Hungry for franchising
There are indications that the retail sector, and food retailing, remains the dominant sub-sector within the franchising arena.
This is reflected in the annual survey conducted by Mortgage Choice which questioned potential franchisees about
their intentions. In this report, over half of prospective franchisees are looking to invest in the food retailing sector within the next three years.
And according to the latest Franchisor Expansion Study, produced by research company 10 Thousand Feet, franchisors themselves predict the food retailing sector to be a growth industry.
This is despite the proliferation of cafes and coffee outlets already in the franchise arena.
An appetite for franchising
The Mortgage Choice 2010 Potential Franchisee Survey results highlighted the dominance of food retail as the franchise sector of choice, with 53 percent listing retail — food/restaurants/cafes – as their chosen industry.
According to franchisors responding to the Franchisor Expansion Study 2010 the key sectors expected to grow in the next 12 months are take-away food, with 17 percent of franchisors seeing this as a growth area, followed by coffee at 12 percent. This marks a continued return to popularity for coffee, which had only three percent of franchisors seeing it as a growth area in 2007, before it climbed to eight percent in 2007, says head of intelligence at 10 Thousand Feet, Ian Krawitz.
“The return in optimism for the coffee sector is no surprise. In 2007 the franchising community was looking at the coffee category and thinking about the retail cafe format of Gloria JeanÕs or The Coffee Club.
“Now on top of these models which are continuing to grow are other coffee formats that are growing rapidly. When it comes to other formats, look out for emerging brands such as Muzz-Buzz, a drive through coffee business whose revenue and store numbers continue to grow in WA and Victoria; Xpresso Delight, which puts coffee machines into office environments nationally and has built a network of over 100 franchisees in a short period, or variations on the traditional caf franchising model through the likes of Coffee Guru, which charges franchisees a fixed royalty fee rather than a percentage fee.”
More than half of franchisors surveyed for the Franchising Australia 2010 report have multi-unit franchisees. And in DC StrategyÕs Franchisor CEO Survey, itÕs revealed that 60 percent of chief executives have targeted multi-unit franchising as a key strategy.
Greg Hodson, national lead partner, franchising, PwC, also highlights the potential for the sector to develop this aspect of its business model, and suggests that means change.
“Multi-site and multi-brand franchisees are the norm in the United States, with some operating as listed entities. Yet in Australia, only 10 percent of franchise systems are owned by franchisees who own more than one site.
“The Australian sector has historically struggled to attract people capable of being successful multi-site and multi-brand operators. Attracting people with the necessary business skills will help this.
“It may also require even more highly systemised and controlled business processes, which lessens the need for day-to-day input from franchisees and allows them to work on their portfolio of sites rather than in them.”
Certainly the winner of this yearÕs Excellence in Franchising award for multi-unit Franchisee, Tony Zoobi of Hairhouse Warehouse, believes this is the way forward.
And it’s a view echoed by the Franchise Council of Australia‘s executive director, Steve Wright. “In the past this has been an intimidating concept for franchisees and franchisors. Now people are becoming a lot more comfortable with the concept, seeing it as an opportunity to achieve faster organic growth and greater profitability.”
The franchisee field
Franchisees have seen greater investment in marketing and support from franchise teams in the past two years.
But there is still room to help franchisees increase the value of customer transactions, suggests DC Strategy executive director Rod Young. “Some groups are doing this very well but others need to focus more on up-selling. There needs to be a clear distinction between the need to attract more customers and increasing the spend of current customers.”
And there’s potential in extending the marketing to the field of social media, he adds. “We encourage franchisors to consider the rapid and demonstrable effects of sites such as Facebook and Twitter as a highly effective marketing tool that is currently underutilised by the majority of franchisors.”
Franchisee costs and profits
According to the Franchising Australia 2010 study, the costs of setting up a franchise have risen in the last two years, particularly in the non-retail sector. The median start-up cost in a retail franchise in 2010 was $275,000, in comparison to $89,000 for a non-retail franchise. And dividing retail into food and non-food outlets shows non-food franchises cost more to enter at $304,500, as opposed to $254,500 for food franchises. Total start-up costs across the whole franchising sector were between $1600 to more than $1.2 million.
Almost every franchisor charges an upfront franchise fee (98 percent) and this can be up to $250,000 but the median figures vary from $30,000 in non-retail franchises to $40,000 for retail outlets.
The survey reports: “The median cost of inventories was $10,000 in retail franchises and only $1250 in other franchises where inventories are often not required. Non-food franchises included start-up inventory costs of $77,500 compared to $5000 in food franchises”.
Naturally there were significant fitout costs in retail franchise systems, and these showed a median cost of $150,000, with the extra costs of kitchens and serving areas pushing up the figures for food retail outlets.
There are costs for training, too, with the median at $2000 for retail franchises and $1250 in other sectors. Almost half of franchisors (45 percent) did not allocate specific costs for training.
All-important legal and accounting costs can be up to $15,000 in retailing and $12,000 in the non-retail sector. Add to all these figures appropriate working capital, and itÕs clear that financial acuity is needed before a franchise purchase and in the early stages of establishing the business.
“If franchisees get in too much debt starting out, once sales drop in a downturn, itÕs too hard to get back up,” believes Lorelle Frazer, director of the Asia Pacific Centre for Franchising Excellence, which produced the Franchising Australia 2010 study.
“Franchisors have put more effort into marketing and promotions as a response to the GFC and this is a good sign,” says Frazer.
This positive view is echoed in the PricewaterhouseCoopers report, the Franchise Sector Indicator. According to the report more than 40 percent of respondents added to the marketing funds that franchisees contribute to. Just nine percent felt their marketing levy was insufficient yet did not boost it with their own contributions.
There was also evidence from this survey that the internet and social media are playing a substantial part in franchisor consumer marketing strategies with 79 percent increasing their participation in internet marketing, and 49 percent introducing social media to the marketing mix.
Still needs more work
One of the keys to franchising is compliance, yet franchisors have pinpointed lack of compliance as an issue with franchisees. Following the rules and systems of the franchise is fundamental but somewhere in the franchisee/franchisor relationship compliance goes awry, with 61 percent of disputes caused by compliance issues according to the surveyed franchisors. Lorelle Frazer questions this: “Why do franchisors see franchisees are not compliant? Is it communication? The franchisee might not see the sense in that they have to comply with or they might just be the wrong franchisee.”
Extensive researching of the franchisee/franchisor relationship before purchase should reveal the system’s vulnerability or strength in the field of compliance.
Why franchisees leave
Confidently investing in a franchise is one thing; leaving it at a time that suits you is another. Exit strategies are not often top of mind when a franchisee starts out, but most do have a goal in mind. Frazer says “If franchisees are exiting because they’ve satisfied their goals, thatÕs good. If itÕs because they are unsuitable, thatÕs the franchisorÕs responsibility.”
And franchisors surveyed in the Asia-Pacific Centre for Excellence study revealed 17 percent of franchisees left because they were unsuitable to the system; a further 18 percent were deemed unprofitable — neither of these statistics good news.
So what advice is there for franchisees wanting to avoid being one of these negative statistics?
“There are no guarantees, but you reduce your risk if you go for an established franchisor who has been in the arena long term and is a larger brand. But you still have to make sure of your own suitability,” says Frazer.