market share, even though gross sales might be lower than the previous year.”

Ritchie is overwhelmingly positive about the prospects of the franchising sector, noting a growing acceptance of the concept in broader business circles. But he tempers this observation with the comment: “There has always been a bit of scepticism – even cynicism – about franchises because of the few shonky operators there have been in the industry. I think we are getting through that, but everybody in the industry needs to be aware of it and keep working to improve it.

“Regardless, I think the Australian structures are as good as any in the world and in many cases we are probably more innovative. We are, perhaps, more entrepreneurial. There is a risk in that, but I think there is reasonable balance.”

One risk he identifies is the growing propensity to co-brand.

“It absolutely has the potential to dilute a brand,” he warns. “McDonald’s does not do too much of it because of the realisation that an association with anybody in any public way directly reflects on the main brand. McDonald’s only wants to associate itself with quality which, of course, is so self-evident as to hardly need stating. But there is a risk for franchisors that might be looking for immediate cash flow help to fall for the trap of taking money from somebody to take advantage of their network, or something similar. I would warn against it, because who you associate with will have a direct flow-on effect to your own brand.”

The fragility of brand integrity is such that an ugly public fall-out with a partner of any sort is likely to not only adversely impact the perception of a brand, but the bottom line as well. A franchisor/franchisee spat can result in seriously negative publicity if it deteriorates to the point where it ends up in court and under the media spotlight. Still, conflict can also have its benefits.

“There is scope for constant conflict between franchisor and franchisee and in a way that can be a sign of a healthy system. If there can be argument between the two parties that is not fatal it is, in most cases, positive,” Ritchie says. “But when it breaks down the first thing to look for is mediation and some companies, like McDonald’s, have that facility set up in-house. If it failed you would then go to an independent mediator, or I certainly would, before resorting to the courts.”

Part of the problem, he says, is that lawyers can have a vested interest in only encouraging court action.

“And the rest of the community needs to be aware of that,” he adds. “Some of the more enlightened legal people do encourage mediation, but certainly not the bulk of them. There are some particular lawyers and some biggish firms out there that have no interest other than encouraging legal action.”

But just as it is in other business sectors, legal action is sometimes the only course of action in franchising. Cases involving fraudulent behaviour are an obvious example, with the Queensland Minister for Tourism, Fair Trading and Wine Development, Margaret Keech, recently using her powers under Queensland’s Fair Trading Act to name Ronald Frederick, who she described as a career criminal with more than 50 convictions in Australia, as the culprit behind a scam that promotes snack-food distribution franchises promising earnings of $2000 a week. Keech warned that Frederick’s usual scam is to register business names and then attempt to sell franchises of the businesses, advertising throughout Australia. Unfortunately, they turn out to be worthless, with some past victims having been stung for as much as $100,000. She said police were investigating his latest bogus scheme and that the Office of Fair Trading would assist wherever possible.

More commonly, fraud is committed ‘in-house’. As Ritchie notes, its extent gets to the establishment of the franchise system in the first place.

“If the system is too loose, it will encourage fraud,” he says. “In my opinion, controls need to be overly stringent. As much as they might rail against them at times, franchisees really feel supported by tightened controls, including financial controls. In many cases it is that which differentiates them from a small business – they have a strict financial regime that will keep them disciplined and in control.”

So what, then, are the single most important skills necessary to succeed as a franchisor?

“A franchisor has to be the real expert. If they are not, then what are they really selling? Being the real expert is the absolute minimum,” Ritchie says. “A franchisor must at all times be capable of assisting franchisees to grow their business – be it through improving the structure, adding to their marketing or enhancing their personal abilities and expertise. In this regard, franchisors must always be ahead of the game. If the franchisor is just putting them into business and then collecting a proportion of their gross revenue, in the long-run it won’t work. Franchisees will ultimately see what they’re doing and realise they are just funding somebody who is taking a percentage off the top. Another way of expressing that is that there has to be value to justify the percentage off the top.”

As architect of one of the most successful franchise operations in the Asia-Pacific region, Ritchie knows that little can be accomplished without planning and commitment. But if there were any one aspect of the way franchising is conducted in Australia that he could change overnight, what would it be?

“Perhaps communication between franchisor and franchisee,” he says. “More communication can only be beneficial. I say that not with any particular organisation in mind but, rather, simply because I know it is valuable and will improve the situation for both parties in every case. Even at McDonald’s, where there is already a lot of communication, we know that more of it will result in better relationships and that the businesses will generally work better because people are happier.”

Unfortunately, an issue rarely bringing a smile to the face of franchisors these days is that of occupational health and safety. Ritchie acknowledges this, accepts that it is an expensive overhead, but warns about the danger of failing to properly manage it.

“McDonald’s puts a lot of effort into it, and once again it comes back to communication,” he says. “The company really works at communicating the issues to franchisees, who need reminding and prompting and urging to spend the money necessary for compliance. It is something learned from bitter experience, but when you have 800 stores all over the place there is a lot of room for little problems to arise that aren’t compliant with the requirements of the law – things that can just get overlooked in the big scheme of things. It’s tough, but the bigger the franchise, the more you need to worry about it.”

Words such as communication, profitability, expertise and integrity feature strongly when Ritchie talks about business. Franchisors need to be the experts and no system can rely on somebody not being told the whole story or a “bit of a twisted truth”.

“There are also too many franchise systems set up to provide people with a job,” he says. “Unless there is enough profitability to ensure franchisees make more than just a reward for their efforts, the system will not survive. Communication must be totally open. Franchisors and franchisees must be able to tell each other exactly how it is.”

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