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WHAT’S THE NEXT BIG THING IN FRANCHISING?

by Simon Lord,
last updated 25/06/2013

March 2013 - One of the questions that anyone who works in franchising is regularly asked is ‘What’s the next big thing, then?’ Here are some thoughts that might help you decide the answer for yourself

Predicting the future is a dangerous thing to do, particularly if someone is looking for an opportunity into which to invest their money and their life. Different people have different skills and what suits one person won’t necessarily suit another. Nonetheless, we’ve taken the challenge: we’ve been looking at trends from around the world and comparing them to what’s happening in New Zealand. It’s important to remember that what works in the US, Asia or Australia won’t necessarily work here, but overall trends may be reflected in different ways so we’ve also asked some local experts for their opinions on particular issues.

Here are our tips for six sectors to watch over the next few years. You’ll notice a few themes that are common to many: changing demographics, the impact of an ageing population and a focus on products or services that consumers consider necessary rather than just desirable. But possibly the biggest factor that unites these sectors is that, for the moment at least, they all offer something that cannot be delivered via the internet.

Infographic - The Next Big Thing 2013

Hair & Beauty

The personal services area is one of those tipped for global growth in the near future, especially in countries with ageing populations, and hair and beauty are a major part of this. Even during a downturn hair still grows and, while people might cut down on new cars, expensive restaurants and overseas holidays, they still need to get a haircut. That applies in New Zealand, too, where Rodney Wayne has always maintained, ‘There are three things that are recession-proof: hops, chocs and locks’ – or in other words, beer, chocolates and hairdressing. With the Rodney Wayne chain looking to expand again, international franchise Toni&Guy entering the New Zealand market and budget alternatives also on offer, this is a promising industry to consider. Many franchises are profitable, need no experience and allow for multi-unit ownership.

The beauty industry offers many of the same advantages, and may be even better placed as the recovery comes and people are more willing to spend a little extra on themselves. Appearance medicine is already franchised in New Zealand via the Caci clinics although attempts to franchise individual services such as nail salons, spas and hair removal have been less successful to date (though hair removal is a big hit in Mexico according to David Foster, who attended an expo there recently in his capacity as chairman of the Franchise Association of New Zealand).

Health & Fitness

With the government and media all preaching the benefits of leading a healthy lifestyle, threats about epidemics of obesity and diabetes, and the statistical reality that people are living longer and wanting to stay fit and active longer, the gym and fitness industry is experiencing a boom.

Having said that, there is currently a lot of volatility in the market. High-end, full-service clubs are reliant on discretionary spending and are coming under attack from the low-cost, low-staffed (or totally unstaffed), 24-hour gym formats – that’s part of what the recent Club Physical/Jolt Fitness dispute has been about. However, the larger gyms can offer a much better range of activities and classes, and might be expected to adapt to changing conditions and bounce back in a variety of new formats. Outdoor fitness classes, using public spaces, are also attracting some interest.

Another aspect of this sector is youth sports franchises. Schools in the US are increasingly outsourcing their sports programmes and franchises have emerged to take up the slack. Companies such as Kelly Sports have brought the concept here with some success, while exercise and co-ordination classes for pre-schoolers are also popular.

The Next Generation

With parents both increasingly working longer hours to make ends meet, publicly-funded schooling under pressure and increasing competition for good tertiary places, it’s no surprise that educational support is a growth market in many countries, and New Zealand is no exception. Franchises such as sKids provide pre- and post-school care as well as holiday programmes, while others specialise in maths, English, drama, dance and music tuition.

According to David Foster, such franchises are already a large part of franchising in many parts of Asia, where the desire to give children the best possible start in life creates a ready market. With similar concerns among parents in New Zealand – as well as a growing Asian demographic – this sector looks set to continue growing. While online tutoring will certainly become more popular, there’s little to match personal time with a dedicated tutor.

Senior Services

At the other end of the demographic spectrum, what the Americans call ‘senior care’ services are a boom sector in the US. We have the same situation here with baby boomers increasingly reaching retirement age, but a different health system which means that what works there may not work so well here. For example, in-home support services have not yet taken off in NZ although they have enjoyed massive growth in the US.

On the other hand, driving services specifically geared to the elderly have proved popular in New Zealand, so it may be that the market here lies in making existing popular services more age-appropriate – for the immediate future, at least.

