The franchise business sector has demonstrated remarkable resilience during New Zealand’s extended economic recession, and fortitude in the wake of the devastating February 22 earthquake. NZBusiness editor Glenn Baker reviews the current franchise business landscape and gathers some practical advice for franchisee and franchisor.
Business owners in this country don’t need any reminder that these are challenging times. Those gloomy, grey economic clouds barely show any sign of lifting – and now we’re having to cope with one of our worst ever natural disasters.
But there is good news amongst the gloom – and it’s coming from the franchise sector, which surveys suggest has largely come through the recession in good shape.
Perhaps the best indicator of the state of our franchise sector is the Franchising New Zealand 2010 survey. Conducted by Massey University Business School in collaboration with Australia’s Griffith University, the survey was generally positive about the local franchise sector – and it was not without its surprises.
I asked survey co-author, Dr Susan Flint-Hartle of Massey University’s School of Economics and Finance, what her biggest surprises from the data were. Number one, in her mind, was how well New Zealand’s franchise sector had held up against the recession – with the total number of franchised units increasing by 5.3 percent from 2009 to 2010. There are now 423 active ‘business format’ franchise systems in New Zealand (an estimated 23,600 franchised units) operating 450 brands and employing approximately 80,000 people. The number of franchise systems here means New Zealand continues to be the most franchised nation in the world on a per capita basis.
Understandably retail was down a little over that period, while the service sectors showed modest growth (although there were mixed results within sectors, too). Some of the trends make interesting reading.
Mirroring a 2008 Australian survey, around 41 percent of New Zealand franchisors appoint part-time franchisees. Flint-Hartle believes this is in response to franchisees who require more flexibility in operations and lifestyle.
However, the Survey suggested that, as part-time franchisees require almost as much support as full-time ones, part-time franchising is often less profitable for franchisors and that this strategy needs to be carefully managed.
Other developments in New Zealand’s franchise sector – highlighted by the Survey and perhaps a reflection of the increasing number of mature franchises out there – include specific growth strategies such as more multi-unit ownership; a reluctance to utilise Franchise Advisory Councils; and a greater consciousness of sustainability issues amongst franchisors.
Only around 20 percent of the 423 franchise systems completed the Franchising New Zealand 2010 survey, a disappointment to the researchers (and 94 percent of these were locally-developed systems, whereas some 25 to 30 percent of the franchises operating here are from overseas). Other interesting statistics to come out of it include:
• The average franchisor has 13 years franchising experience.
• 24 percent of respondents commenced franchising in the past five years.
• Half of all franchised units are owned together with a spouse or partner.
• 26 percent of franchisees are aged over 50, only four percent under 30.
• Franchisees remain within a system for a median of six years before exiting.
• 87 percent of franchised units did not change ownership during 2009.
• Substantial disputes were experienced by just two percent of franchisees and 19 percent of franchisors.
Look for further analysis of Franchising New Zealand 2010 at www.franchise.co.nz/article/view/1167 and you can download the full survey report from www.franchiseassociation.org.nz
The tough get going
It’s a fact that franchised businesses traditionally perform well during recessions. Simon Lord, publisher of Franchise New Zealand magazine and website, believes this is due to a number of key factors, such as the efficiency, buying power, planning, and focus that franchises bring to small business – and the maintaining of advertising and marketing efforts.
“This time around, franchising has again fared pretty well although there have certainly been casualties. The recession has highlighted structural weaknesses in some systems which were set up in the good times and are finding it hard to cope with a prolonged period of reduced revenue and cheap competition. Even some long-established systems are finding that and have seen some of their franchisees go out of business as a result.
“The result has been that some franchises have stopped growing or recruiting. That can lead to other issues resulting from the franchisor’s lack of revenue,” says Lord.
“The interesting thing is that franchises have fared differently even within the same industry. In some cases this is because of their fundamental structure, but in other cases it comes down to the brand’s relationship with its customers, the franchisor’s experience or the ongoing communication and mutual trust between franchisor and franchisees that helps everyone pull together rather than looking for someone else to blame.
“Unusually, this recession has not been accompanied by the mass redundancies that have often fuelled franchise recruitment in the past,” he adds. “Combined with the difficulty that many people face raising finance for new ventures at the moment, the result has been that some franchises have stopped growing or recruiting. That can lead to other issues resulting from the franchisor’s lack of revenue,” says Lord.
The size of the franchise industry in New Zealand, with its estimated turnover of between $15 to $25 billion, justified the creation of its own confidence index in 2010.
The latest Franchising Confidence Index (www.franchisingconfidence.co.nz), representing the views of 37 franchisors and 24 service providers surveyed between 17 and 21 January 2011, provides a fairly accurate reality check on the state of New Zealand’s franchise sector.
