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TEN YEARS OF CHANGE –
WHAT’S NEXT FOR FRANCHISING?

by Simon Lord,
last updated 10/09/2010

It’s been 10 years since the start of the new millennium. Simon Lord examines what the decade has brought for franchisors and franchisees

Looking back at 10 year old copies of Franchise New Zealand magazine, you’ll spot a lot of familiar names that franchisees – and the New Zealand public – have come to rely on. It might seem at first glance as if little has changed, but that’s not the case. We decided to look at some of the challenges that faced franchising in the Noughties and see what trends might emerge as the economy improves.

In general, the past decade has been a time of growth. In 2000 New Zealand was still recovering from the previous recession after the Asian currency crisis and drought of 1997/98. While that recession was not as deep as the recent one, recovery was slow. Some sectors did not really spring back until the Twin Towers terrorism of 2001 brought an influx of returning Kiwis and new immigrants seeking the safety of the South Pacific.

In franchising, the 2000 Survey of Franchising suggested that there were some 300 franchise systems in New Zealand. A year later, the same survey suggested that those 300 franchises represented 14,000 franchisees and over $10 billion turnover. In 2003, another survey reduced that figure to $6.9 billion, although few actually believed that franchising had shrunk – the reason for the reduction was more likely to be a change in the survey’s sample base that made calculating overall figures meaningless. No survey has been carried out since 2003 but most industry observers feel that franchising had probably grown to around $17.5 billion and maybe 20,000 franchisees by the end of the decade. A Massey University study planned for later this year may validate these statistics, although the global economic crisis could have depressed the turnover figures from expected levels.

Finding Franchisees

One of the issues that franchisors were most concerned about in 2000 was a shortage of suitable new franchisees restricting growth. Over the next few years, though, the pool increased as business confidence returned and the new and returning New Zealanders sought out the security offered by franchises. Many arrived with both money and valuable business experience, and visa requirements which encouraged new immigrants to buy into larger franchises that provided employment also boosted the franchise sector.

Some franchisors recognised this early on and employed (especially) Chinese-speaking staff to help recruit and acclimatise new franchisees, while other businesses that required a high level of communication with the public focused more on the growing numbers coming from South Africa and Zimbabwe. The success of these approaches has been evident in the results of the Westpac New Zealand Franchise Awards over the past 10 years, where winning franchisees have been Maori, Pakeha, Chinese, British, Indian, South African and even French.

That’s not to say that the recruitment market has been easy. With recovery came high employment and the property boom, meaning that everyone who wanted a job had one while many of those with capital to invest were frequently putting it into bricks and mortar rather than business. The wisdom – or otherwise – of that approach only became clear towards the end of the decade… Nor was the recruitment issue improved when the property market declined and unemployment increased again. Suddenly, people found that they no longer had the equity in their house that they thought, and those out of work were often so concerned by all the reports of low business confidence levels that, although they might be interested in franchise opportunities, they weren’t ready to commit to buying one. Only now is that starting to change and, if the post-1997 experience is repeated, we will once again see double digit levels of growth for franchisee numbers in many systems.

One sector that did grow dramatically during the decade was the café sector. Many people used the increased equity in their property to fund the dream of running their own café and the result was that New Zealand café society exploded. ‘Back in 1990 Robert Harris was probably the only franchised café chain in the country and there were fewer than 50 outlets,’ says franchise specialist Dr Callum Floyd. ‘By 2000 there were a few more franchises but still under 100 outlets. Now there are 11 franchises and well over 250 specialist outlets, as well as various brands that have added coffee to their menus. That’s not including McCafé and Starbucks, or the mobile coffee franchises.’

The Decade When The Text Book Hit The Table

Callum, who researched the organisations and management of franchise systems in different business sectors, was awarded his PhD from Canterbury University in 2000 – the first doctorate in New Zealand to specialise in franchising. He comments that, ‘The operating environment for franchises over the past decade has been incredibly dynamic and challenging, especially in the last two years. For me, this has been the decade where the text book hit the table. All the abstract concepts like the economy, labour, capital, technology, competition, industry and supply environments have impacted upon the business models of both franchisees and franchisors.

