2003 Survey of Franchising - Highlights

EDITOR'S ADDITION, 20 April 2022 - The 2021 survey of the franchise sector in New Zealand gives the most up to date statistics on franchising in New Zealand.

 

The 2003 Survey of Franchising shows that franchising has continued to grow strongly over the past 12 months, although franchisors in many sectors report some difficulty in finding suitably-qualified franchisees. The greatest percentage increases in franchisee numbers have come from the South Island.

The Survey, organised by the Franchise Association and sponsored by The National Bank, was carried out electronically. Research company Colmar Brunton contacted all known franchisors and invited them to complete an on-line questionnaire. 120 franchisors responded, with 88 completing a more detailed survey which sought additional information on attitudes and prospects.

‘The Survey shows that franchising in New Zealand is continuing to grow strongly,’ says Simon Lord, Chairman of the Franchise Association. ‘In the last year, franchisors have enjoyed continuing growth and franchisees increasing sales. The total number of franchised units among our respondents increased by 24% from 2002 to 2003. That speaks volumes for the strength of the sector and the success of franchising as a way of doing business.’

Viv Vesty, Senior Manager Franchising for The National Bank, agrees. ‘Enquiries from people looking to buy a franchise have never been higher and the variety of businesses we see now using a franchise model has expanded beyond the traditional retail store. The National Bank is pleased to sponsor the Survey once again.

‘Franchise operations are now appearing in all industry sectors and franchising is a key alternative in the suite of expansion options available for business owners. This year the results suggest that franchising is happening earlier in the business lifecycle. Almost a quarter of businesses franchised their business within three years of starting up, and a third of these set themselves up as a franchise from the outset.

‘Starting any new business is always challenging. How successful this strategy is depends on many things, including the robustness of the franchise systems and the skills of the franchisees who buy into the system. The National Bank has recently focused on this area as well and has developed a comprehensive start-up package to help people understand the issues and challenges in starting a new business from scratch.

Sector Growth

The Survey asked franchisors for year-end figures for both 2002 and 2003. The 120 respondents reported that their total number of franchised units has increased from 3258 to 4047 during the last year – a growth rate of 24%. At the same time, the number of company-owned units operated by franchisors increased from 119 to 170, a rate of 42%.

Although the number of company-owned units is a fraction of the total, the fact that the percentage growth rate was so high may reflect a number of factors. Anecdotal evidence suggests that first, as they become better-established, more franchisors are more prepared to establish a unit themselves and sell it as a going concern. Second, where good sites become available, franchisors increasingly have the confidence to take the site themselves prior to finding the right franchisee. Third, and perhaps most significantly, current high employment rates have reduced the pool of available franchisees.

The suggestion that a higher proportion of company-owned units may be start-ups is reinforced by the turnover statistics, which suggest that franchised units produce a far higher turnover on average than company-owned units.

For the sector as a whole, the latest Survey suggests an increase in total turnover of almost 19% for the past 12 months. ‘Putting an overall figure on the franchise sector is a hugely difficult process, though,’ says Association chairman Simon Lord. ‘Because the Survey of Franchising is a voluntary one and the sample varies from year to year, the estimates for things like total sector turnover and overall numbers can vary. For example, although all the industry observers would agree that franchising has grown considerably since the 2001 Survey, some of the figures for that year appear inconsistent. Fortunately, the Minister for Statistics, John Tamihere, has now taken an interest in the sector and we are looking forward to working with him and his department to gauge its overall size.’
Regionally, the highest growth rates came from the Mainland, particularly Christchurch and the Upper South Island, although Auckland continues to have by far the largest number of franchisees.


Respondents suggested that a similar level of growth could be expected in 2003-2004, and almost one-quarter of all franchisors advised that they have plans for creating another franchise system within the next five years.

One big leap from previous surveys was in the proportion of franchise systems operating as listed companies – up from 2% in 2000 and 2001 to 23% in 2003. This may reflect the increasing maturity of franchise companies as well as the adoption of the franchise model by corporations.

International Ambitions

The majority of franchise systems which responded (74%) were once again based in New Zealand, a figure which is broadly consistent with previous years. Of those based overseas, 67% operated through a New Zealand master franchisee and 21% had franchisees report direct to the overseas franchisor.

Only 20% of New Zealand systems have so far exported their systems, although almost half are intending to expand overseas within the next three years. Those who have commenced franchising since 2000 are far more ambitious internationally. Australia is seen as the key market: 17% of New Zealand franchisors are already trading there, and 34% plan to export there. The UK and USA are other key targets, along with the combined Asian market.

Among those already franchising overseas, the median number of franchised units held in New Zealand prior to exporting was 13, and the median number of company-owned units was seven. This indicates that franchise systems usually establish a certain foothold in the New Zealand market prior to overseas expansion, but that they are often nowhere near saturation point at home.

