Franchising in 2011
The global financial crisis (GFC) finally caught up with the franchising sector in 2010; but only for some.
The good news is the well managed systems with strong balance sheets continued to grow and prosper in 2010. That was the finding of two major studies of the franchising sector in 2009/2010. And it is a very encouraging portent for 2011.
The GFC, which struck at the end of the third quarter of 2008, hit small businesses in Australia very hard in 2009. Australian Bureau of Statistics figures showed that almost 1000 businesses a month ceased trading in the first half of 2009. Retail businesses were among the hardest hit.
Franchising was the exception in 2009, with many businesses experiencing record growth in revenue and strong growth in franchisee profitability. Brands like Clark Rubber, Mr Rental, PoolWerx, Pack & Send, Eagle Boys Pizza, Dominos, Athlete’s Foot, Hairhouse Warehouse, Crust, Sumo Salad and Grill’d all recorded strong growth. A number continued their overseas expansion on the back of strong performance in Australia.
By 2010, the less well-established brands were having trouble coping with the ongoing tight economic conditions. Growth stalled for many. Some hit serious financial difficulties, including Allied Brands and non-franchised brands such as Krispy Kreme. Brands like Wendy’s were forced to undertake tough measures; but they are now confident of proceeding with a more robust model. A number of the smaller players sold into the bigger operations.
The result was that, overall, sector growth slowed in 2010.
However, as pointed out in the biennial survey conducted by Griffith University, and released in October 2010, the established brands continued to grow in line with previous years. Griffith identified what it called a shake-out and consolidation of the market, where the solid performers were able to capitalise on the consumer flight to quality and value, delivered by trusted, reliable brands.
In 2009/10 the overall sector turnover shrunk marginally, as did franchisor numbers, according to the survey. But it remains a $128 billion sector, employing over half a million people.
And that is the essence of franchising. Without any help from Government and without billion-dollar bail-outs, the franchising sector stood out, continuing to perform when many industries were seriously bleeding.
The most promising aspect of the outlook for the year ahead was the survey conducted recently by PricewaterhouseCoopers. It showed franchising to be outperforming the Australian economy and highlighted strong optimism for ongoing growth among the businesses it surveyed.
Its 2010 survey backed up findings from the previous year's survey (conducted during the GFC) in which franchise systems were forecasting growth of 12 to 15 percent. The 2010 results bore out the franchisor expectations, with franchisor revenue (which is of course a function of franchisee revenue in most systems) growing by 12 percent and profitability by 19 percent. And the outlook is optimistic, with franchise systems forecasting growth of 13 percent for 2011, and 49 percent over the next three years.
Another demonstration that the sector is on the right track was seen in the Griffith University findings regarding the incidence of disputes between franchisors and franchisees. The study found that only one percent of franchisees were in dispute with their franchisor — a number which has been consistent over the past decade of biennial surveying by Griffith.
What does this mean for the road ahead?
With the Australian economy jumping somersaults over many other economies in the developed world, the scene is set for franchising in 2011 to continue its strong run. But it won’t be without its challenges too.
Currently franchising in Australia is regulated by the Franchising Code of Conduct — a national set of rules that complement the Trade Practices Act and provide the sector with direction, boundaries and avenues for low-cost mandatory dispute resolution. Our regulatory mix is the most comprehensive of any in the world and it is working well, with new enhancements to the Code introduced on 1 July and new ACCC powers coming into effect on 1 January.
However, at the end of 2010 (and at time of writing) two backbenchers, one in WA and one in SA, have launched a push for new state-based rules for WA and SA. Franchisees and franchisors came out strongly against the legislation mooted in WA (which was raised against the wishes of the Government and was opposed by the Federal Minister, Senator Sherry). The matter has now been referred to a committee for greater scrutiny of its potential impact. We are awaiting developments in SA (the backbencher bill raised at the end of 2009 was not adopted by the SA Government, but it has said it is still considering introducing new rules). FCA is against state-based legislation as this will inevitably add cost and complexity to what currently is a seamless national system.
Availability of funding
According to the PwC survey, franchisees in over 60 percent of systems are having difficulty obtaining funding. Although funding for small businesses may have slowed down somewhat during the GFC, generally speaking, there is less risk in lending to bank accredited franchise businesses, as proved by the performance of franchise systems during and after the GFC. Some banking institutions, such as NAB, have been on the front foot in providing financial support for franchise operators and in 2011 you will likely see other funding institutions coming around to the advantages of franchising.
Finding suitable franchisees
It is important to realise that to be a successful franchisee there must be certain traits that are evident and, depending on the system itself, a real fit between personality and culture.
Sound business skills, passion, the ability to follow rules and processes as well as a strong work ethic, are all factors which contribute to franchisee success. In a sense, it is reassuring to know that one of the other biggest challenges for franchisors in 2011 is the availability of suitable franchisees (over 70 percent of systems feel this way, according to the PwC report).
Franchising is not just about paying your franchise fees and getting the franchisor's "good luck!" sentiments. There is much more to it than that. The relationship between franchisor and franchisee is often likened to that of a marriage, where both parties must have a certain compatibility and, more importantly, clear channels of communication and expectations.
Steve Wright is the executive director of the Franchise Council of Australia.