Dynamic Business

Coping with the financial crisis

The franchising sector has not escaped the reach of the GFC though. A number of high profile franchise systems have collapsed in the last 12 months including Kleins, Kleenmaid, Samsara and Beach House. Commentators have been quick to highlight both the shortcomings of the individual franchisers and the risks involved in business format franchises.

It has been reported that it is the action of the Australian franchisers that have enabled the majority of the sector to both survive and thrive in these difficult times. Instead of reducing marketing budgets, cutting staff numbers, delaying critical capital expenditure or passing on costs to franchisees, franchisers appear to have taken a hands-on approach to help their franchisees. In stark contrast to the typical cost-cutting attitude of the less stable non-franchise small business models in Australia, franchisors are helping their franchisees navigate the economic downturn by:

• Assisting franchisees to increase consumer demand;
• Closely monitoring franchisees for signs of financial distress;
• Increasing marketing expenditure where possible;
• Negotiating better deals from suppliers (including landlords); and
• Focusing on improving franchisee recruitment.

Norm Hunt, co-founder of the Cold Rock Ice Creamery franchise, which had revenue of $27.54 million for the 07/08 financial year, believes the formula for franchising success is based on a franchiser’s relationship with its franchisees and commitment to keeping everyone happy. This sentiment is echoed by Simon Crowe, whose Grill’d burger franchise entered the BRW Fast Franchise List 2009 at number six, demonstrating an impressive 87.55 percent growth spurt over the past three years. Crowe is reported to have revealed that the secret to franchising success revolves around the people, the brand and the product. Crowe says that his achievement stems from his careful approach to franchisee selection and his subsequent provision of franchisee support through good branding and services.

While franchisers are not recession-proof, franchised businesses are universally considered less risky than start-up businesses. This is because in a franchised business the franchisee has access to a well established brand, training, ongoing support and a tried and tested method of operating the business.

The franchising sector continues to evolve and improve. Recommendations borne out of the recent state and federal inquiries into the sector calling for the Government and other industry participants to develop and fund a comprehensive pre-franchise education program, provide evidence of the sector’s effort to minimise its risks. These inquiries have brought greater attention to the franchising sector and will ultimately result in better protection for franchisees.

Plans for expansion

Franchisers expect their profits to increase by up to 24 percent over the next three years, and that they will need to employ more staff to keep up with expected demand. Current surveys suggest that franchisers will focus on domestic growth and development through franchisee recruitment, multiple unit franchising and expanding their product and service range, rather than international opportunities and acquisitions which typically gain momentum in times of economic boom.

Previously, strong performing franchise systems regularly tried to buy similar networks as a means of expansion. BRW reported that while 69 percent of franchisers have been approached by potential buyers, only six percent of the franchisers approached planned to sell in the next 24 months (the majority basing their decision on the global financial crisis). The preferred approach is to outlast the economic downturn and maximise the projected growth in the foreseeable future.
There have been some voluntary sales and acquisitions in the franchise sector. Franchisors hoping to acquire other franchise systems at a bargain price, as a result of the economic slowdown, will need to reconsider the price they are prepared to pay to attract interest from mature, successful systems or shift their focus to newer, smaller systems.

Looking to the future

Despite the global financial crisis, the outlook for Australia’s franchising sector remains upbeat as it continues to make a vital contribution to the national economy. The franchising sector is confident that the Government position is relatively supportive. Short of any unforseen significant change to the current regulatory environment, franchising is set to carry on this upward course.

–Chris Nikou is the National Franchising Partner at leading Australian law firm, Middletons (www.middletons.com), with offices in Melbourne, Sydney and Perth.

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