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

The Australian Competition and Consumer Commission jumped on claims, this week, by a number of bottled water manufactures that their water was ‘organic’.

Media is important to franchise systems to build image, launch products and maintain the brand. As media exposure is the primary way to reach the public, it is essential to understand how to deliver your messages in a positive manner. Today’s media represents a vast information stream encompassing all forms of communication channels including television, radio, print, video, film, as well as, social internet mediums such as Facebook, YouTube, Twitter, Instagram, Four Square, websites and individual blogs. A company can disseminate a message in the morning and have it circulated globally in a matter of hours. This volatile form of dissemination, called viral distribution, can be a whirlwind of goodwill or a camp fire turned into an inferno. Therefore it is essential for franchises to ensure that their spokespersons are prepared to deliver their key messages correctly; gaining attention whilst growing and protecting the brand. It is important to realise that journalists conduct interviews to get a story and are often searching for a sensational response, incorrect answer or embarrassing moment. Remember the adage “bad news sells."

As a franchise consultant I have been asked many times what are the main causes of franchisee failure in the industry and how to avoid them. Most failure comes back to a couple of industry problems, lack of proper training and undercapitalised owners. Often the basic training is rushed or inadequate and follow up is often very minimal. Many franchisees are inadequately capitalised and have over borrowed either from banks or family either way it becomes a problem in quiet seasons. Most responsible franchisors like no more than 40% borrowing which is a fairly safe margin. There are further reasons of failure. Cost controls being a major problem, with over 20 years in the fast food arena I never cease to be amazed at the number of franchisees that I talk with who do not know what stock level they are holding , what dead stock they have, when ordering they just guess what they need. It is absolutely essential in today’s market with rising costs to know what your costs really are. We all know that a major killer is the cost of labour and rents, which are continually rising. Wages you can control rent is not so easy. With wages employ the minimum of staff and where you can man the fort yourself, I have found over the years that many franchisees want Saturday & Sunday off and once a week some other day off or afternoon. When it is quiet more reason to do the work yourself why pay staff when not needed. The staff you do have ensure they are multi-taskers and very efficient so that they can often cover for another staff member who is maybe busy with a customer. Another cost factor often overlooked is machinery maintenance especially refrigeration equipment. Cleaning grills and air vents can save a heap on electricity alone, clean weekly. Regular servicing can prevent major expense such as new compressors often thousand of dollars, when a 3 monthly service would probably cost you less than a thousand per year. Every dollar wasted is an added cost of sales. One other point I would like to make is retraining. We are never too old to learn and we need to continually train staff and self in all areas of the business especially customer service which is certainly getting better in some parts but still leave s a lot to be desired. Training staff to up sell is also very important but I hardly ever see or hear someone upselling with the exception of say McDonald’s and Hungry Jacks. It has been said that 20% of McDonald’s sales are in fact from upselling. I had a sticker on the cash register, which said “ I don’t pay your wages the Customer does so remember that always.”

Recent press exposure regarding allegations of significant underpayments to staff have once again displayed the serious risk to brand equity that can result from franchisees not complying with Australia’s industrial awards and wages system. It has been has been reported that a La Porchetta franchisee believed he could ‘top up’ their sub-minimum wage pay packets by providing pizza and soft drinks. The case will appear in the Federal Circuit Court in Melbourne for a directions hearing on September 18 later this year.