‘The economic environment has gone from the highest high to the lowest low, and while not every sector of business has been badly affected, most have. The labour market meant it was hard for franchisees to find staff when they were at their busiest, although that has now eased. Access to capital has suddenly become an issue for many, whereas before it was relatively easy to find funding. That’s not only stunting growth – it’s also affecting resales and the ability of people to exit their businesses and move on. Technology may not have affected businesses like the cafés (apart from enabling them to offer wi-fi as an added attraction) but it has certainly affected sectors like booksellers and home entertainment. The food business has been hit by dairy price increases and everyone has been affected by volatile fuel prices and transport costs. All of those changes have impacted upon store profitability, meaning that previous structures and methods of operating may no longer be desirable – or even possible. Good franchises have had to improve and adapt; those who don’t may not survive the next decade.’

And Callum fears that a large proportion of franchises are still not actively taking steps to improve their position. ‘There are some progressive franchisors, and that number is increasing, but there is still a big gap between the best and the rest.’ Daniel Cloete of Westpac agrees that there is still scope for improvement in many franchises although he says, ‘Franchisors in general are more prepared to get expert advice than ten years ago and their head office structures have become a lot more professional. Likewise, POS and management information systems and software have improved dramatically, giving franchise systems better benchmarking and management tools.’ That’s an issue that Franchise New Zealand has covered regularly over the years, from test-driving one of the first franchise intranets to looking at till-based management systems and the impressive hand-held devices that Carpet One introduced to speed the quoting process for its franchisees.

Ownership Changes

The past decade has seen some franchises go from strength to strength. Quiet achievers like Fastway, Robert Harris and Provender grew steadily, reviewing systems and re-inventing themselves where necessary. Provender even changed names, starting the decade as Have-A-Snack before its increasing dominance of the machine vending business made it desirable to signal its new focus. Others struggled, with even well-known names such as Para Rubber and Stirling Sports going through competitive challenges and several changes of ownership at the franchisor level before settling down again.

As some of the pioneer franchisors started to look for ways to exit the businesses they had founded, franchising started to attract the money men. Some systems were bought by accountants excited by the cashflow they appeared to offer: however, if the new owners failed to appreciate the importance of the franchisor/franchisee relationship (or lacked the skills to manage it) either their ownership or the franchise itself proved to be short-lived.

We also saw the big corporates flirt with franchise ownership. Examples include Contact Energy’s purchase of Rockgas with its franchising arm and AMP buying Roost (formerly Mortgage Choice), whilst New Zealand Post developed a proper franchise business model for its new combined PostShop Kiwibank venture. Not all corporate ownership was successful, though. Fletcher Building bought Hire A Hubby for the synergies with its Placemakers business, but found it too hard to marry the corporate structure with the less-controlled and more personal management style required by franchising. Exceed Window Maintenance was taken over by Swedish security giant Assa Abloy before being sold back to its founders a couple of years later. Meanwhile, both Green Acres and Caci Medispa looked at going public: Caci actually did so but ultimately delisted from the Stock Exchange to go back into its original private ownership.

Some companies have followed the overseas trend whereby a number of franchise brands come under the same ownership. This enables some synergies with head office functions and increased buying power, although support structures are usually kept separate. A prime example is Retail Food Group, which is listed on the Australian stock exchange and owns Donut King, Michel’s Patisserie, Brumby’s Bakeries and bb’s café. Here in New Zealand Restaurant Brands owns KFC, Starbucks and Pizza Hut but does not sub-franchise (although in 2009 it announced plans to franchise some Pizza Hut outlets). A better example might be Franchise Brands, which owns both Green Acres and Hire A Hubby, or United Franchise Systems with the Palmers, Cobb & Co, Valentines, Sierra Coffee and Café Botannix brands.

