in this article:
March 2006 - Increasing numbers of Australian franchises are crossing the Tasman. What should Kiwi buyers look out for?
New Zealand has always been a popular first port of call for Australian companies testing the export market. Many franchises, particularly in the food and service sectors, have found a welcome home on this side of the Tasman. Now that trend looks likely to increase even further as Australian franchisors get more export-minded.
Edmund George is just one of them. A New Zealander himself, he found franchise success in Australia when he and a fellow Victoria University graduate created bedroom and bathroomware franchise Holy Sheet! Today there are 12 Holy Sheet! franchises in Australia and the chain is looking for a master franchisee in Edmund's home country.
‘I think New Zealand is the obvious "next step" for Australian franchisors looking to expand into an overseas market due to the similarities in language, market and culture,' Edmund says. ‘You've seen a similar trend in non-franchise Australian retailers expanding into New Zealand over the last 15 years - it's the first country to be looked at when Aussie businesses are reaching near saturation in their own market. The advantage of this is that the franchises are fairly mature concepts when they arrive in NZ. They can also leverage on their Australian economies of scale in the smaller NZ market. And franchising growth has been even more phenomenal in Australia than New Zealand, so there are a lot more systems in place here than ten years ago. I would expect this trend to continue.'
That's certainly true if a recent report in the influential Australian Business Review Weekly is to be believed. The January 2006 report suggested that, after eight boom years, the growth rate of franchising over the Tasman is slowing down as franchisors face growing competition for franchisees and good sites. As a result, franchisors are turning to acquisitions, new products and exporting as a means of new expansion. And, when it comes to export, New Zealand (along with the UK) is top of the list.
But if you are looking at buying into a franchise, can you expect success in Australia automatically to guarantee success in New Zealand? ‘History shows that isn't the case,' says Win Robinson of Auckland-based Franchize Consultants NZ Ltd, who has just been appointed as an advisor to the Queensland government to help Queensland-based franchisors successfully enter New Zealand.
‘A franchise may be reputable in Australia - a top performer, even - but may still have difficulty adjusting to the New Zealand market. There are different conditions here, different tastes, different ethnic mixes and smaller niches. Donut King, which is a brand owned by a very successful, very professional Australian franchise group, was launched here a few years ago but just didn't work, yet the same group's BB's Café franchise has been a great success.
‘The competition is different, too. Sometimes a new entrant may come up against well-entrenched local brands that are already occupying the market position that they are used to having to themselves in Australia. That can take some time to comprehend - for example, it's no use having brand-leader advertising if you aren't the brand leader and to be honest, some Australian franchisors can be slow to respond to that reality. There may be lots of similarities, as Edmund says, but there are also sufficient detail differences that they can easily make the difference between success and failure unless the franchisor is properly prepared.'
As an example, Win quotes the experience of a recently-arrived Australian franchisor. ‘This company is a very successful franchise at home and sent across one of its most-experienced executives to establish the pilot operation here. He did a very good job, built up the pilot over time and has now sold that outlet as a turnkey operation to the first franchisee knowing that all the bugs have been ironed out and it is a truly viable proposition. He will now do the same again in another city to prove the replicability of the concept in different markets before the company starts franchising new locations.
‘However, along the way he's learned some interesting lessons about the differences between NZ and Australia. For example, mall sizes are obviously different but the layouts differ in some interesting ways too, which has some important impacts upon siting policies. They just don't translate directly. Another example would be average transaction levels, which he found lower here than they had in Australia. Yet another is the cost of importing initial supplies - and even store design and fit-out services - from Australia. It might be easier for a franchisor to require that at first in order to ensure that consistency and standards are maintained, but the costs are often higher doing it that way. These things are fundamental to the potential profitability of the business. If the company hadn't established a pilot store first but just tried to franchise direct, or appoint a master franchisee without the necessary capitalisation or experience, they might have faced a very different outcome to their first overseas venture.'
Cheryl Scott agrees. Franchising specialist at the Australian Trade Commission (Austrade), Cheryl has seen an increasing number of Australian franchises explore the export option, some with more success than others.
‘Although CER and the similarities between our two countries make it relatively easy for franchises to cross the Tasman, franchisors from both countries need to ask themselves whether they are ready for the overseas market, not just if they have a suitable product,' Cheryl says. ‘They need the right resources, the right people and knowledge about suitable financing and protecting their IP. Some people get carried away with ideas but the more time you spend up-front, the better your chances of success.'
For the franchisee, buying a new entrant franchise from Australia has many advantages. You know you are getting a thoroughly developed franchise system that has been tried and tested by other franchisees, yet you also have the advantage of being ‘first off the block' in New Zealand. This means that you will get first choice of the prime locations or territories and have the chance of a high capital return when the time comes to sell the business. There might be a few more start-up wobbles, but you should have a properly-funded and highly-experienced franchise support team to help you out. That's providing that the support team have been educated in the market differences too, of course.
So if you are looking at a new entrant franchise, what are the key questions to ask? Here are some suggestions.
