What's driving the franchise sector right now

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Franchising in 2016. Image: pixaby.comThe franchising industry is still growing, despite being a mature sector. In the five years up to 2015-16 there is an expected annualised growth of 2.8 percent. In the five years through to 2020-21, growth will be a steady 2.3 percent. That will take the sector's franchisor revenue to $192.6 bn.

Franchising has seen some ups and downs in trading conditions, and as it heads into the next five years consolidation of businesses is expected to create more multiple-brand franchisors. There will be more franchisees across their networks too, and a trend for these franchisees to operate more than one unit or outlet.

Perhaps surprisingly the growth from new businesses has come from retail-based operators entering the franchise arena.

Ambitious Generation Y who see franchising as a way to run a business with support and training have, with financial assistance from their parents, helped drive the sector on. 

Corporate downsizing has also brought in new franchisees.

Looking ahead there is likely to be stronger demand for service-based franchise operations in line with social and demographic trends. Consumers will increasingly look to have some domestic chores outsourced as they are time-poor but with discretionary income. Gardening and cleaning, for instance. 

Day spas and beauty salons are expected to continue their growth trajectory as consumers with spending power look to indulge in luxury goods and services.

And an ageing population adds its own dynamic to the spending pattern - a focus on healthier lifestyles and travel, but also the desire to access aged-care at home.

According to the latest IbisWorld industry report, Franchising in Australia, "Industry growth areas include service-based franchises such as health, nutrition and well-being, along with aged care services and recreational services. 

"These types of franchises require at least 20 to 30 establishments to generate enough revenue to cover marketing and over-head costs."

It's good news for franchisees that service time-constrained customers with high disposable incomes.

Retail outlook

Strong competition in well-established industries such as the food sector will continue. It is expected that emerging niche areas like the health and wellbeing services will be less affected by compet-ing brands.

IbisWorld suggests profitability growth can be achieved through greater market penetration, expansion or diversification of the goods or services on offer, and of course by making general cost reductions.

As the Franchising Australia 2014 report from Asia Pacific Centre for Franchising Excellence outlined, online retailing is still being used by fewer than 50 percent of franchise systems (45 percent). But that should rise to about 65 percent as more franchisors implement their plans to trade online.

According to a recent survey from the Commonwealth Bank, retailers in general are forecasting online sales growth of 20 percent. The CommBank Retail Insights report indicates the value of the average online sale has risen 14 percent, year on year. 

Online retailing will allow franchisees themselves to reach customers in new regions, particularly in rural areas, but handling the allocation of business, particularly when there are local bricks-and-mortar stores, remains a challenge for franchisors.

Key sectors

The key sectors remain retail trade and accommodation and food services.

Despite economic uncertainty and fluctuating consumer sentiment, the size of the retail arena - which accounts for 27.1 percent of the sector - has grown since 2010. But there's less profit to be achieved because of the higher wages and penalty rates introduced.

When it comes to the staffing of franchised outlets and businesses, while individual franchises will require their complement of full-time, part-time and casual staff, the sector is expected to follow the national trend for increased part-time and casual positions. 

Fast food chains have helped drive the growth of the accommodation and food sector (18.1 percent). Healthy eating in part-icular has boosted this part of the franchising arena, which includes coffee shops and hotels.

At 14.7 percent of the franchising sector, the administrative and support services includes domestic and commercial cleaning, gardening services, office support and travel agencies.

Personal services (10.5 percent) have grown because they are predominantly low-cost, mobile operations that find it easy to attract new franchisees. The dominant services here are home-based - technology and outsourcing trends have boosted their growth. Australia's pet services market has been fuelled by demand for pet-care merchandise.

The remaining 29.6 percent of franchised businesses is made up from services such as real estate, transport, rentals, financial, education and training.  

The rule of law

The sector is governed by the Franchising Code of Conduct which is regulated by the Australian Competition and Consumer Commission. In January 2015 a new revised Code came into force, and this updated regulation is expected to strengthen relationships between franchisees and franchisors. There's a great focus on both parties acting in good faith, and for franchisors a requirement for greater transparency and disclosure. 

Sarah Stowe

Sarah Stowe heads up the editorial in the Inside Franchise Business group at Octomedia. Sarah is a hands-on editor who has worked in consumer and B2B titles in UK and Australia and she has been editor of the View More...
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