Dynamic Business

In the midst of the GFC, franchising is one sector still very much growing. We look at how it’s coping and the challenges ahead for both franchisees and franchisers.

Franchising is one of the most robust forces in the Australian economy. Representing more than $130 billion in revenue and employing over 700,000 people, the Australian franchise sector has outperformed the economy to date. Recent reports indicate that despite the GFC the sector has recorded positive growth over the last two financial years and expects continued growth for the current financial year.

Franchising as a business system

Franchising presents a highly successful format to develop and grow a business despite the current economic situation. Franchising can assist a franchiser to build value in their business by:

• Assisting businesses to realise a greater level of operational performance;
• Producing a higher quality customer experience in the business as the (franchisee) owner has a higher level of day-to-day involvement with customers and incentive to prioritise customer service;
• Making it easier to recruit representatives that are more motivated and focused than employees (franchisees are motivated as an increase in sales, efficiency or increased value in the brand directly impacts their bottom line);
• Allowing quick market penetration due to better access to a wider geographic area and increased resources;
• Shifting the capital demands of a business to the franchisees.

Challenges facing the sector

Steve Wright, executive director of the Franchise Council of Australia, commented earlier in the year that: “franchise systems typically respond more quickly and effectively to changed market conditions, as the dual dynamic of having franchiser and franchisees close to the market and focused on meeting changed consumer expectations produces a synergistic response.” Despite this positive outlook, the franchise sector now faces a number of challenges as a consequence of the GFC. According to the PriceWaterhouseCoopers Franchise Sector Indicator, the most notable potential impediments to franchised business growth are:

• The difficulty of obtaining finance for incoming franchisees; and
• The scarcity of suitable candidates to be franchisees.

With more than 1,100 business format franchise systems currently operating in Australia, there are more franchise systems aggressively seeking new franchisees than ever before. Competition to recruit the best applicants as franchisees during the downturn has forced successful franchisers to refine their focus to ensure that what they offer to franchisees is financially rewarding and is based on a business that is attractive to the ultimate consumer.

In a climate of economic instability, potential franchisees are typically more interested in established franchise brands rather than brands that are new to the market. They see established brands as more likely to be financially stable and successful. Despite this, franchisers with established brands have not reported any significant increase in the quantity or quality of inquiries from prospective franchisees. This is because in comparison with previous periods of economic downturn, the current recession has not resulted in the same number of capable workers being made redundant, armed with redundancy payouts, ready and eager to invest in franchise systems.