SURVEY OF NZ FRANCHISE SECTOR SAYS
TURNOVER UP, FRANCHISEE NUMBERS DOWN
in this article:
- highlights |
- about the survey |
- snapshot - the franchise sector in 2012 |
- system turnover growing |
- moderate growth in franchise system size |
- age of franchise systems |
- longevity of franchisees |
- multi-unit franchisees |
- franchise unit changes |
- the economic impact |
- mediation becoming more popular for resolving disputes |
- the challenges ahead |
- conclusion |
- about the survey |
- 0 reader comments
12 November 2012 -The latest Franchising New Zealand survey suggests that turnover and the number of franchise systems has increased, but the number of franchisees has gone down for the first time
Since 2008, the long drawn-out downturn and the resulting lack of confidence have taken their toll on businesses large and small, and the franchise sector could not expect to be immune. According to the latest Franchising New Zealand survey from Massey University, the overall number of franchise units in New Zealand has dropped since 2010, although franchising ‘remains an important business strategy in New Zealand and continues to grow at around 5 percent over the past two years.’ The total number of franchise systems has actually increased from an estimated 450 in 2010 to 485 in 2012, reflecting the fact that different franchises – and different business sectors – have enjoyed varying fortunes over the past four years.
The findings are consistent with franchising trends world-wide and therefore come as no surprise, but it’s worth noting that the apparent reduction in franchise unit numbers is the first recorded since New Zealand surveys began in 1997. It’s another indicator that the current situation is different from previous downturns. Traditionally, franchises grow both outlet numbers and market share in a recession: in 1991, when the British economy was severely depressed, sales in franchised outlets rose by an average of 11 percent; at the same time, while Australia was suffering business losses in the billions and hundreds of thousands of lost jobs, franchising there grew by 25 percent. Much of that growth was fuelled by redundancies and redundancy payments, neither of which have occurred to the same extent in 2008-2012.
In addition, the early 1990s saw the emergence of the home services franchise, which offered good returns on small investments to those in fear for their jobs. No similar major sector has developed this time. Nonetheless, the development of new franchise systems and reported increases in overall sector turnover do suggest that many franchises are still out-performing the economy as a whole.
- There are approximately 446 business format franchisors in New Zealand in 2012, compared with 423 in 2010.
- The median total system turnover increased from $5.5 million in 2010/2011 to $6.0 million in 2011/2012.
- It is estimated franchised businesses contribute between $19.4 billion and $21 billion to the New Zealand economy.
- System growth has been static in 2011 and 2012.
- Franchised unit numbers have decreased from an estimated 23,600 in 2010 to an estimated 22,400 in 2012. The survey sample suggested a shift from franchisee-owned to company-owned units.
- Just over half the systems report increased sales activity in the last 12 months but a significant number experienced pressure on profit margins.
- Franchised businesses employ more people than ever - over 100,000 people in 2012, compared to 80,400 in 2010.
- The percentage of franchisees involved in disputes has risen, but more use is being made of mediation.
- Franchisees remain in a system for an average of 7 years.
Franchising New Zealand 2012 is the second biennial survey to be conducted jointly by Massey University in New Zealand and Griffith University in Brisbane. The survey sets out to provide accurate data on the franchise sector in New Zealand. Similar surveys have been conducted in Australia for many years and provide a useful point of comparison.
Researchers face a number of challenges in collecting data. As there is no legal definition of what constitutes a franchise in New Zealand, and no official registration requirement, they had both to define what constitutes a franchise and then approach those companies that met this definition for information. Of the 494 companies originally approached, a total of 446 were eligible and 76 completed survey questionnaires – a response rate of 17.4%. This is lower than in 2010 (when 20.8% responded) but higher than the same survey in Australia (11.6%). Not all respondents answered all the questions. The 76 franchisors represented a combined total of 2735 franchisees.
