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IS FRANCHISING
GOOD NEWS OR BAD
FOR SMALL BUSINESS?

by Simon Lord,
last updated 27/10/2011

Why is franchising so popular in New Zealand – and is it good news or bad?

With around one franchised outlet per 186 people, New Zealand is the most franchised country in the world. Of course, the term ‘franchised outlet’ doesn’t refer just to retail shops and fast food restaurants – it also includes individual home services franchisees (of whom there are thousands), commercial cleaners, couriers and many others. It’s that huge range of services provided by franchisees (along with the ‘per capita’ measurement that always makes us near the top or bottom of global statistics) that has skewed the figures to make us look so heavily franchised.

But even allowing for those factors, why are franchises so popular in New Zealand? Part of the reason lies in the fact that we are a country of small businesses. According to the latest statistics from the Ministry of Economic Development, 90% of enterprises in New Zealand employ 5 or fewer people, while 69% have no paid employees at all. In many industries, those businesses are increasingly competing for market share with large, publicly-listed or overseas-owned corporations, which is a tough ask. Niche markets are hard to find and, once developed, soon come to the attention of the corporates. Franchising gives the little locally-owned guys a way of taking on the big guys.

But couldn’t independent operators achieve many of the advantages that a franchise offers through banding together in buying co-operatives? That was the way that many New Zealand businesses thought some decades ago, and it led to the creation of a number of buying groups. Some of those are still with us today but many more have fallen by the wayside. It is mostly only those which transformed themselves into something more akin to full-format business franchises that have become major players in the market.

You see, although buying power is important, it’s only one of the advantages that a good franchise can provide. A buying group may be able to negotiate some useful discounts but if each outlet is operating under a different name with different pricing, they are not able to co-operate on joint advertising or promotion, and if each outlet uses different systems and doesn’t share information, they are not able to learn from each other.

Another significant factor behind the growth of franchises in New Zealand over the past 20 years has been that, in order to survive in an increasingly competitive and global market, independent operators have needed to develop significant business and management skills. Very few actually have any formal business education and equally few will take on a mentor or coach to help them, which may be one of the reasons why such a large proportion of new small businesses last only a few years. But by buying a franchise individual operators can gain access to professional product or service design, marketing, costings, benchmarking, training, upskilling and many other services. Yes, they pay for them through their franchise fees, but if they have chosen their franchise wisely then they should get good returns for their money.

A few years ago, Colin Taylor, the founder of Stirling Sports (one of the first home-grown retail chains in New Zealand) categorised the differences between buying groups and franchises as follows:

Franchise

Buying Group

Discipline/Rules

Indiscipline

Team spirit

Individualism

Legal contract

Non-contractual

Leadership

Committee

Universal image

Confused image

Working to master plan

Each to his own plan

Holistic scheme

Narrow thinking

Planned funding

Funding shortage

 

In fact, research carried out since by the Franchise Relationships Institute suggests that the fourth of Colin’s items – leadership – is the single quality that franchisees most value in a franchisor. Franchisees appreciate having someone they can trust to help guide their business, look at the big picture and take the difficult decisions sometimes required to protect the overall group. That’s something that few buying groups or co-operatives can provide, and it’s naturally an area that most independent operators struggle with, too.

So when we look at the statistics saying New Zealand is the most franchised country in the world, should we despair for the loss of individuality in our malls or rejoice that so many Kiwis have found a way to access the skills and support they need to succeed?

Well, as I showed in my other article, our malls are dominated by non-franchised retail chains anyway. What franchises do is enable individual operators to take space among the chains, which would otherwise not be possible. But consider this: most people who buy a franchise establish a long-lasting, locally-owned business. They learn how to plan, how to cost and how to manage cash flow. When they move on, they take with them all sorts of valuable business skills that they would not have learned any other way. Looked at this way, franchising is a means of upskilling our entire entrepreneurial population. As franchise consultant David McCulloch puts it, 'Franchising is the biggest business school in the world!'

Personally, I think that makes our franchise numbers a cause for celebration.

This article is updated from one first published in NZ Business magazine.

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