Australia’s heavily populated franchising sector has seen some changes over the last couple of years that have set it up for a more sustainable future. Consolidation has been a conversation piece in the sector for some time, now we have seen the reality: out go some of the newer systems, particularly in the retail arena.
So there is a slimmed down portfolio of franchise systems which Professor Lorelle Frazer believes is best for the sector. Frazer, who heads up the Asia-Pacific Centre for Franchising Excellence, says “I’m pleased to see a slowdown in the sector. ItÕs been ridiculous, franchise systems have not been prepared and itÕs the smaller, younger systems that have dropped out.”
Overview
According to the latest report from the Centre, the Franchising Australia 2010 survey, there are now about 1025 business format franchisors across the country, down from 1100 two years ago.
There has been a reasonably mild downturn (two percent decline) in the number of franchise units since 2008, with an estimated 69,900 units now operating. And there is evidence that these systems have adapted to the economic conditions and are growing.
The impact of the tightening economy, particularly at retail, has resulted in a drop in the overall sales of the total sector (including fuel retailers and motor vehicle sales) now reported as $128 billion.
The 2008 report recorded the sector’s sales at $130 billion. Business format franchise units account for a $60 billion turnover.
While the numbers are lower the figures are better than Frazer had expected. “Franchising has held its own despite the downturn in retail,” she says.
Holding on has been the experience for many franchisees, with sales up for 34 percent and profitability for 29 percent of franchisees and about 40 percent of franchisors reporting a decline in franchisee sales and profitability since 2008.
Frazer says “Franchisees have taken the brunt of it.”
But there is good news for franchisees in the more established systems. Rod Young, executive director of DC Strategy, believes the franchising sector is bullish, a view garnered from 150 top executives across leading
retail, food and service franchise groups (based on stores numbers and total profit). DC Strategy‘s annual Franchisor CEO Survey revealed a positive attitude to growth over the next 12 months.
Young said “The results clearly validated the strength of a well developed franchise system. The franchise sector has succeeded in creating stronger performing and more valuable businesses. Well developed, mature and well managed franchise systems fared much better, growing very quickly whilst the less mature systems were still growing at a reasonable pace.”
What he expects to see is more consolidation as the larger systems snap up some of the smaller franchise
systems.
And the consulting firm PricewaterhouseCoopers‘ annual survey of the franchise sector highlights the current growth in franchisor revenue and predicts great things for franchisees in the coming years.
The report, the Franchise Sector Indicator, which surveyed established franchises with more than 20 outlets, found franchisor revenue increased by 12 percent in the 12 months since the 2009 report and profits increased by 19 percent, figures not matched by the franchiseesÕ experience. However, the report points out franchiseesÕ revenue and profit growth at six to seven percent were still double the Consumer Price Index.
And looking ahead, these established franchisors see average franchisee profit growth as high as 46 percent
over the next three years. For their own short to medium term outlook, franchisors predict growth in line with the last year — 13 percent.
This report points to franchisors’ confidence in the recovering economy and their own business models. It reads: “Having survived the global financial crisis and economic downturn, most franchise networks are now strongly positioned to continue to deliver on growth targets”.
Steve Wright, the executive director of the Franchise Council of Australia, commented on behalf of the association on the survey’s findings. He remarked on the strong growth of franchising over the last year. But, Wright says, restricted access to funding remains a problem for the franchising sector.
“There are concerns that uncertainty over the global economy is going to prompt banks to tighten lending criteria even further, with those franchise businesses fortunate enough to obtain funds paying very high prices to do so.”
New research from research house 10 Thousand Feet shows that in the 2010 financial year franchisors found it
tougher to recruit. Ian Krawitz, head of intelligence at 10 Thousand Feet says “Redundancies and particularly redundancies with large payouts were not widespread and in fact franchisors cost of acquisition increased by 63 percent. With a higher cost of acquisition and less easy growth opportunities, franchisors instead took the opportunity to clean up their own backyard, with an increased focus on supporting existing franchisees.”
In the latest study by the research house, the third edition of the franchisor Expansion Study, it was highlighted that 80 percent of franchisors have a mentoring program in place to mentor their franchisees to success, up significantly from 42 percent last year.
“The fact that more franchisors have mentoring programs in place is fantastic for franchisees and the industry as a whole, but the really impressive news is 70 percent of franchisors with a mentoring program in place are training their mentors,” says Krawitz.
The other good news for prospective franchisees is that franchisors remain optimistic about growth, with the study showing seven in 10 franchisors feel they will recruit more new Greenfield franchisees in the next 12 months in comparison to the last 12 months, which means more opportunities and locations will be made available for new franchisees.
The research also found that franchisors are starting to take Gen-Y more seriously with 17 percent of franchisors having a tailored strategy to recruit Gen-Y, up from 11 percent a year ago.