Ongoing Development

by Simon Lord

last updated 09/03/2012

when importing a franchise MAKES SENSE

by Simon Lord

last updated 09/03/2012

Many franchises are developed locally – but are NZ companies missing out on investing in overseas brands?

The death of Hugh Morris in 2010 ended a link to the early days of New Zealand franchising. It was Hugh and his brother Wally, the Shop Rite supermarket founder, who first brought McDonald’s to New Zealand. In fact, Hugh was among those who served the very first Big Macs at McDonald’s Porirua in June 1976. He stayed with the company until his retirement 20 years later and always took a special interest in the training and development of McDonald’s employees nationwide.

The Morris brothers were not the only ones who saw the potential of the US chain in New Zealand – Progressive Enterprises were also in the race. But a determined pitch saw the brothers granted the master licence and they then faced the demands of launching the brand in a country that, as McDonald’s themselves admit, wasn’t quite ready for them. While the queues might have stretched out of the doors in the early days, the challenges of finding and appointing the right managers, training staff, establishing reliable supply chains and, above all, maintaining the (for the times) fanatically high standards of quality, service and cleanliness that McDonald’s demanded were enormous.

By the time of Hugh Morris's death there were some 150 McDonald’s restaurants from Kaitaia to Invercargill  – a total that far exceeds the Morris brothers’ original vision. The company has succeeded in New Zealand because a well thought-out and carefully-developed franchise system was imported by experienced businessmen with sufficient financial and management resources to overcome the obstacles. Such a mix is surprisingly rare in this country.

Why overseas franchises find it difficult to find local partners

I’ve recently been corresponding with a US-based consultant who represents 20 franchisor clients looking to expand internationally. He is dealing with Australia, China, India, the UK and many other markets and, having visited New Zealand several times, is well aware of the potential here for some of those brands in an English-speaking, franchise-friendly country. However, he is also aware of two huge limitations: market size and investment ability.

My colleague’s clients fall into two broad categories: one is food, the other includes education, retail and service.

Food franchises require a minimum unit commitment from a licensee in order to cover the costs of country start-up. All but one of the brands he represents require a 10-unit minimum commitment: any less and it is difficult for a franchisor to justify committing resources that could be utilised in bigger markets. His experience is that New Zealand entrepreneurs are frequently unwilling or unable to commit to a 10-unit minimum, whether on a company-owned or sub-franchised basis.

For education, retail and service franchises, minimum numbers are less of an issue but the start-up costs are considerable. The minimum licence fee for any of his brands is US$150,000. From the franchisor’s point of view, that figure just about covers the country start-up and support costs for the first two years of the licensee’s operations when number of units and royalties are very low. From the licensee’s point of view, however, it represents a huge commitment when added to the research and establishment costs of a pilot operation as well as the investment in recruitment and support of the first franchisees. The result is that overseas franchises find it difficult to attract New Zealand licensees with the requisite capital.

But why re-invent the wheel?

The fact is that most New Zealand businesses are small businesses, which means that they do not generate the level of returns that enable them to invest in overseas brands at this level. The result of this lack of capital is that many of our franchises in this country have been developed locally, either to ape the success of overseas systems or to fill a gap that their absence has highlighted. Sometimes, the development has been hugely successful; often, however, those systems have developed slowly as their founders have got to grips with the challenges of establishing a franchise.

I suspect a lot of local franchisors would admit with hindsight that they have invested several times the cost of a licence from an overseas company in order to make their franchise truly effective – and they continue to invest on an ongoing basis in order to utilise the latest technology and maintain their competitive advantages.

Bringing in a franchise system from overseas does not guarantee success, of course – I have written in this column before about the difficulties of converting a brand to the New Zealand market and the need for careful research, and there are many examples of overseas brands that have failed to take off. But there are also plenty of brands that, like McDonald’s, have been imported by New Zealand individuals and companies with the experience and ability to make them work.

So if your own company is looking to expand or diversify, and has the resources and vision to do it, it’s worth looking at the options from overseas. After all, look at what the Morris brothers achieved and compare that to their competitors at Progressive Enterprises. Progressive missed out on the McDonald’s franchise so they founded the Georgie Pie chain instead. Though popular, it was closed down after a few years and guess who bought many of its high-profile locations? That’s right – McDonald’s.

This article was first published in NZ Business magazine

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