Commentary

From Delhi to Dallas to Durban and Darwin from Da Nang and Dubrovnik to Dundee and Dhaka, familiar franchised food brands dot the planetary landscape in ever increasing numbers. So what is franchising exactly?  In simple terms, a franchise is a successful business concept, which combines the franchisor’s proven product or service, their experience, systems and processes, their marketing know-how and brand, which together constitutes their intellectual property. The franchisor builds a multi-unit network through selling the rights to this intellectual property to investors (franchisees) to operate one or more units. The franchisees in turn operate their businesses under the guidance of the franchisor who is paid an on-going royalty or fee. Franchisees know that if they comply faithfully, the franchise model provides greater certainty than an unproven concept, reduces the risk and offers a higher potential for growth and realising their enterprise value when they sell. This mutually beneficial relationship is secured by a customised legal agreement and maintained by the franchisor’s training, operations and procedures manuals and support. Franchising seems to be growing year on year, why is that? Even when economies are going through tough times franchising remains the growth strategy of choice because it addresses the two fundamental requirements for business growth: raising the funds to expand and finding the right people to manage that growth. As a capital raising strategy franchising is hard to beat. In times when banks are less willing to loan money to small business and venture capital is out of reach for many small operators, franchisee capital comes without loans, interest or collateral, it requires no dilution of ownership and no reduction in control of your operation. And this is just as relevant to established businesses keen to increase sales, expand their reach into new locations, grow their brand and release capital tied up in stock, fixtures, equipment and goodwill. By converting company owned outlets to franchises and offering new franchises, capital flows back into the network, allowing the franchisor to establish new territories, invest in infrastructure and technology and develop the brand.  As an HR strategy, franchising is also hard to beat. In owning and operating their own business, motivated franchisees see the direct benefit of driving sales, managing costs, overseeing their employees and engaging with their customers and their communities. For more on franchising as a growth strategy.  On average, franchisees commit 7 years to the network, which easily outstrips an employee in the food industry who averages less than 2 years’. Hiring and retaining good people in the face of the high cost of training, high staff turnover, workplace relations and escalating labour costs, is the largest challenge facing the QSR sector in Australia today. In addition the right franchisee (and recruiting well is key here) will outperform a company owned and operated outlet in both sales by 15 -25% and profitability by up to 100%1 or even more. But isn’t franchising all about foreign brands taking over Australia? Franchising is a huge part of the global economy. And certainly Pepsi, Shell, BP, Ford, General Motors and McDonalds, Subway and KFC have used franchising as a capital raising, HR, management and marketing tool to span the planet. However over 90% of the almost 1200 franchises in Australia are home grown. Hairhouse Warehouse, Pie Face, OPSM, Total Tools, Boost Juice, Grill’d, Baker’s Delight, Terry White Chemists, Laser Clinics, Red Rooster, Sumo Salad, Zambrero, Coffee Club, Gloria Jeans, Pack and Send and ANZ Mortgage Solutions have all used franchising to grow substantial domestic and in some cases international franchise networks. In fact Australia is one of the most heavily franchised countries per capita in the world. And that’s because we are also one of the most risk averse nations globally, which combined with the fact that Aussies really like to be their own boss, makes franchising such a winner. So where does franchising fit in the QSR sector? Revenue from the franchise sector currently exceeds $150 billion annually or 11% of GDP2. Not only do food operations constitute the largest single segment, half of the all food outlets in Australia are franchised. And even more significantly, there isn’t one large multiple unit QSR food brand in Australia that is not franchised! The entire QSR industry contributes 12.6 billion to GDP3 annually. How is our industry looking within the Australian economy? Despite a slowdown in annualised growth in Australia over the 2008-2013 period to an average of 1.6% across the board and a 7% net decline in franchise systems from 2008 to 2010, franchisor revenue grew by 5% in 2012 with franchisee revenue growth close behind at 4%. This trend looks secure in 2013-2018 with measurable uplift to consumer spend underwritten by a forecast rise in disposable income of 3.4%4 for the period. So QSR and franchising seems pretty compelling Yes, it is, but franchising isn’t a guaranteed formula for success. Not for the franchisor and not for the franchisee. In fact only about 15%5 of franchise companies Australia-wide thrive and reach critical mass. And the reasons are many – so in my next column, let’s look at what creates a successful franchise - one of that elite group of brands you know. 2&4 Source: IBIS World Report – Franchising in Australia March 2013 3 Source: IBIS World Report - Fast Food Services in Australia May 2013 1&5 Source: DC Strategy Research 2012