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If franchising died, what would we say?

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Inside Franchise Business: would we miss franchising if it was closed down?Franchising in Australia has been getting a bad run in the media lately. Imagine the media coverage if Australian franchisors decided to stop franchising. What might this look like?

Here's one way the death of franchising might be reported...

The announcement that Australian franchisors are closing down their franchised operations has sent shock waves through the business and wider community.

In a press conference, a group of senior franchise executives admitted they had mixed feelings about the decision. They said, while they won’t miss the constant worry of thinking about the viability of their franchisees, or the stress of constantly being criticised by feisty franchisees, they will greatly miss the satisfaction of helping people achieve their dream of owning their own business.

One executive said “The thousands of people who were in business for themselves but not by themselves will now be battling it out alone and, to be honest, I fear for their future.”

Business experts predict significant sales declines in major industries such as home services, food retailing, health and beauty, financial services, real estate and hospitality. They attribute the impressive past growth in these sectors as largely due to a culture of innovation in the majority of franchise networks, and their ability to harness the entrepreneurial drive of their franchisee

While some franchisors plan to convert a proportion of their franchises to company owned units, the general consensus is that, without the franchisee “skin in the game factor”, sales in most of these business units will drop by 20 per cent or more, forcing the closure of a significant number of locations.

Some franchisees have been seen rejoicing, especially those who have been in conflict with their franchisors.

However reports of devastated franchisees are flooding in. Many are grieving their loss of access to the brands they and their customers had come to love. One ex-franchisee said “It feels like the death of a family member. My wife was crying as we took down the signs from our store and handed back the uniforms.”

A young couple, who owned a juice bar franchise, told us “We were initially relieved we wouldn’t have to pay those annoying royalty fees, but then we realised we’d no longer be visited by our field consultant, or be able to use the systems that had made our business so easy to run.” A businesswoman who’d been a printing franchisee for 15 years said, “I’m going to be lost now I don’t have the benchmarking data to compare and measure my business performance against my peers.”

Numerous ex-franchisees are expressing concerns about now becoming isolated. They refer nostalgically to the regular conferences and meetings that provided a place to get-together with their peers, many who had become lifelong friends, to share their ideas and challenges, and have a legitimate tax deductible holiday.

While on the subject of conferences, the conferences and events industry is now in crisis management. A spokesperson said the thousands of franchising sector conferences and events each year used to directly and indirectly generate almost a billion dollars a year.

Thousands of other suppliers are also reviewing their options as they will now have to negotiate and deal individually with tens of thousands of small business owners.

One supplier said that not having a franchisor head office to coordinate product standards, distribution arrangements and payment terms would be a nightmare. He said independent small business owners often lacked cash flow management skills and had unreasonable expectations, making them difficult to deal with and unreliable in paying their bills.

Parents are disappointed their kids will no longer have a job with a reliable business that requires them to wear a uniform, practise positive personal habits, and gives them accredited training in important life skills.

Another group to be affected are the families of the nearly half a million people who worked for local franchisees. Parents are disappointed their kids will no longer have a job with a reliable business that requires them to wear a uniform, practise positive personal habits, and gives them accredited training in important life skills.

Shopping centre managers are also in a panic, as without the guidance and support of franchisors, many ex-franchisee tenants are cutting corners on product quality, store image and customer service, in an effort to keep paying their exorbitant rents.

Shopping centre share prices have plummeted, as the market predicts a downward spiral in rentals as centre managers try to prevent their malls from becoming deserted. One ex-franchisor, who had 130 franchisees in shopping centres around Australia, said this was possibly the only good thing to come from franchising’s closure.

The reaction to the announcement by Government departments has been interesting. There are rumours the Australian Fair Work Ombudsman has applied for funding to employ an additional 300 inspectors to ensure that small businesses are paying their staff correctly, a task formerly done for free by franchisors.

The Commissioner for Taxation has convened emergency meetings to discuss what are expected to be significant reductions in tax revenues due to an increase in the black economy. The head of a large accounting firm, who declined to be named, said that while many independent small businesses and large corporations fly under the radar or avoid paying taxes, franchisees were the most compliant business group in paying their correct taxes because their franchisors required them to declare their revenues and keep accurate records.

Given that business format franchises generate total sales revenues of around $66.5 billion for the Australian economy each year, the Prime Minister is said to be concerned about the broader economic impact of franchising’s closure, and the risk that this could trigger a recession.

There are rumours the Australian Fair Work Ombudsman has applied for funding to employ an additional 300 inspectors to ensure that small businesses are paying their staff correctly, a task formerly done for free by franchisors.

One group that believes it will benefit from this change are the cooperatives, who claim they can organise small businesses to come together under a group buying framework.

However several experts in cooperatives, have discreetly admitted that, ironically, one thing cooperatives do not do well is cooperate, and that the franchising model was far superior in both providing credible leadership and coordinating the energies of small business people to work together under a common brand.

What about the average customer? Do they care? We spoke with a number of shoppers in a busy retail district. The sentiment was definitely that customer service standards have dropped. Many customers were surprised to learn that their local gym, hairdresser, homewares shop, pool cleaner, chemist and even their local bank were once franchises.

Consumer groups have acknowledged that the consistency customers have come to expect when buying from businesses under the same brand will be a thing of the past. Consumer groups are also worried that, without franchisors maintaining the reputation of their brands, individual small businesses may become opportunistic in their pricing and in their dealings with customers.

Franchising, perhaps we should have appreciated you more while you were around. It looks like you will be missed.

  • This is Greg's Healthy Franchise Relationships 2-Minute Tips #164
   

 

Greg Nathan

Greg Nathan is a psychologist, keynote speaker, author and international expert in franchising relationships. Greg is the founder of the Franchise Relationships Institute and is regularly invited to deliver keynote addresses at international franchise sector conferences. His books include Profitable Partnerships and the Franchise E-Factor. Greg started out in franchising as a multi-unit franchisee with the Brumby's chain and he went on to support roles with the franchisor. View More...
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