As a result, there are some sampling differences between the respondents and the franchisor population as a whole: for example, 88% of the respondents were New Zealand-developed franchise systems, whereas systems developed overseas represent perhaps 20-25% of our total franchise numbers (including some very large systems and many of our food franchises). In addition, some industry categories, such as Construction, are perhaps over-represented in the survey with 9% of the total responses coming from this sector although, according to the researchers, they represent only 1.6% of franchise systems. ‘Other services’ (a category that includes personal services, pet services, auto repairs and servicing, IT services, etc) is by contrast under-represented with just 12% of the responses representing 26% of the franchise system population. This is frustrating for the researchers, who have attempted to allow for these variances in their report.
The full report is 100 pages long and can be downloaded here. The following analyses some of the information of particular interest to franchisors and franchise buyers and provides some helpful comparisons.
Franchising New Zealand 2012 reports that the number of franchisors in this country has increased over the past two years from 423 to 446 – a net increase of 23 (5.4%). Some of those 446 franchisors are operating multiple concepts under a single brand name (think of Green Acres with lawnmowing, home cleaning, car valeting, carpet care and so on), which means that NZ has a total of 485 business format franchise systems (up from 450 in 2010). Researchers identified around 27 franchisors either no longer in business, no longer franchising or which never actually franchised.
Once again, the survey also provides a valuable picture of the various industries in which franchises operate – it’s not all fast food and lawnmowing, by any means. Here we’ve shown the 2012 estimate of the total franchise population in each industry category compared with the percentage from each category that responded in the 2010 and 2012 surveys.
Note: as in 2010, the survey uses the Australian & New Zealand Standard Industrial Classification coding system, which has a broad definition of what constitutes retail – for example, retail businesses need not operate from premises.
The number of franchise units in New Zealand is estimated to total 22,400, made up of 19,300 franchised businesses and 3,100 company-owned units. This is a reduction from the 23,600 total in 2010, which was made up of 22,000 franchised businesses and 1,600 company-owned units. There are a number of possible reasons for this: in addition to the economic situation, which has certainly caused some units to cease trading or be put on hold, the Christchurch earthquakes have taken a toll.
The suggested reduction in the number of franchised units from 22,000 to 19,300 is considerable. Using the sample data as a base, the researchers have estimated a 12% drop in franchisee units while the number of company-owned outlets has almost doubled. Although it may be dangerous to extrapolate such a major change from the sample, it is certainly true that many franchisors have opened company-owned units where franchisees have been hard to find and that, in some cases, franchisors have taken units back from franchisees for a variety of reasons (see below).
However, there are also some positive signs: in addition to the launch of new franchises, franchisors reported turnover growth across their systems (franchised and company outlets) between the two financial years covered by the survey (year end 31 March 2011 and year end 31 March 2012).
Growth varies by system and by industry: in the broadest sense, retail franchisors who responded reported median turnover increasing by over 9% from $8.5 million in 2011 to $9.3 million in 2012, while non-retail franchises reported a massive 47% increase from $4.0 million to $5.9 million. It should be borne in mind that this was often from a base which was either low or had been static for some time, and that some of the non-retail growth will have come from new franchises and new units.
Total annual turnover for the New Zealand franchise sector was estimated as being between $19.4 billion and $21 billion ($21 thousand million). This does not include motor vehicle sales and fuel retail sales of $15 billion.
New Zealand franchise systems are often small by international standards, with 49% of franchise systems holding fewer than 20 units (although the figure is similar in Australia – 46%). 34% of NZ franchises comprise 20 to 50 units, and just 17% have over 50 units.
The survey reports that ‘Despite economic and demographic constraints, the sector has reported moderate growth overall. Whereas retail systems have maintained their size, expansion occurred in non-retail franchises.’ Retail franchises held a median of 18 outlets in both years, down from 25 in 2009 and 2010, although this may just reflect the different sample. Non-retail franchises grew from 22 units in 2011 to 24 units in 2012 (up from 16 in 2009 and 20 in 2010).
