SOUTH ISLAND FRANCHISING
in this article:
March 2009 - Simon Lord looks at the opportunities and issues facing franchise buyers and franchisors in the South Island
From the big skies of Central Otago to the crisp clear air of Queenstown, the old stone of Oamaru to the artistic mecca that is Nelson, the solid grandeur of Dunedin to the never-quite-dried-out feeling of the West Coast, the South Island offers visitors and locals alike a huge variety of experiences. When it comes to franchising, however, it seems that many well-known brands never get far beyond Christchurch. If that's true, what sort of opportunities exist for Mainlanders looking for businesses, South Island companies looking to grow and North Island companies trying to work out how to take their brands into the dispersed southern markets?
It's a question that's particularly relevant right now as companies look for growth and people look for new directions. As Grant McLauchlan, managing director of the Dunedin-based Crest Commercial Cleaning franchise, says, ‘The South Island is traditionally less affected by recessions than the North. We may not hit the highs that Auckland gets, but we don't get the lows either. Yes, some cities have exposure in the manufacturing sector but we're not expecting to hit the depths of depression.
‘You can probably put some of that down to the canny Mainland attitude to money,' he smiles. ‘People are less comfortable with debt. The old joke is that people in the South Island spend last year's profits, people in Wellington spend this year's and people in Auckland spend next year's. That has its downsides when it comes to people investing in themselves and buying franchises, but it does mean people and companies here are generally carrying less debt. At the moment, that's a huge positive and means more opportunity for franchise buyers and franchisors.'
With around 70% of franchise systems in New Zealand being based in Auckland - and a significant proportion of the remainder having headquarters either elsewhere in the North Island or overseas - it's perhaps not surprising that franchising seems to have grown more slowly south of the Cook Strait. Of course there are notable exceptions, some of them locally-grown.
‘Look at the Night'n'Day convenience store franchise, which is found throughout the South Island from large cities such as Christchurch to tiny places like Arrowtown,' says Graeme Wyllie, Westpac's franchise manager in Dunedin. ‘With 25 stores that's quite a big brand yet many North Island based franchises will never think outside the major cities. Just as there are chains here that Aucklanders have never heard of, there are plenty of franchises that just haven't really made it in the South Island yet.'
‘Our experience shows that franchising has a huge amount to offer South Islanders,' says Grant McLauchlan. ‘For the past few years we've had full employment and people have been able to chop and change jobs at will, but now people are starting to look around a bit more and they're realising that franchising has a lot of positives.
‘I think in the past people have maybe felt that a job is more secure or wondered why they would buy a franchise rather than doing something themselves, but that's changing. Now is a time when the advantages of franchising - the brand, the buying power, the training and the benefits of having someone else to do a lot of strategic thinking about how to make the most of a changing market - are coming to the fore.
‘In fact, I'd love to see people moving from the North Island to take up franchises here, too. Better lifestyle, cheaper housing and often the same business returns for the same effort - why wouldn't you? One of the advantages of franchising that you don't often hear about is that it offers you the chance to change where you live as well as what you do. That applies to new immigrants, too - I think a lot of people get stuck in Auckland because that's where the plane lands, but there are fabulous opportunities all over New Zealand for those prepared to look.'
Mark Anderson of Stirling Sports agrees. One of New Zealand's oldest franchise brands, the company is now based in Christchurch and, after a difficult few years following intense competition and ownership issues, has started growing again. Some of its newest stores are in places that might not immediately spring to the mind of retailers: Gore, Balclutha, Cromwell and Richmond in the South Island, Whangamata and Kerikeri in the North.
‘These places actually offer quite a lot of advantages,' says Mark. ‘Rents are very low, which makes a big difference to what you need to be profitable. There is little competition because the category killers just can't afford to open in somewhere like Cromwell. People aren't as highly-geared because the cost of living is lower, so the end result is a return on investment that is just as good as - or even better than - you'd achieve in a big city. And you have all the lifestyle benefits, too.'