Franchisor Financials

In keeping with the perception of franchising as a young sector, over half the respondents commenced business operations or franchising during the 1990’s and almost a quarter commenced operation within the last three years. Three in ten have only begun franchising within the last three years.

Of the 19 franchises that set up operations during 2000-2003, 14 also started franchising within the same year with an average of just under seven months from business commencement to franchise commencement. Of the 21 businesses that set up operations prior to 1990, it took on average 7 years 4 months to commence franchising. This indicates that businesses today are much more likely to start up an operation with a view to franchising, while historically franchising may have been a development much later in the life cycle of the business.

When it comes to showing a return, the Survey shows that franchisors need to look to the long term. The estimated annual gross income findings for franchisors reflects the fact that many franchisors are relatively new. Those who commenced franchising since 2000 are more likely to sit in the under $100,000 category (56%), while companies which commenced franchising during the 1980’s are more likely than average to sit in the $1 million and over category (69%).

Over half of all respondents believe they are likely to require additional finance for expansion within the next financial year, while those already trading overseas state this is ‘very likely’.

Perhaps the biggest concern for franchisors is that almost half (43%) believe that there are insufficient prospective franchisees available for their plans over the next 12 months. Franchises that run home-based operations (generally the lower investment level systems) are the most positive, with 36% saying there are more than adequate numbers of prospective franchisees available. However, the message is clear – franchisors are going to have to work harder to attract appropriate people.

Franchisee Matters

As you would expect in a sector which covers a wide range of industries, there is a huge variation in investment levels for franchisees. The highest overall maximum start-up cost quoted was $532,000 while the minimum was nothing. On average, franchisees pay $132,000 in combined start-up costs although the median is considerably lower at $66,250. The table below shows the median of each of the various start-up costs. 62% of franchises have start-up costs of below $100,000, while just over a quarter are over the $200,000 mark.

The good news is that the availability of finance for prospective franchisees is seen as largely adequate (75% said adequate or better).
When it comes to training, on average 13.1 days of pre-opening training are provided to new franchisees, with the figure being significantly higher for overseas-based systems. Franchises run from fixed premises have the highest number of training days.

The same applies to the provision of on-site support: overseas-based systems are more likely to provide 6-10 days of on-site support while the same figure for New Zealand systems is 1-5 days.

This perhaps reflects the relative maturity of overseas-based systems, and suggests areas where new local franchises may require further development and investment – especially prior to overseas expansion.

In terms of ongoing training, two distinct groups exist – systems that offer between one and two working weeks training per annum, and those who offer at least one month per year.

A variety of methods is used to provide ongoing support. Franchise Advisory Councils meet quarterly on average, with 35% meeting once every two months. The majority of those conducting regional meetings do so between once every two months and once every four months.

The Franchise Environment

Respondents were clear on the main issues they believe face new franchisees: chief among these are a lack of understanding of business and franchising systems, the capital and cash flow requirements of business, and confidence issues such as uncertainty and fear of failure.
One franchisor summed up concerns as follows: ‘Risk of failure in a business they usually know nothing about. Being able to accept the system as proven and trust the franchisor. Acknowledging that they actually have to make the business become successful, not the franchisor.’

Interestingly, some 13% of respondents cited ‘Lack of training and experience’ as issues, perhaps pointing to the need for a longer or more thorough training process in some systems.

The general feeling among franchisors is that the economy has had a positive impact upon franchising in the past year and the climate is generally favourable to small business. However, one negative effect of such a positive economy and the low unemployment rate has been a lack of potential franchisees. Some believe that improved immigration and the restructuring of large companies helped to negate this effect over the period, although it remains to be seen what impact the expected slow-down in immigration will have.

The Survey also asked whether they believed the government was creating an environment that is more or less conducive to franchising. Respondents believe that it is either about the same or somewhat less conducive, with increased compliance costs and regulation being the key factors quoted.

Respondents were also asked about current issues. A consistent theme was that poor impressions of the franchise sector are being created either through negative publicity, a poor understanding of franchising or ‘cowboy’ operators giving the sector a bad reputation.

Two schools of thought have emerged: the first believes that greater regulation is required to stop the cowboy operators, while the second believes that a move towards legislation and regulation will have a negative impact on the sector and hamper plans for expansion.

Conclusion

‘The 2003 Survey of Franchising is incredibly valuable for the sector for several reasons,’ concludes Association chairman Simon Lord. ‘Not only does it confirm the continuing growth of the sector, but it also outlines its future potential for the New Zealand economy. Equally importantly, it identifies some specific areas of which franchisors, franchisees and the Association itself needs to be mindful in order to ensure that that potential is realised.

‘On behalf of everyone involved, I would like to thank all those who participated in the Survey and The National Bank for their continued sponsorship.’

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