The researchers also looked at the origin of new franchise agreements. They found that 36% of respondents had not granted any new agreements for greenfield sites at all in the past 12 months and the median among the remainder were only one unit. It is worth noting that new franchise agreements were more prominent in well-established franchises across a range of industries, which perhaps reflects the greater confidence buyers have in proven systems.
The researchers found that the New Zealand franchise sector is both mature and experienced. According to the survey report, ‘Franchisors in the sample have been operating their businesses for a median of 21 years and franchising for 15 years. In general, concepts were piloted for one year prior to launching the franchise.’ This test period is recommended as a minimum by most consultants, although there is no legal requirement to do so nor does the Franchise Association require new members to have operated pilot operations. In Australia, where franchising is heavily regulated, most businesses were piloted for four years.
The majority of New Zealand survey respondents commenced franchising in the 1980s and 1990s, with a slight slowing of growth in the current century. However, there was a higher percentage of young (5 years and under) franchisors in the 2012 survey sample. A remarkable 44% of respondents have been franchising for over 20 years.
Franchisors who have been franchising for more than five years were asked to give the average length of time that a franchisee remains within their system. 34 franchisors answered this question, giving an average of seven years. There was a slight difference between retail (average 7 years) and non-retail industries (average 8 years). In 2010, both figures were slightly lower (6 years and 7 years). This increased ownership period could reflect the undesirability or difficulty of selling a business during a downturn (see Unit Changes below).
Franchisee age and gender were surveyed in 2010 and the question was not repeated again this year. In 2010, 62% of primary franchisees were men and 71% of franchisees were aged 30 to 50 years. Future surveys could usefully re-instate this question to monitor demographic changes among franchisees as New Zealand’s population ages.
Many franchisors reported that franchisee recruitment is one of their biggest challenges, which makes the granting of additional units to existing franchisees an attractive strategy for some systems. It is therefore not surprising that some 61% of respondents use this strategy, mostly in the retail sector. The researchers note that franchisors who grant multiple units to franchisees have franchise systems that are significantly larger (median 25 units) than those who do not (median 15 units).
They go on to say, ‘However, although multiple unit franchising is used extensively in some industries in New Zealand, among the respondent sample multiple franchising was not a dominant approach. Almost one third of franchisors (32%) had only one multiple-unit franchisee.’ It should be noted that multi-unit franchisees often require a different set of skills and may require different management from single-unit owner/operators.
41% of franchisors who responded reported no resales at all in their systems in the last 12 months. This possibly reflects the fact that, rather than sell at a bad time, many franchisees have preferred to hold on to their investments. Resales were most likely to occur within well-established, mature franchises which have perhaps held their value better.
In fact, 89% of franchised units did not change ownership during the 2011 financial year. Of the remainder, 5% were sold by franchisees and only 2% ceased to operate altogether, while in 3% of cases the franchise agreement was terminated or not renewed by either the franchisor or franchisee. Across a total franchise unit population of 22,400, this would amount to a total of 450 closures and 230 non-renewals during a 12 month period.
The researchers also asked the reason for changes in ownership. Just under a quarter (24%) said that it was because the units were unprofitable, while 21% of change was attributed to business or personal reasons. Other reasons are as shown.
Franchisee profitability is regularly highlighted as a concern in the quarterly Franchising Confidence Index survey of franchisors and service providers conducted by Franchize Consultants. In the Franchising New Zealand survey, respondents estimated that 80% of their franchisees were earning profits beyond employee and owner wages – the same figure as in 2010. Some 21% of franchisors (predominantly in non-retail systems) reported that 100% of their franchisees were operating profitably, and only 6% indicated that none of their franchisees was profitable; the report notes that these were in very small systems.
The survey asked franchisors a series of questions to ascertain growth levels in franchisor and franchisee business activity over the past 12 months.