Food – Fast, Casual And Healthy

Food, as they say, never goes out of fashion – but spotting what will really be popular and profitable, rather than trendy, is never easy. For example, for the past decade or so, all the stargazers have talked about the growing trend to healthy eating and how the fast food industry must respond. It’s certainly true that big brands such as Subway and, particularly, McDonald’s have amended their menu, cooking techniques, ingredients and marketing massively over that time, but the most successful new fast food launch in New Zealand in recent years has been Carl’s Jr. – a brand that has been widely criticised by healthy eating groups not just for its menu but for the placement of its stores largely in lower socio-economic areas. On the other hand, that other staple of American police shows, the donut, has yet to take off properly here despite several attempts to launch chains.

A growing part of the US food market which might transfer well to New Zealand is what is called ‘fast-casual’ restaurants. This is a more upmarket version of traditional quick service restaurants like McDonald’s offering a more premium experience with higher prices but still a counter-service model. It’s aimed at customers who want to retain the eating-out experience while spending less money by trading down from full service restaurants to a less expensive option.

Of course, healthy eating and sustainable food chains are still big news and many of those franchises that have created or adapted their model to reflect these aspects are doing well. As Daniel Cloete, national franchise manager for Westpac comments, ‘Almost all the new food brands looking to enter New Zealand have a fresh or healthier-type concept as a basis.’. According to QSR magazine, US operators are experimenting with more multicultural options like falafel and Indian food, while the hottest chains like Chipotle are offering ‘create your own dish’ menus with more premium protein options and ethnic flavours that you wouldn’t normally find in regular fast food restaurants. Other new menu items include turkey burgers (Carl’s Jr.), oatmeal (McDonald’s), bison burgers (Energy Kitchen) and air-baked fries (Evos). According to Entrepreneur, industry eyes are also on Lyfe Kitchen, which aims to do for organic ingredients what McDonald’s did for factory farming. It’s been created by a team of ex-McDonald’s executives and is making waves.

It’s also worth noting that, as in many things, some trends take time to become viable in New Zealand. Frozen yoghurt, which is just taking off here, is already tipped to be at saturation point in the US, with observers commenting that the time has come where winners will be sorted out from losers. Mobile food and coffee franchises, however, seem to be becoming increasingly popular in New Zealand, offering relatively low investment levels as well as the opportunity to chase the market.

Building & Renovation

This may not be a sector that overseas franchise pundits have identified, but within New Zealand, building and renovation are set to grow significantly over the next few years. The reconstruction in Canterbury is attracting a lot of effort and as insurance claims are finally sorted out so there is work for smaller operators as well as the large companies. In other parts of the country, Auckland apparently needs even more housing while the leaky homes saga rumbles on everywhere.

While franchised building groups are common, in recent years we have seen the development of specialist renovation franchises. These may deal in whole homes (such as Refresh Renovations) or specific areas such as kitchens (Dream Doors) and bedrooms or bathrooms. There are also franchises that offer sheds, steel-framed buildings and mobile cabins.

Is That The Lot?

Of course, there are plenty of other good opportunities outside of these six sectors, so don’t write any opportunity off until you’ve researched it properly. During the past few years, when money has been tight for many people, we’ve seen franchises perform well in areas that people have to spend money on, such as car repairs, accounting, courier services, commercial cleaning, packing and shipping, and in areas where people want a cheap treat such as dining out, desserts, coffee and chocolate. Many home services franchisees have thrived too – another area where the internet can’t deliver.

One area to keep an eye on over the next few years is the development of franchises especially suited for ownership by the over-50s. People in this age bracket are increasingly entering the franchise market thanks to forced early retirement, redundancy, reduced retirement savings and, of course, a longer working life. Last year, we featured a man who had bought his business at the age of 79 – a Fastway Couriers franchise! – but more commonly we see baby boomers looking at the business and sometimes home services markets. A franchise which especially suits the needs of this age group and which targets them as franchisees could expect to find a ready pool of operators.

Embracing The Digital Age

Technology, of course, is something of a double-edged sword. While the growth of online shopping is making life difficult for some, especially in the retail and entertainment sectors, it’s also changing the way that franchises market to customers, communicate with franchisees, train their staff and manage their businesses.

Anyone looking for the ‘next big thing’ therefore needs to take into account the possible impact of further developments, including ultra-fast broadband, on their chosen industry.

Dr Callum Floyd of Franchize Consultants in Auckland notes, ‘Some franchise networks have been increasingly impacted by online retail, often from a mixture of international and local direct sales sites. Rather than a sudden decline, there has often been a slow, incremental erosion of sales and it has meant some businesses have disappeared already while others are marginal. Unfortunately, some of these concepts don’t have a future in any form.’

But at the same time, technology is enabling some franchises to improve. International franchise specialist Greg Nathan comments, ‘All businesses continue to be impacted by technology, which is providing significant opportunities to improve efficiency and customer service. At the recent International Franchise Association convention in the USA, almost every supplier was offering a technology-based product or service.’