Mark Forward says that while he wouldn't generalise about franchising being years behind, as Richard Smith suggests (below), it is fair to say that it is not top of mind for most businesses or individuals. Mark has recently taken on the task of revitalising the franchise sector on the Mainland, organising business breakfasts in Christchurch and Dunedin on behalf of the Franchise Association ahead of the Queenstown conference in July. A former franchise manager for ANZ in Auckland, after returning to his Mainland roots and doing an MBA, Mark has joined Franchize Consultants (NZ) Ltd as their first South Island-based consultant.
‘We have seen some South Island franchises go on to achieve huge success nationally,' he points out. ‘Cookie Time, Roost and MTF Direct have all become big brands throughout the country. But there are a lot of other businesses locally that have found marketable niches who haven't even looked at franchising because it has such a low profile here. By running events such as the breakfasts we're hoping to build up the awareness of franchising and also bring together all sorts of people who can help to create a basic infrastructure - a support group if you like - that will help newcomers learn more about what franchising has to offer.'
The demand is clearly there - the first breakfast in Christchurch in February attracted nearly 60 franchisors, franchisees, master franchisees and a variety of advisors, all eager to learn and share experiences. ‘People want that face-to-face contact,' Mark says. ‘Now Franchize Consultants has a local number, companies looking at franchising are saying "You're local, we'll use you." It's good to be able to develop relationships with local lawyers and bankers too, rather than relying on the Auckland knowledge base.'
Mark does agree with Richard that franchising is not front of mind for many people thinking about business. ‘Per capita, the South Island probably has as many small businesses, if not more, than anywhere else in New Zealand, but there's a certain amount of scepticism that makes people think "Why buy a franchise when I could do it myself?" You see franchises advertised locally on the basis of "low royalty, low fees" rather than focussing on the advantages and services that good systems offer. A lot of people haven't yet realised that buying a franchise enables them to compete, to succeed, to build their independence rather than surrendering it.' He points out, though, that it is wrong to single out the South Island only. ‘Somewhere like Gore probably has more in common with Feilding than Christchurch. It's a question of looking for the differences and working out how to turn them into advantages.'
One company that has a strong track record in creating advantages for itself is Cookie Time, the snack food distribution franchise. Founded 26 years ago, the company has 43 franchisees throughout the country but is still very much a Christchurch-based family business. ‘Our basic approach is pretty simple,' says franchise manager Chris Rhoades. ‘The more of our product the retailer sells, the more the franchisee makes and the more we make. It's a win/win/win.'
Behind that straightforward approach, however, lies a huge amount of careful development. The Cookie Time range has grown from the original chocolate cookie products into health bars, gluten-free products and even a totally different brand, One Square Meal. ‘We do all our test marketing close to home, initially at least,' says Chris. ‘To date, we haven't found any real differences in product acceptance between the North Island and the South but there certainly are differences in the markets. Auckland, for example, presents some unique aspects and I'm not sure whether Auckland-based businesses realise how different their own market can be. I think in many ways it is easier to have a business based down here and then head north.'
But the South Island presents its challenges, too, such as distance - particularly important in a distribution franchise. ‘Some of the territories our franchisees cover are pretty huge in terms of travelling time, and you have to address that in your franchise structure,' says Chris. ‘We actually provide a support margin in some cases where the distance they have to cover, sales volume and customer numbers require it.
That's not just a South Island thing, of course - there are remote areas of the North Island, too. Of course, the major cities can present different problems such as traffic jams, and a regional fuel tax in Auckland would certainly have an impact. As in any business, you just have to keep working through the issues all the time and stay flexible.'
And that flexibility encourages co-operation with other franchises, too - the gluten-free Cookie Time product is currently being trialled in selected Robert Harris Cafés around the South Island.
Cookie Time also provides a prime illustration of another of Mark Forward's comments about South Island companies - that they are often more export-minded than their colleagues in the North. ‘Perhaps it comes from having smaller markets locally, perhaps it's our familiarity with primary produce and having lots of ports, but Mainland companies often think export at a much earlier stage than firms in the North,' he suggests. In the case of Cookie Time, it has just announced that its One Square Meal range is to be stocked by the General Nutrition Center franchise in the US - a chain of 6500 stores. The brand will be promoted by Kiwi Phil Keoghan, host of The Amazing Race.
