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THE CHANGING FACE OF FRANCHISING

by Simon Lord,
last updated 25/02/2015

February 2015 - Most buyers of existing franchise units are recent immigrants. What challenges does that pose for franchisors, and where are the opportunities?

According to a report in the latest issue of Franchise New Zealand, almost 70 percent of purchasers of existing franchise units are recent immigrants, predominantly from mainland China or India. The figure comes from an analysis of sales made by Link Business. Link defines ‘recent’ as people who have immigrated to New Zealand within the last five years.

Now, the survey is hardly an academic study, being based purely upon an undisclosed number of sales made through Link over a six month period. It also favours food & beverage and retail-type franchises – the type of businesses that are arguably most likely to appeal to recent immigrants. Nonetheless, it does point to a significant change in the franchising landscape in New Zealand, and a significant challenge to franchisors.

The challenge of communication

Why should it be a problem? After all, immigrants often have access to funding, are keen to establish themselves in their new homeland and are prepared to work extremely hard to do so. Buying a franchise gives them access not just to an established business but to training, marketing and support which will help them succeed. And, as has been proven by peoShiraz Hajeee, Supreme Franchisee of the Year 2005, with then-minister Lianne Dalzielple like Shiraz Hajee, who was named Supreme Franchisee of the Year for 2005 in the Westpac New Zealand Franchise Awards, and Ivy Joe, who won the same title in 2014 for a record third year in succession, immigrants can be a massive asset to any system.

But – and this is a big but ­– both Shiraz and Ivy speak excellent English, and have the ability to communicate and build relationships with customers and staff, which is key to success in any business. That isn’t the case for all recent immigrants, especially among immigrants in the Business category. In fact, over 40 percent of migrants in this category were reported in the Department of Labour’s 2009 Longitudinal Immigration Survey (LIS) as having only moderate or poor English language ability, and changing immigration patterns mean the situation is unlikely to have improved since then.Ivy Joe, Supreme Franchisee of the Year 2012-2013-2014

Two-way communication is vital within franchise systems, both to maximise franchisee performance and to ensure the franchise’s brand and operational standards are maintained. A 2012 study by the Franchise Relationships Institute in Australia and New Zealand found that franchisees with English as a Second Language performed significantly lower than franchisees with English as a First Language on all measures, so language does matter. And that’s why franchisors are understandably concerned about the trend suggested in the Link statistics.

Within a mature franchise system, some 10-20 percent of its units might be available for re-sale at any one time. When an existing franchised unit changes hands, the franchisor will be keen to see the performance of that unit at least maintained or, preferably, improved as a new owner with new energy takes over. But new owners take time to train – a task which is usually shared between the franchisor and the outgoing franchisee. If communication is difficult, training will take longer and be less effective, and it will take more resources, both initially and on an ongoing basis, to bring the new franchisee up to speed. Even then, because so much of the value of a franchise comes from the camaraderie, sharing and informal communication between franchisees, it would be easy for those with language difficulties to miss out on vital information ­– or at least the nuances. As the LIS found, ‘Migrants who were more proficient in English were more likely to establish relationships with friends outside their own ethnic group than were migrants with poor English language ability.’

And there’s another aspect to all this, too. The need for franchisors to maintain standards within their system means that the franchisor will almost always have the right to approve or otherwise the purchasers of existing businesses from outgoing franchisees. A franchisee looking to sell isn’t going to be happy if the franchisor doesn’t approve a willing buyer at the right price – yet if the most likely buyers are recent immigrants, that may be exactly what they need to do. If it happens several times, you have the difficult situation where the franchisee is increasingly unmotivated and feels they are being imprisoned in their business by an unsympathetic franchisor. That’s the sort of thing that leads to declining performance – and, ultimately, to the law courts.

For any franchise network to thrive, it must be able to attract people willing to buy not just new outlets but also take over existing ones. Because existing franchises have an established customer base and immediate cashflow, they are often more attractive to new immigrants. But if the immigration authorities value financial qualifications over language skills despite the conclusions of the LIS report, and franchisors bow to pressure from outgoing franchisees to do the same, franchisors had better be prepared to put additional resources into training and supporting the new recruits their outgoing franchisees are finding.

The opportunity for new franchisees

Of course, the demand for established franchise outlets from immigrants also increases the opportunity for those willing and able to take on the challenge of developing new outlets. If you have the drive, the confidence and the language skills to open a brand new outlet, especially in the food or retail sectors, then if you do it well you'll have a ready market of buyers when the time comes. That's something that many people haven't yet realised, as franchisors are complaining about a shortage of new franchisees, but it's a logical next step. With a variety of hot new franchises and sites available and no capital gains tax, you could do very well in just a few years.

This article is expanded from a column first published in NZ Business magazine, February 2015

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