Franchising to the rescue
A pick-me-up for tough times? A parachute out of the corporate world? A business model that’s increasingly popular. Kevin Kevany looks at what the wonderful world of franchising can do for you.
So you have stopped reading the daily papers, there’s a towel over the TV and the radio’s pulled out at the wall. And you’d walk to work, if you hadn’t given up food when its costs overtook the petrol price gouging. In short, you’re up to ‘here’ with all the doom-and-gloom; and your job in the corporate world, which was barely tolerable in the good times, is driving you to the brink. Time for the good news: there’s never been a better time to consider buying a franchise – the ultimate counter-cyclical play. There is a great deal of history and statistics to back that up, along with a lot of solid, reputable expertise. And even the banks are coming to the party. Franchising in New Zealand has enjoyed very strong growth since the late ‘90s. The last Survey of Franchising, sponsored by The National Bank in co-operation with the Franchise Association of New Zealand (FANZ), showed the sector would have grown to be worth well over $7 billion. It identified more than 350 franchise systems in New Zealand – a staggering three-quarters of them home-grown. Estimates of 40,000 to 50,000 people employed within the franchise industry are regarded as conservative by many pundits. It seems we have more franchise systems per capita than any other country in the world and probably 15,000 to 20,000 franchisees. The figures are a little loose because no government statistics are kept on franchising. Daniel Cloete, national franchising manager for Westpac New Zealand, and a man with a wide range of national and international experience in this niche has no doubt about the opportunity franchising presents in this current business environment. “Well-run franchise systems tend to be able to weather economic downturns much better than small independent businesses. The reasons for this include better purchasing power – the ability for a cluster of companies to ‘push back’ on suppliers. “Also, having a (good) franchisor who is constantly tweaking and improving the model to take into account changes in the market environment, provides a big boost, something the individual operator busy running his/her business will find especially difficult in tough times. “We always regard the renewing of the concept and the consistent provision of excellent management information systems as the primary responsibilities of the franchisor (franchise system) and critical success factors at all times.” Simon Lord, NZBusiness ‘Franchise File’ columnist, franchising expert and publisher of Franchise New Zealand magazine and website, has been through hard times before and draws on that experience to give additional insight. “In 1991, when the British economy was severely depressed and getting worse, sales in franchised outlets rose by an average of just over 10 percent. When Australia was suffering business losses in the billions and redundancies were measured in hundreds of thousands in 1991-92, franchising grew by 25 percent. “Here, in New Zealand in 1998, when business confidence was at a seven-year low, many franchisors achieved sales growth in existing outlets of around 20 percent. And since the New Zealand Institute of Economic Research warned in early 2006 that a slump was on the way, franchises have found their biggest problem has been a shortage of new franchisees to serve their growing customer base. “So, does all this mean that now is a good time to buy a franchise? Well, if you choose wisely, the honest answer is ‘yes’. There are a number of areas where the unique characteristics of a franchise help businesses not only to survive in an economic downturn, but actually to flourish.” Distinct advantages Win Robinson, managing director of Franchize Consultants (NZ) Limited, also believes the franchise model usually has distinct advantages in tougher times, although “it is no different from any other business as far as the normal economic cycle and industry risks are concerned”. “Operationally, franchisees are almost always more nimble than company branch operations and usually more profitable. They are able to put in more sales effort quickly and can usually reduce costs quicker – since they usually run a leaner ship than the typical large corporation. “Generally, they are more responsive to customers and therefore have better results. At the same time, they do have the professional backend services like advertising, purchasing and monitoring, etc done by the franchisor and still can, therefore, in most cases, compete on marketing spend.” Jake Phillips, franchise manager for the National Bank offers another perspective: “Franchising is not a quick road to riches, but it can be a successful and profitable path to future growth and prosperity in any economic environment, provided all the right elements are in place and the parties thoroughly understand the industry and the respective obligations between franchisees and franchisors.” Founder/director of Red Hot Business Coaching Limited, a franchise in its own right, Karl Baker also believes the franchise system performs better than most in these circumstances. “Franchises typically have more resources, better systems, stronger direction, superior brand presence, which all work in favour of a good franchise during leaner times. And just like any business, the more proactive ones who accept responsibility for themselves and take the appropriate actions, will always win out.” The consensus is that the network franchise operations have better protection and support in rough times, but that lower-cost franchise businesses (such as home services and recruitment) and retailing could get squeezed as some big businesses reduce staffing levels, and employment generally becomes more difficult. Financing revolution Now here comes the best part – and it’s all to do with financing. Westpac’s Cloete again: “Whereas business is usually seen as a risky investment there has been a revolution in franchise financing. The good news is that because the strong systems and brands of the better-known franchise systems tend to lower the business risk considerably, it has enabled us to take this into consideration. “This means that a bank with a specialist franchise unit is prepared to lend against the new business, based on the success of the franchise system and all the other franchisees. In practice, this means that potential franchisees would need less of their own money and can secure part of