Mega Trends

Tony Blackie Writes for BRW The Mega trends which will determine the future direction of the franchising industry in Australia...

Greater sophistication in the way franchises are run combined with better regulatory controls and consumer protection is giving the industry strength.

The fact is that in these difficult economic times it is the franchising sector which stands out as one area of continued growth.

Part of the reason is that the core structure of franchises which included basic business planning as a starting principal is often lacking in other businesses in the small to medium sector.

Things as basic as a business plan, advisory boards, financial management processes and a basic understanding of the return on investment are usually provided as part of the start up pack from the franchisor.

To understand the way in which the franchise industry is progressing, franchising specialist with law firm Deacons, Stephen Giles, has identified six major trends that are emerging in the market.

The first mega trend is aggregation which Giles says is a feature of competition in all markets. Because the Australian industry has been growing rapidly it is now finding great difficulty finding new franchisees to operate the increasing number of opportunities. This has lead to more businesses merging with or acquiring others to increase revenue and achieve economies of scale.

"Currently there are around 1,100 franchise systems in Australia, which means Australia has around 3 times as many franchise systems per head of population as the USA," Giles says. "However in the US the number of franchisees per franchise system is much higher than in Australia, with many systems having more than 1,000 franchisees. The consolidation of franchise networks that has occurred in the US market is now visible in Australia."

Giles says local examples of groups which have opted for aggregation include Yum Restaurants, the Penfold Group, the Retail Food Group, Allied Brands and Freedom Group. He predicts that the aggregation trend is likely to spread across the whole franchise sector.

The second major trend is development of the "super franchisee". These are franchisees that gain financial and market strength by buying multiple franchises and have their own resources.

Giles says some of the best examples of this can be already be seen in the motor vehicle distribution, petrol and fast food sector. "In future we will see franchisees operating franchises from different non-competing co-branded outlets and even raising their own venture capital," he predicts. "These franchisees will be totally focused on, and expert in, operational matters. The challenge for the franchisor is to deliver brand and systems value that justifies the royalty cheque from the super-franchisee."

He says the concept of the super-franchisee has become common in the US, where there are in now several publicly listed franchisees.

The growth of franchising systems Freedom Furniture, Captain Snooze, Forty Winks and House has put pressure on many of the existing large retail groups. As a result the third mega trend according to Giles is "corporate competition" as the corporations fighting back to regain lost market share.

"Franchise systems will experience even greater competition from department stores, supermarkets, international chains and even other beefed up franchise networks that have added capital or other networks to their stable to achieve greater economies of scale," he says. "To compete effectively franchise systems will need to develop powerful retail brands sustained by strong national advertising funds, and continue to be innovative."

Because of the increased competition and the difficulty in finding quality franchisees franchisors will have to develop greater sophistication to attract the best buyers and staff. This is the fourth mega trend according Giles. He says franchisors will now need to focus on brand and system development and purchasing economies such as supply chain benefits rather than just providing a the usual operational services.

"Franchisors will also need to become more sophisticated in their brand promotion, communications, marketing, management, business methods and use of technology," hje says.

The fifth trend is the growth of corporatisation which is already occurring in the US franchising market. Giles believes the local market will follow suit as more and more franchise companies move from private companies owned and operated by the founder to corporations where management and ownership are separate.

"Corporatisation will see franchisors raising capital to fund future expansion and facilitate exits for founders, with features of the new corporate franchisors including management with specialist skills in brand building and systems development and expert boards of directors appointed by shareholders," he said.

The sixth and final major trend is one of increased regulation for the franchising industry. The development of the Franchising code combined with the introduction of other new legislation in areas affecting franchising, such as employment law, occupational health and safety, consumer protection and taxation will have a major impact.

Giles predicts an increased risk of litigation for franchise systems and to avoid this he urges franchisors to use the alternative dispute resolution and to develop contracts providing for structured negotiation, expert determination and arbitration to supplement the existing mediation framework of the Franchising Code of Conduct.

The development of the Franchising Code of Conduct which is now administered under the Trade Practices Act has also been a major impetus for expanding franchising. According to John Simpson, Senior partner of Sydney Law Firm Cropper Parkhill, there are three main elements to the code. The first being disclosure which requires the franchisor to provide the prospective franchisee with information on all agreements made including financial agreements.

The second major element is the provision of a cooling off period which allows a franchisee to get out of unreasonable arrangements within seven days of signing a contract and the code ensure there is no ability to waive the cooling off period and finally a dispute regime has been installed which provides for mediation. This means that larger companies can't use high cost legal action to tie up a franchisee in court.

Simpson says while the franchising sector is growing fast with some celebrated success it does not mean that franchises cannot fail.

"The first thing a prospective franchisee has to do is get appropriate advice from a lawyer or accountant who is family with the franchising industry," Simpson says. "The accountant needs to look at the number especially the profit margin to make sure it is good enough to make a living.

"The lawyers will tell you what has to be disclosed to you by the franchisor. The code of conduct does require that you get a lot of information but it doesn't help you to analyse the commercial and legal transactions contained in that documentation."

Ruth Levick, franchising specialist with Cropper Parkhill says one of the disclosure items under the code is the disclosure of existing and past franchises. "From that you can work out whom to talk to to find out what experiences they have had with the franchisor."

She says that it is important that any contract with the franchisor must contain solutions for problems which might arise if the franchisor doesn't live up to the terms of the contact. "Usually the contracts talk about the the obligations of the franchisee not the franchisor. The problem is that I suspect that many people entering into these agreements don't get advice. If you bought a business that is not a franchise, you would get full information before the purchase, this is the same exercise."