Such services include POS systems which deliver accurate, timely information both to franchisees and franchisors that enables them to fine-tune their businesses, respond to opportunities, eradicate poor performers and increase both productivity and profitability by comparing to set Key Performance Indicators (KPIs). Other new technologies are designed to speed up quoting, order-taking and processing, automate systems and improve communications. Increasingly, franchisee and staff training are moving online, too. All of these are aspects to consider when choosing a franchise for the future.

And Greg, who described some of the issues facing franchises in the adoption of online strategies in a Franchise New Zealand article last year says that social media is the current hot topic. ‘Every serious franchise system would now have an online and social media strategy. The biggest challenge is how to co-ordinate their social media efforts, because franchisees vary immensely in their level of skill and will in this area.’ As the Club Physical/Jolt dispute has shown recently, the correct handling of social media is vital to a brand’s image and customer perception – something that KiwiYo has used to its advantage in developing a Facebook profile with 27,000 ‘likes’ to date.

Increasing Profitability

Another focus for franchisors looking to the future is enhancing the profitability of their franchisees. ‘The US has undergone a transformation with franchisors focussing a lot more on franchisee profitability that they did five years ago,’ Greg explains. ‘This was largely brought about by the GFC which, because of a dearth of funding for new franchisees, forced them to look after existing franchisees.’

While that might seem a cynical approach by US franchisors, Callum Floyd says profitability has been an issue for franchises here too and the wise ones have been addressing it. ‘Even good brands have found sales harder to come by in recent years. Some franchisors recognised that there were a number of problems: a) their business models were outdated; b) their franchisees could execute better; c) their structure wasn’t right, and d) they could manage their systems better. We’ve carried out a thorough review and subsequent programme of upgrades and improvements on a number of franchises and in some cases they’ve required a complete rebuild. There wasn’t a recognised need for it when the times were good and sales were coming easily, but as the economy gets moving again those businesses will find themselves in a much stronger position.’

The effect of this is highly important for intending franchise buyers. While getting in on ‘the next big thing’ can be highly profitable in the short term, it’s important to know that the franchise has been properly structured and can be profitable in lean times as well as good. Sometimes, a franchise with a proven track record of responding to changing times can be a better bet than a brand new one. It may cost a little more, but the risk is lower.

As Callum says, ‘There are always new waves of franchises emerging but the danger is that people see an early success and rush imitations to market without adequate pilot testing. We saw that, for example, with the auction drop-off stores in the US and other countries, including Australia, which aimed to piggy-back on the success of eBay. Some of those chains got huge before anyone realised that no money could be made from it. Even if you want to get in early on the next big thing, you need to check that the franchisor has a viable model first – one that will work in New Zealand.’

Improving Customer Service

All these trends come together as franchisors strive to restore sales and profitability levels through improved customer service. ‘Franchisors and franchisees are becoming more aware of how important it is to pro-actively manage their brands and deliver an exceptional customer experience,’ says Greg. ‘Most franchise systems in the US are now using the Net Promoter Score (NPS) method of measuring customer loyalty as a simple measure of customer satisfaction. In some cases, this is replacing mystery shopper programmes.’

NPS was devised ten years ago and requires companies to ask the single question, ‘How likely is it you would recommend us to a friend?’ on a scale of 1 to 10. They then follow this question with an open-ended request soliciting the reasons for a customer's rating of that company or product. As a result of feedback gathered through this process, franchisors and franchisees can easily see what action is needed to turn unhappy customers (‘detractors’) into happy ones (‘promoters’).

Technology can help provide solutions here, too, from the simple (texting ahead to order a coffee, for example), to the sophisticated (the scoreboard that shows the average waiting time in every McDonald’s drive-thru in New Zealand, with each outlet’s ranking clearly shown). It’s an approach that Domino’s has recently taken online with an app that allows their customer not only to rate their experience but see the result in real time on Facebook.

It’s Up To You

So – what IS the next big thing? Since franchising really took hold in New Zealand in the 1980s there have always been new waves of opportunities emerging, either developed locally or imported from overseas, and there’s no reason to think that will stop. What is changing, though, is the way that people are shopping, communicating and interacting.

In this article, we’ve highlighted six sectors being tipped for growth internationally. We’ve attempted to identify some developing trends and suggest how they might apply to New Zealand. We’ve also commented on some of the key issues you need to take into account when investigating any opportunity, new, old or remodelled. We hope you’ve found it a helpful summary and a starting point for your own researches. Good luck in catching the wave!

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