the investment against the assets and future cash flow of the business.” It seems too good to be true. So what has it been like at the coal-face? Richard Karam is the face of The Coffee Guy, an Auckland-based franchise which is scheduled to “go national” as this story is published – with the signing of a master licence for the South Island and Australia next. Already, in just over two years, his mobile coffee dispensing vehicles have gone from being an occasionally glimpsed coffee oasis in a drab Auckland industrial area, to being ubiquitous at school sporting events, concerts and, as he puts it “making sure no one in Auckland is too far away from a good cup of coffee”. Given that the leasing of fixed premises is usually the biggest hurdle and the heaviest burden to a business, even in good times, has The Coffee Guy’s moment arrived? The steady flow of new franchisees, swelled by younger operators disillusioned with corporate life and middle-aged executives “cashing out”, and 40 franchises, would seem to say so. “Put it this way; we offer a guaranteed minimum of $750 a week and have yet to have anyone call that up. We train well; support massively and promote consistently.” He says franchisees are attracted by the absence of a fixed property lease, totally flexible working hours and a simple formula that gives a return on the amount of effort put in. “I don’t like making comparisons, but think of it in terms of an hour: you can mow two lawns for $50. A return trip to the airport brings in $120 and a Coffee Guy can do 80 coffees at $4 – and take the afternoon off or do something else.” Establishment, training and a fixed territory costs $33,000 and another $49,000 secures the fully equipped and branded van, which can be leased. While we tend to think fast-food and catering when it comes to franchises, one of the country’s most successful operations is in what, at first sight, would hardly be regarded as a “sexy” industry – corporate signage. Speedy Signs is part of one of the world’s largest signs and graphics companies, with more than 800 outlets in 30 countries – 22 in New Zealand. Established by chartered accountant, Grant Archibald some 10 years ago, the franchise is on a roll and achieving extraordinary success. Earlier in the year, Grant and wife Sarah were named Most Valuable Player (Master Licence) – a year after taking the Master Licensee of the Year award, covering some five brands, 50 countries and 1200 franchisees. The Archibalds also operate the complementary EmbroidMe franchise, which provides corporate clothing. We spoke to one of their franchisees, Brent Neighbour, who along with wife Donna took over the East Tamaki Speedy Signs in 2003 to see how corporate types “wanting to run their own business for a change” cope. Brent, who has an IT background, was thumbing through Franchise New Zealand magazine when he came across Speedy Signs. “I liked what I read and I thought it sounded like me. Next thing, I contacted Grant who mentioned the East Tamaki store was coming up, and he believed it had a lot of potential. He was certainly right on that.” With no experience in the sign industry, Brent and Donna felt far more confident having done the two-week training in the US. “We’ve followed the systems ever since and they do work, plus we’ve had all the support we need and have actually tripled our business since we started. We are still growing, too.” While his IT experience stands Brent in good stead with the computer technology now used in sign making, it’s the thrill of owning their own business which drives the Neighbours. Even being together at work as a couple is a positive factor. So are there any rules about not bringing the business home with them after hours? “We live it 24/7, because we are so passionate about it,” he says. Take precautions What are the particular precautions anyone entering the franchise market should be alert to – the must-dos and don’ts? If you are planning a business start-up, then understanding what your competitors offer and what share of the market they hold is even more important in straitened times. “For example, in the course of your research you might discover that the competition is stronger, more entrenched, or more pervasive than you had imagined. This ‘reality jolt’ could save you from costly financial commitments or mistakes, or lead you to modify your plans to make your concept more competitive and practical,” says National Bank’s Jake Phillips. And if you are already established in the industry; for one, do not stop advertising. (That’s the message loud and clear from all those who have studied this seemingly contradictory behaviour by successful companies.) In a recent definitive paper for the World Advertising Research Center, entitled “Cutting ad spend in a recession delays recovery”, Paul Dyson points to six studies, dating as far back as the 1920s, showing that brands with sustained advertising expenditure through recessions have a competitive advantage by stealing “share of voice” from brands which reduce their budgets. He also demonstrates that the sales impact of budget cuts is long-lasting. A brand which stops advertising for one year will take three to four years to return to a level of sales had its budget been maintained. And even halving budgets for one year requires two further years to recover fully. Local expert Simon Lord believes this to be a “home truth” too: “Existing companies looking for savings often find the advertising budget the easiest item to cut – simply because it means no lay-offs. And because many people find advertising effectiveness difficult to measure accurately, cuts in this area may seem to have least impact on a company’s performance. “Fortunately, most local franchise systems include in their franchise agreement a marketing or advertising levy in the form of a percentage or flat-fee which the franchisor is obliged to spend on promoting the business. This enforced spending is one of the main reasons for franchising’s excellent performance, I believe.” Are there any significant new factors on the franchise horizon? Of note is new legislation requiring registration and not much more, and the imminent return of Aussie franchises – this time correctly researched and pitched at the local market. Keep looking west; it could be worth your while. Kevin Kevany is an Auckland-based freelance writer. Email [email protected] Relevant websites: www.franchise.co.nz www.franchize.biz www.businessresourcecentre.co.nz www.westpac.co.nz www.redhot.co.nz www.thecoffeeguy.co.nz www.speedysigns.co.nz www.kensingtonswan.co.nz