Another example of export-mindedness comes from the Flight Experience Group. The company started out as an attempt to build a full-size aeroplane cockpit simulator in the garage of one of three plane-mad friends. Today, the company has eleven franchisees operating incredibly-realistic Boeing 737 simulators in New Zealand, Australia, Singapore and Hong Kong, with more to come, and has divided into two wings - one offering the simulators as entertainment franchises located in malls and the other specialising in serious pilot training. Despite its ‘kiwi shed' origins, the business has attracted assistance from the government's Foundation for Research, Science and Technology resulting in an entry plan for the US market researched by students from the world-renowned Massachusetts Institute of Technology.
One aspect that is common to all the Mainlanders interviewed for this article is a palpable sense of enjoyment of where they live. As Grant McLauchlan puts it, ‘I've travelled all round the world and visited friends working in many places and I can tell you that there are significant upsides to running a national company based in Dunedin. There's schooling, leisure, fresh air and the absolute proximity of where I live to where I work. You can enjoy a balanced lifestyle here.
‘But it's also about people. We have loyal, committed staff in our franchise support office in Dunedin and many of them have been with us for many years. That translates to the relationships we have with our regional masters and our franchisees. Yes, 68% of our actual business is now done in the North Island but we support North and South just the same. What would be the benefit in moving? It would just cost more.'
And that is perhaps the strongest appeal that franchising has to offer both franchisees and franchisors in the Mainland - that it enables people to be based almost anywhere. By harnessing the buying power that franchises derive from their activities in the more populous areas, franchisees are able to compete more effectively with large chains. They are still running their own local business but they have the training, systems and support to run them better. And, ultimately, they can live where they choose, enjoy the changing of the seasons and the freedom to make the most of it. As the economic climate changes too, perhaps franchising is about to discover the true potential of the South Island - and South Islanders will discover the potential of franchising.
‘In franchising terms, the South Island is about eight years behind Auckland.' That's a contentious statement that nobody but a Mainlander would dare to make. Richard Smith is the former franchisor of a nationwide franchise (Mr Green) and now a franchise consultant and business broker with Affiliated Business Consultants (ABC) in Christchurch. He suggests that franchisors generally need to be more aware of the regional and cultural differences that exist around the South Island.
‘Our trading patterns are slightly different, our markets often feature a different mix of competitors and our climate varies more,' he points out. ‘These things aren't always addressed by franchisors arriving here from the North Island or Australia. For example, Christchurch might have a thriving pavement café culture in the summer but most of the year it's too cold so you have to ensure your premises and interior layout allow for that. It might sound incredibly basic but, believe me, I have seen some mistakes made.
‘It pays incoming franchisors to be flexible and to look at all aspects of their business model. The numbers vary. For example, you could lease a huge building in Oamaru for $25,000 a year that would look very impressive, but you still have to sign it and fit it out so you have to adjust your model accordingly. In the same way, the freight costs of getting supplies to Oamaru will be greater than for many parts of the country. That doesn't mean a franchise won't work in Oamaru, it just means that it may have to be structured differently.
‘In smaller areas, you also have to address the expectation that people like to do business with people they know. In Mr Green, we discovered that 0800 numbers can actually deter people from ringing because they think they'll be talking to a call centre in Auckland or Mumbai. An 0-3 number seems much more approachable. That's not just a South Island thing - it applies to a lot of small town New Zealand. You have to adjust your marketing to the local community just as much as your service or outlet, and that's why appointing local people as franchisees is often important.'
Richard is very supportive of efforts to create more awareness of franchising throughout the Mainland. ‘The general public aren't too aware of just how good a franchise can be. They see it as buying into a big company rather than as a way of gaining a competitive advantage that they can use in their own business. Often, they'd rather pay $100,000 for a little independent café than $200,000 for one that will provide many times the return and be worth a lot more when the time comes to sell. There's a lot of education needed before South Islanders really understand what buying the right franchise can achieve for them.'
This article was first published in Franchise New Zealand magazine Volume 18 Issue 01
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