- How long has the franchise been established in Australia? How many franchisees do they have? How fast have they grown?
- What research have they carried out into the New Zealand market? How was this research carried out? May I see a copy?
- Who are their major competitors in Australia? Who do they think their major competitors are here? Who in the current NZ marketplace most nearly fits the position that their franchise fills in Australia?
- Have they got a strategic plan for entering the New Zealand market. Who developed this plan? Has it been reviewed by experts in New Zealand? Who?
- How is their New Zealand operation to be structured? Will New Zealand franchisees be supported directly from Australia or will there be a master franchisee here?
- If directly from Australia, how often will I see a franchise support person? What specialist knowledge do they have of the New Zealand market? Will I see the same person every time?
- If there is a master franchisee, what knowledge do they have of the New Zealand market? What is their role: sales, marketing, training, site selection, lease negotiation, ongoing support? What specialised training have they received in each of these areas?
- Have they or the master franchisee run a pilot operation in New Zealand? How long has this been running for? What results has it achieved? May I see the figures? What is the average transaction level? How does this compare to a similar location in Australia?
- What supplier arrangements are in place? Are they using New Zealand suppliers where possible or is the franchise reliant upon imported items (including items imported from Australia)? Does this apply to initial items such as design and fit-out and/or to ongoing supplies? Have comparative costings been done on local versus overseas suppliers? What security of supply is there? How does this affect the margins? Has this been tested in the pilot operation?
- What is their recruitment process? How does this differ from the one they use in Australia?
- What is their marketing strategy? How has this been adjusted to take account of the New Zealand market? What positioning are they aiming for?
- What allowances have been made in the franchise agreement for the different laws in New Zealand? Have they had the agreement checked over by a local franchise specialist? Have they joined the Franchise Association of New Zealand?
Of course, these questions apply equally to new entrants from countries other than Australia, too. It's just that our closeness and regular visits to each other's countries make it more likely that we will make assumptions about similarities rather than look for crucial differences. (see also Lost In Translation )
While Australian franchisors may believe that they have a small population at home compared to many countries where franchising has taken off, it is still many times the size of ours. Cities and conurbations there may have more competition, but they have more customers too. And higher population densities mean other differences too. For example, the need for efficient public transport systems mean that transport hubs are often key locations for franchises, which is certainly not the case at Auckland's Britomart - yet. Congestion charges could change all that. Similarly, our definitions of what constitutes a ‘small' town are different. Such differences affect what a franchisor needs to do in order to attain critical mass here.
For retail franchises, occupancy costs in the big malls are a worry. The BRW survey reported that retailers in Australia have paid 22% more, on average, to renew their retail leases in the past year while almost 30% of those franchises the BRW surveyed have walked away from a site since 1 January 2005 because the rent demanded on the renewal of the lease was too high. This has major implications for franchisees, who need to plan to recoup their investment and make a healthy return within the initial term of their lease. Anything after that becomes a bonus.
Of course, the fact that many malls in both countries are operated by Westfield is another factor that may seem to make it easy for Australian franchises to migrate across the Tasman. As Edmund George of Holy Sheet! says, ‘Westfield have been on the New Zealand scene for a fair while now, so I think occupancy costs have already adjusted in the local market within the regional shopping centres and Kiwi retailers are already facing the same issues as Aussie ones. Rentals will be driven by the market and what retailers can sustainably pay. If they can't pay the rent and have their franchisees make a profit, their system will not be able to operate within a regional shopping centre environment - whether it's in NZ or Oz.'
But, as Win Robinson points out, there is a choice of mall operators here and new Australian franchisors don't have the history of dealing with, say, Kiwi Income Property Trust or other organisations that may serve their first franchisees better. ‘It's yet another reason why incoming franchisors must carry out a proper situation analysis and a feasibility study before creating their entry plan - and why they must consult local advisors before doing so. If they don't, they will be guessing - and they may get it right or they may get it wrong. If you're a new franchisee, you want to be certain they've done their homework.'
The list of Australian franchises which have done their homework and thrived in New Zealand is a long and impressive one, and covers all sorts of industries. Action International, Baker's Delight, Go Gecko, Jim's Mowing, Muffin Break, The Touch Up Guys, Wizard Home Loans and many more testify to the fact that many franchises have crossed the Tasman with enormous success, and that many Kiwi franchisees have shared in that success.
If you are looking at a franchise from Australia, then, take your time to check that the franchisor has done their research and thoroughly understands the market. Check the answers to the questions outlined above. If they can demonstrate that their plans for New Zealand have been developed with knowledge and care, then a trans-Tasman alliance could turn out to be an excellent business decision for all concerned.
This article first appeared in Franchise New Zealand magazine Volume 15 Issue 1
This material is copyright © Franchise NZ Marketing Limited, Franchise New Zealand ™ magazine and Franchise New Zealand On Line . While it may be downloaded for personal use, no part may be reproduced in any form whatsoever without the specific written permission of the publisher.