MORE FRANCHISES THAN EVER - BUT SHOULD WE CELEBRATE?
The latest survey of New Zealand’s franchise sector finds more new franchises have launched at a time when franchisee numbers have declined. Why should this be - and what are the implications?
The 2012 Franchising New Zealand survey finds that franchising ‘remains an important business strategy in New Zealand and continues to grow at around 5 percent over the past two years.’ But there is an apparent paradox in the findings in that, while the picture painted is one of growth, the reported size of many of New Zealand’s franchise systems has actually contracted over the past two years.
The reduction in overall unit numbers from 23,600 to 22,400 comes as no surprise at a time when small businesses in general have found it hard to keep going through a prolonged downturn. The closure of many outlets and service franchisees’ businesses in Christchurch will also have had a considerable impact. Nonetheless, the figures represent the first apparent decline in franchisee numbers since the inaugural survey of franchising back in 1997.
The 2012 survey is the second in a biennial series conducted by Massey University in New Zealand with Griffith University in Australia. Of course, all surveys are open to question and it should be noted that this year’s survey is based upon responses from just 76 franchise systems (17.4 percent of the total), less than the 88 responses (20.8 percent) of 2010. In addition, almost 90 percent of respondents were NZ-originated franchise systems, while perhaps 25 percent of the franchises operating here originate overseas, including some of our largest and fastest-growing systems. Whether or not the reported decline is real, though, there is little doubt that after 25 years or so of consistent growth, franchisee numbers have at least stalled.
Given this fact, then, how can the survey report say that franchising has grown by 5 percent over two years? The answer is that the growth figure refers to the number of franchises operating in New Zealand. The net number of franchise systems in New Zealand has increased by 23 to a total of 446. As the researchers found that 27 companies formerly identified as franchises are either no longer in business or no longer franchising, this means that 50 new franchisors have emerged over the past two years. A similar pattern occurred in Australia, where 155 new franchisors were identified.
So why has the number of franchise systems grown at a time when many small and not-so-small businesses have been suffering and a lack of business confidence means recruitment can be difficult? There are a number of reasons.
1. Some existing franchisors have developed new brands to take advantage of the lower start-up costs and prime sites currently achievable. One such example is the Mad Butcher group, which has launched Yögg, a frozen yoghurt chain.
2. International franchises are entering the market. Slow growth in the US and Europe makes new destinations appealing for established international franchisors, and exchange rates make master franchises more attractive for New Zealand companies. Restaurant Brands, for example, has acquired the rights to Carl’s Jr. and is planning rapid growth.
3. Some existing corporate businesses are looking to reduce their exposure and capital costs by adopting franchising as a growth (or at least risk management) strategy. Pizza Hut is one such example.
4. Entrepreneurs looking to expand existing businesses have found it more difficult to raise growth capital. Often they have less equity, banks are more risk-averse and require more security, and external investors are hard to come by – even if the entrepreneur is prepared to sell part of their business and lose some control. That makes franchising – which allows you to expand by using other people’s capital and labour while still retaining overall control – seem more attractive than ever.
But is the growth of franchise numbers always good news? When the Australian results were announced, a colleague of mine over there emailed me: ‘I don’t take the growth in franchisor numbers as a positive. More naïve and undercooked concepts that will struggle and in many cases fail, thus continuing the negative perception of franchising.’
I have to say, I understand his concern. While many of the new franchises have solid and sound strategies for launching at this time, those that start franchising purely for financial reasons may be doing themselves – and their franchisees – a disservice. Franchising is not just about accessing capital; it is a complex process that requires the long-term management of a series of interdependent relationships. New franchisors need to have a real understanding of this, as well as a carefully-developed structure and strategy behind their whole franchising programme. If they look at it solely as a financial strategy, cut corners in set-up, fail to take advice and don’t run a pilot operation to find the gaps between ideas and realities, they are setting themselves – and others – up for failure.
Of course, many of the new franchises will succeed – history shows that many of our best franchises have started during downturns. Some, however, will not. For franchise buyers the trick, as always, will be to differentiate between the companies that have done things properly and those which only have good intentions and high hopes.
This article was first published in NZ Business, December 2012
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