Callum Floyd of Franchize Consultants (NZ) Ltd, the firm that produces the quarterly Index, says not surprisingly there’s still a lot of negative business confidence out there – which ties in with other business surveys. The Canterbury earthquake won’t help matters either – although it will spotlight the special supportive relationship between franchisee and franchisor, says Floyd.
“A continual challenge for the industry is access to finance. The banks have changed their lending criteria, and they won’t lend as much as they would have before the GFC.
“Of course, with the onset of the recession and its associated corporate redundancies we all thought franchisees would be easier to come by for franchisors. However, reduced customer spending, limits on finance and the downward spiral in confidence have put the brakes on to a large extent,” says Floyd, although he points out that certain sectors, such as fast food, are performing better than others (such as general retail and construction).
“What’s happened is the natural law of the business jungle. Those franchises with a strong value proposition and that have their systems right, have coped much better during the recession than those that are less organised.
“There’re opportunities out there for stronger, well managed companies to acquire their weaker competitors.” He takes solace in the fact that franchisors are optimistic about their own growth prospects. “They may not grow as fast as they like, but they will still grow,” he says.
Floyd’s company, Franchize Consultants, has been reviewing the performance of many franchise networks, and he is surprised at how well many have been going during the recession.
This fact is not lost on franchisees either – Floyd says that during a recent review a number of franchisees stated how grateful they were for the opportunity their franchise has provided – and how it has helped them to weather the recession.
“Overall there is real resilience in the franchise sector, and this has been highlighted by the recession,” says Floyd. “It’s significant that the number of units has continued to increase.”
He sees more challenging times ahead for franchised businesses. “More franchisors are expecting economic deterioration than improvement.” Challenges include the Christchurch quake (even before the February 22nd disaster) few forward sales, demand for low-cost (verses premium) products, depressed demand from consumers not spending, increased competition, lower supplier loyalty, margin pressure, lease problems and issues with access to capital.
“Conversely some franchisors were more optimistic – noting increased interest from prospective franchisees, returning consumer confidence, increased sales, average spend and conversion rates.” A mixed bag, it would be fair to say.
The family steps in
Estelle Logan is chair of the Franchise Association of New Zealand (FANZ) and, together with her husband John, is the national franchisor for V.I.P. Home Services. Not only does she have a good handle on New Zealand’s franchise sector, she also has first-hand knowledge of the impact of the recent Canterbury quake on franchisees. Of the 18 V.I.P. Home Services franchises in Canterbury, five were severely affected by the February 22 quake. One had 70 percent of his business wiped out, and Logan says they will be doing everything they can to help these franchisees get back on their feet, even if that means having to redeploy people to the North Island. A relief fund set up amongst franchisees outside Canterbury last September raised $10,000 – and Logan has been amazed at the response from the V.I.P. ‘family’ this time too.
This disaster further highlights the strength of the franchise business model – the business owner has much more resources behind them to help deal with major events such as this. It’s like having the support of a big family, says Logan. “They are definitely not alone.”
The primary role of FANZ is to be the voice of franchising in New Zealand, explains Logan.
Its members include franchisees and specialist service providers as well as around a third of the franchise systems operating in New Zealand.
Unlike Australia, New Zealand’s franchise sector is subject only to normal commercial law and has a voluntary code of conduct. FANZ is charged with infusing ethical standards and best practice into the sector, so franchising remains a trusted business format. It regularly dishes out advice to member franchisors and franchisees. People are keen to uphold the standards in this country, says Logan, and as a result, complaints are very low and comparable to the US and Australian franchise sectors, which are heavily regulated.
Logan believes the recession has really amplified the weaknesses in many businesses, not just franchised ones. “It’s the smart business operators who took steps to do exceptional things that have survived and grown – even during the recession.” V.I.P. Home Services, she says, is one franchise that has experienced good growth from the latter half of 2009 to the present day.
Her advice for franchisors right now is to focus on training and support. “Help your franchisees to understand the impact of economic factors on their business. Don’t bury your head in the sand – respect your franchisees as business owners. If they see you putting your hand up for them – they’ll work with you.”
Logan puts the resilience of the franchise business model in the current economic climate down to a number of factors – including robust systems; the viability of franchise businesses (“at least 80 percent of franchisees earn incomes over and above what they were earning as employees or owner-managers”); and the faster responsiveness of franchise systems to changing market conditions.
Of course, it goes without saying that you shouldn’t even consider getting into franchising without seeking expert advice, conducting proper feasibility studies and due diligence. Logan reminds me that when someone buys a franchise from a FANZ member, they are buying from somebody who is bound by their code of practices and ethics.