For franchisors, the responses suggest that a majority have experienced increases in gross sales/revenue margin and customer count although they were forced to increase their promotional spend on products and services concurrently in an environment characterised by increasing levels of industry competition. A quarter of all respondents reported decreases in gross sale/revenue margins and profitability over this period.
For franchisees, the picture is a similar one of differing results, wins and losses. While approximately half of the respondents agreed that product sales and numbers of customers had improved in the last 12 months, only one-third (34%) indicated that profitability had increased during the same period.
The report also lists a number of strategies used by franchisors to promote franchisee profitability. These include: store benchmarking; improving efficiencies in financial management; building brand awareness through national and local initiatives, including social media; extending sales opportunities (eg. through adding mobile units to fixed-store operations); strategic partnerships with high brand value suppliers and developing manufacturing capabilities for high margin products.
Increased economic pressures increase stresses on both people and business models and, as we predicted back in 2009, there has been an increase in the level of franchise disputes reported by respondents – although it should be emphasised that these are still at a low level. Substantial disputes (defined as ‘those referred to an external advisor for action’) were experienced by 19% of franchisors within the past 12 months although they involved only 4% of franchisees. The 2010 figures were 19% and 2%. In Australia, dispute levels have remained reasonably constant at 18% for franchisors and an estimated 1.5% for franchisees.
The main cause of disputes (as reported by franchisors) was franchisees not complying with the system (57%). Apart from unspecified (other) reasons, the next largest cause was profitability (21%). Multiple responses were recorded for some respondents.
The majority of disputes (64%) were dealt with by legal correspondence. However, there was an apparent and welcome trend towards increased use of mediation for resolving issues, with this having increased from 8% in the 2010 survey to 17%. Litigation remains relatively constant at 19%.
As in 2010, franchisors were asked to name their most significant ongoing challenges. Surprisingly, franchisee profitability was not mentioned as a specific issue for franchisors. Instead, franchisors reported almost exactly the same concerns as in 2010 with the top three being: recruitment of suitable franchisees; maintaining standards; funding for franchisee’s initial purchase.
This year’s survey also looked at a number of specialist areas, such as franchise banking, environmental sustainability and information technology. With regard to funding, Westpac was considered to be the bank most helpful to franchisees in both establishing and growing their businesses, while you can read our summary of the survey's findings on how New Zealand franchises are addressing online retailing here.
The picture painted by the 2012 Franchising New Zealand survey is of a sector where some are doing better than others. This is not surprising: franchising is not an ‘industry’ in itself, but a method of marketing and distribution that has been applied to many different industries. In the last two to four years, all businesses have faced ongoing challenges and, just as in the world as a whole, some franchises have addressed those challenges better than others.
While franchisee profitability remains a major concern for many, there are many positives to be taken from the findings. Franchising remains a popular and practical growth strategy for many companies; sector turnover looks to have increased; and franchisors have put in place some practical strategies for improving franchisee performance.
For those looking at buying a franchise, the signs are encouraging. Franchisors are eager to find franchisees and may have a range of new and existing opportunities available, including company-owned units. Business models have been revised with a focus on what really works. Sales are cautiously creeping upwards and reconstruction is taking off in Canterbury. Barring more bad news from external economies, a slow recovery seems likely.
In these circumstances, the message for business buyers is the same as always, only more so: take your time, do your research and choose your opportunity carefully. As the survey shows, there are winners and losers in franchising, as in all areas of business.
The Franchising New Zealand 2012 survey was undertaken by Massey University in collaboration with the Asia Pacific Centre for Franchise Excellence at Griffith Business School. The authors are Dr Susan Flint-Hartle (Massey) and Professor Lorelle Frazer and Associate Professor Scott Weaven (Griffith). The survey was sponsored by FANZ along with Westpac, The Franchise Coach and Hayes Knight. The full report can be downloaded here.
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