Is franchising in a recession?
The election of a coalition government promised an economic boon that would re-instil confidence in the small business sector. Now, just a few weeks on, the Federal government looks poised to tackle some of the industry’s most prevalent concerns, but is it enough?
While critics have been calling for an independent review of the franchising sector for some time, many believe the joint committee’s probe into franchising will have little effect.
Intense media scrutiny and negative press has seen a slow in franchisee recruitment and interest across the board. Couple that with formation of an eagerly awaited franchising taskforce and the sector looks in for an overhaul.
Jason Gehrke, founder of the Franchise Advisory Centre (FAC) said while it would be easy to blame a downturn in franchise network growth on the parliamentary inquiry, there are a number of external factors that have played a significant role.
“Unless you were a brand that was specifically named in the franchise inquiry, then there may be no attributable reason why franchisees aren’t banging down your doors,” Gehrke said..
Speaking at the FAC’s Franchise Leadership and Management forum in Brisbane, the sector expert revealed two qualities that underpin the identification of a prospective franchisee; talent and capital.
“You could consider both of these to be a form of capital; human capital and financial capital,” he said.
“What impacts the availability of these things can actually be attributed to economic factors.”
Since the early 1990s, the unemployment rate in Australia has been steadily dropping, buoyed by a growing workforce participation rate.
An increase in the number of active workers is often a boost for the overall economic climate, however a low unemployment rate is generally a metric of high job security.
Employees are more confident than ever in their working arrangements, a trend which sees fewer Australians seeking self-employment or entrepreneurship.
“Unemployment is certainly a factor that drives franchise recruitment. In a low unemployment environment, the pool of potential franchises is already shrunk,” Gehrke said.
“It’s very difficult to convince people to leave a job to take on the relative uncertainty of self-employment.”
It’s this uncertainty that is causing a huge barrier in franchise recruitment, but it isn’t the only factor.
Throughout the election, the government promised improved conditions for small business operators, hoping to bolster entrepreneurship and business ownership.
Couple that with the Reserve Bank of Australia’s June move to reduce interest rates to their lowest ever level, and Australian entrepreneurs should be on the path to prosperity.
However, one economic factor continues to loom overhead.
“Households in Australia are at record-high levels of personal debt. In Australia, we are comfortable living at or beyond our means as a nation,” Gehrke said.
“What that means is that very viable franchise candidates, people who have got the talent, still can’t raise the money to buy a business because they are so heavily indebted. People are increasingly challenged to raise any money, not just to buy a business but for any form of spending or investment.”
This accumulation of household debt has also put home-ownership under the pump, which Gehrke believes has made access to business finance more difficult.
“The way people secure a business loan is to put their house on the line and banks increasingly still look to real estate security,” he said.
“If there is a declining proportion of home ownership in this country, that means there’s a declining population of people who have the capacity to actually raise a loan.”
Gehrke suggest that for franchisors to continue to grow their networks, they must respond to an evolving market.
The opportunity for franchise brands to expand has not completely closed, however. In fact, as the domestic population grows, so too does the pool of potential applicants, but it isn’t a one-size fits all solution.
The nature of Australia’s population growth has come largely from migration, rather than from natural births.
“What franchisors have seen is an increase in enquiries that are coming from people from a non-English speaking background,” Gehrke said.
“In fact, if we look at where people are coming from, it’s increasingly from China and India whereas our previous number one destination for migrants was from the UK, which is now being outstripped considerably.”
Gehrke believes that business migration offers a welcomed change for the franchise sector, with the weakened Aussie dollar also providing an advantageous opportunity.
“So long as the Australian dollar stays depressed, a migrant who transfers their wealth to Australia will get better bang for their buck than if they go to the US or somewhere else,” he said.
“We will continue to be a desirable destination for business migrants, who may well be attracted to franchising on the basis that it gives them the opportunity to earn a living in this country, as well as provides them with a pathway to a visa.”
Economic factors causing a recession?
While the economic factors of low unemployment, high household debt and access to finance make the task of franchise network growth challenging in the short term, the status quo may be about to shift.
Some economists are predicting a recession will grip Australia by 2020, after growth slowed to its weakest result since the GFC, but it isn’t all bad news.
Gehrke suggested that a recession would likely improve the appeal of franchising for everyday Australians, which may lead to a jump in network growth.
“In a recession, unemployment goes up and therefore the pool of available franchisees will expand,” he said.
“People start saving money rather than of spending it, which increases their long-term access to finance.”
While there is no certainty that a recession will hit Australia, the Franchise Advisory Centre founder believes that franchisors should start preparing now.
“It means that franchisors through their branding and their disciplines around marketing are better positioned to weather the storm than independent small businesses,” he said.
“Consequently, franchise brands will generally come out the other end of a recession in better condition and probably pick up market share from competitors, particularly independent operators.”