Industry Trade Shows (ITS), what are they, who attends them and why? Are they important to a Franchisor for recruitment lead generation, useful for building the brand, a good public relations exercise or just a huge waste of MONEY!!!! ITS events are conducted over one or more days concurrently, by almost every industry sector and are conducted annually, bi- annually, monthly; locally, regionally, nationally and internationally. Usually comprised of an exhibition supported by information dissemination activities such as conferences, seminars, workshops, forums focusing on relevant themes, an ITS also has business and social networking opportunities and entertainment activities. Whether open to the public or exclusive to a sector, ITS’ can take months to organise and affect tens, hundreds or even thousands of stakeholders, who have their own expectations and reasons for attending. Professionally organised ITS’ supported by key industry players, addressing relevant themes can be exhilarating, motivating and are excellent vehicles for meeting a wide range of expectations. So, who are the stakeholders at an ITS and what are their expectations? • A leading Industry Group usually owns the event, as they act on behalf of the sector (an association/government oversight group) or for a group of interested parties. • Event organisers appointed by owner to run the event. • Exhibitors who display their goods and services to the industry are the backbone of every ITS and because of a monetary investment, they have a number of expectations. o To positively showcase their offer to the relevant audience o A chance to benchmark the company against others o An opportunity to show industry support by event participation o Especially for franchisors, recruitment marketing activities and franchisee lead generation opportunities are key. • Sponsors sourced from key industry participants look for credibility, by being seen as an industry supporter and friend, whilst building brand awareness through cost effective exposure to the industry. • Speakers sometimes augmented by celebrities and VIP’s are mostly industry experts and recognised market leaders, willing to share information and business wisdom through activities such as seminars, workshops, forums and conferences. • Delegates, the audience of every ITS come from all areas including; industry leaders, media, businesses, personnel, relevant associations or governing bodies and the public. Delegates attend for many reasons; to learn about the industry, to hear the speakers, to purchase from exhibitors, to buy a franchise, to find a new career, to network, to compare competitor offers, to benchmark their endeavours against competitors, or just to have a good time. These simple guidelines will help determine if participation in an ITS will be of value: • Identify where the franchise system is in its development; an emerging or mature franchisor? • Assess the ITS to ensure the vehicle can deliver desired opportunities • Identify the ITS target audience • Who will be attending and is it the right target audience for you? • If so, what part can you play in the ITS; an exhibitor, sponsor, delegate? • Identify, enumerate and prioritise reasons for attending and expected outcomes • Prepare an accurate budget for participation, including internal costs • Prepare an accurate measure of participation benefits that would be considered successful enough to offset participation costs. Now make a comparison between expectations versus achievable results. Then compare the success required to the financial outlay and it will be clear whether or not attendance will be worth the investment of time, effort, resources and money.  

The aim of nutrition labelling is informing consumer decisions, giving them the ability to make healthier choices. Traditionally the domain of retail the restaurant industry is now a part of the focus due to the significant amount of food consumed outside the home.

From hearing impaired employees serving customers to tables that recharge diners’ smartphones – there is huge potential for QSR franchises to be at the cutting edge of socially responsible and technological innovations.

Flashing lights and fancy photos, Promise of exceptional quality and world beating prices, Pristine factories and innovative solutions. These are what even the most discerning of procurement executives will find when they start their search to import products and achieve the “The China Price.”

It’s a common challenge; how does business attract ‘best in market’ talent during a period of growth or in addressing natural attrition? It’s no secret that the current market is producing a shortage of top tier talent and this is the cause of great frustration for businesses looking to deliver an exceptional level of customer service and execute an efficient and highly effective operation.

Preparing award submissions is time consuming and takes a good deal of thought and patience, so you might ask if it is worth the effort or just an exercise in blatant self promotion. I have been involved in business and industry Awards for many years; organising, conducting, promoting, judging them and preparing winning submissions for a number of Franchise networks. I categorically believe that entering awards is an extremely useful and productive activity that all Franchisors should integrate into their marketing strategy, for a range of reasons. Major benefits include: Lifting public profile and attracting franchisees Winning awards assists in increasing the company’s reputation, credibility and building the brand. If your industry thinks the franchise system is a winner, it encourages others to look at it favourably. Award winning is a truly newsworthy way of promoting the Franchise brand to the media. Winning an award gives the media a reason to look at the franchise and examine what has made it stand out from the rest. Awards are an ideal way to recognise and promote the diligent efforts of the system’s franchisees, key personnel, products and services. It is an essential franchise recruitment tool, as potential franchisees are more likely to want to join and invest in a Franchise brand that is “going places”. Increasing confidence in those already in the company Being an award winning company helps develop a strong team spirit and company ethos. Employees and Franchisees share in the Franchise system’s accolades and feel proud to know that they are a part of a network that is highly thought of in its field, which promotes a level of confidence in the network’s abilities. Assisting in analysing the company’s strengths and weaknesses When you work in the business every day, you can be blinded to how it may appear to others. The process of preparing an award submission forces you to look at all aspects of the franchise system thorough another’s eyes. There is a lot to be learned from this exercise, as it can help bench mark your company’s efforts to those in your industry. The process of entering awards Investigate appropriate and relevant award opportunities on a local, state, national and international basis. These Awards should include categories that suit your franchise system’s marketing efforts such as; marketing and expansion activities, community service and support, innovation, environmental contribution, customer service, product and service qualities, local small business broadcast or print accolades.