Coming And Going

It’s almost impossible to say exactly how many franchises there are in New Zealand at any one time, but one thing is certain – many of those launched fail to get into orbit. This applies both to locally-developed brands and some systems brought in from overseas. Sometimes the ideas are good but lack the capital or the proper structure to get them going; in other cases a concept that works elsewhere just doesn’t seem to appeal to the New Zealand market. Donuts might be one example: Kiwis just don’t seem to have developed the same sweet tooth as Americans or Australians. In fact, the trend in recent years has been to healthier options, as was shown in our 2009 review of the changes made at McDonald’s.

This lack of proper development of new franchises was a source of concern in the 2000 survey and continues to frustrate observers. Although there are some excellent franchise consultants in New Zealand, a lot of companies going into franchising apply the Kiwi ‘do it yourself’ approach. This frequently leads to a one-dimensional system that lacks the ability to respond to market changes as it grows. Part of the problem is that there is no formal franchise education in New Zealand. Although Unitec in Auckland offered two courses in franchising at the beginning of the decade, these did not attract enough participants to be continued; only now is Massey University talking about developing such courses again.

The result, says Callum Floyd, is that franchisors are not necessarily prepared for the challenges they may face as their systems mature. ‘For example, we are increasingly seeing franchisees own more than one unit within a system. That’s a logical development for good franchisees and franchisors like it too, but all too often they only see the advantages and don’t recognise what structures and management tools are required to make it work. In other cases, even within quite established systems, you can find that basics like good manuals, business plans and auditing tools are lacking. Franchises grew through the boom times without addressing those issues and only when tougher times came did they discover how exposed they could be.’

Past & Future Trends

Modern-day franchising really began in the food & beverage sector, and we see franchising dominating that market to this day. Franchises have embraced the trend to healthy eating and fuelled the explosion of the café scene. At the same time, we have seen the implosion of the pizza market; Pizza Hut paid a premium to remove its fast-growing rival, Eagle Boys, while Domino’s took over Pizza Haven. The ensuing price wars did few favours for franchisees. Above all this, Hell Pizza demonstrated that differentiating your product in the marketplace could pay off in a big way. The company has rarely been out of the headlines for long, and although it has suffered some much-publicised spats and soaring ingredient costs it still enjoys a premium position in the market.

As you might expect, financial franchises – especially in mortgage broking –­ waxed and waned during the boom and bust years. In general, white collar and business services franchises have been one of the major growth areas and while computer training never took off, computer servicing has. Home services generally have continued to expand although not at the explosive rate of the 1990s. Some franchises which focus on specific services, such as ceiling cleaning or pest control, have found a ready market while others have struggled. One lesson that all franchisors – and franchise buyers – might learn from this sector is that companies that got in early, like Green Acres, have remained market leaders to this day.

In retail, there are still not many large franchise chain outside of the supermarkets, petrol stations and convenience stores. Noel Leeming’s plans to franchise came to nothing and other overseas chains such as Holy Sheet! failed to gain traction. As retail recovers, this may change although the market dominance of a few groups means a franchise needs to find a very attractive niche market to compete.

As we enter the next decade, the coming trends in franchising will probably be dictated by two major factors: the ageing of our population and continual advances in technology. Health and fitness franchises have already been on the increase in the last ten years with gyms a particular favourite as the baby boomers attempt to stave off the ravages of time. The same goes for beauty and appearance businesses while, looking ahead, elderly care franchises are starting to become established in a number of areas.

On the technology front, while mainstream media and social media are bound to bring changes, it’s less easy to predict exactly where the opportunities for franchisees will arise: for example, one of the results of the growth of TradeMe and online shopping was a bonanza for franchises such as Fastway Couriers and Pack & Send, while the E-Bay drop-off depots that were hot in overseas franchising for a short time never took off.  

What is clear is that the last decade has been a period when franchising became a major driver of small business in New Zealand and, hence, a major driver of the New Zealand economy. That is set to continue, although franchisors face some major challenges in adapting to new conditions and increasing their own knowledge base to provide them with the necessary skills. For franchisees, then, the message remains the same: in order to find a franchise opportunity that offers you the future you want, you have to carry out your own researches into the industry, the franchisor’s abilities and the franchise itself. Get those right and you could be riding the crest of the wave into the next decade.

This article first appeared in Franchise New Zealand magazine Volume 19 Issue 1. Read the second part here.

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