For over a decade now nutrition has been a growing consideration for QSR’s. But, for an industry where taste and value have traditionally dominated what does nutrition really mean?

Top 5 criteria when fitting out a QSR venue.

The Fair Work Commission review of penalty rates in the fast food and general retail sectors – it rejected any change - has thrown into relief a number of issues that have failed to be addressed. We provide our views on some of them here. Issue 1 - International Competitiveness The unions argued that the overall economic situation of the retail industry remains very strong and there is no evidence of structural change impacting upon these considerations. Our Commentary Competition in the retail sector has been steadily increasing, and the consumer is demanding greater flexibility in opening hours. 2011-12 was a particularly bad period for sales with major retailers cutting staff to remain profitable. As well, there has been a shift in retail spend to online sales and big barns with fewer staff, for example, Ikea, Bunnings, Aldi, and so on. The Productivity Commission (PC) pointed out in a 2011 report that growth in retail sales has experienced a long-term slowdown due to changes in consumer buying habits. Consumers are choosing to spend less on retail goods, are saving more and spending a greater share on services. For many Australian retailers, wages are growing at a faster rate than the price of goods, the ratio of labour costs to sales is high compared to the United States and United Kingdom, and these higher labour costs are being passed onto consumers. According to the PC report: “Part of the explanation for the lower total labour costs to sales ratio overseas appears to be higher labour productivity, which in turn is influenced by capital investments and the adoption of workplace flexibility initiatives, amongst other factors.” So we have a situation where the consumer is paying for higher labour costs at a time when overall retail spending is in decline, and the internet is making consumers increasingly price sensitive. Issue 2 - Our Changing Society The unions argued for no changes to penalty rates. They asserted that penalty rates are a reward for working unsociable hours, and help to compensate employees who are lowly paid. Our Commentary Employers argued penalty rates are a throwback to a previous era, where retail opening hours were closely regulated, where competition for the consumer dollar was low, and a cultural stigma attached to working on a Sunday. They said this was no longer the case. Most people are too busy to shop between 9 to 5 on weekdays, and after hours and weekend shopping has become the new ‘normal’. They also said employees are looking for greater flexibility in working arrangements, including the opportunity to work evenings and weekends. In our view, the nature of our society has changed significantly since the 1970’s, but our award system still seems rooted in that era. We need an openess to change to reflect our changing society. Issue 3 - Legalistic Approach The FWC are requiring employers to produce direct evidence of the link between penalty rates and employer behaviour and practice. For example, they want evidence that lower penalty rates will translate into more jobs and provide greater flexibility to employees. Our Commentary The current quasi-judicial approach taken in the review of awards should be replaced by one of genuine inquiry. The FWC needs to get out to the workplace and find out what is happening by talking to workers and employers, instead of being fed very selective information by unions, lawyers, advocates and paid consultants. One thing it will find is a dual economy - those employers who play by the rules and pay legal rates, but also many who cannot afford to, do not know how to, or the many who choose not to. The employer case was woefully under-funded compared to that run by the unions, and was actively supported by relatively few employers, despite its importance for their businesses. A lot of evidence put forward was either ruled out or ruled irrelevant. It is ironic that the unions ran a concentrated, well-planned campaign presented by legal counsel, while the employers generally muddled through with a diverse range of employer association representatives who weren't well supported by their employer members. So much for business supposedly having all the economic power!  

While “green shoots” are starting to emerge in the Australian retail and QSR industry, the reality is a staggering 1,024 Australian retail companies went into administration during 2011-12.

Leave the grill and give up serving customers for a few minutes. I’m sure your busy but there’s another review of the Franchising Code of Conduct happening.