How to successfully franchise in Australia

How to successfully franchise in Australia

Franchise brands inbound to Australia will find a smaller but well-established franchise market. Peter Buckingham, MD of Spectrum Analysis Australia, tells you what to expect

Franchising in Australia has become the distribution method of choice for some 1,314 systems and 80,000+ franchised businesses. According to the IBISWorld Franchising in Australia report published in November 2018, the industry:

• Employs around 594,500 people
• Represents $27.4 billion in annual wages
• Is worth an estimated $181.8 billion in revenue

History

Franchising’s rapid growth was kick-started when McDonald’s, KFC, Hungry Jacks (aka Burger King) and some other large QSR’s brought over their systems from America in the late 1960’s and early 1970’s. Personally, I became involved in franchising when the government legislated in the Petroleum Retail Marketing Franchise Act of 1980, that every service station owned, leased or operated by the major oil companies was a franchise ̶ effective immediately, with the incumbent given nine years’ worth of franchise tenancy. This created around 8,000 new franchises overnight!

The Senate Inquiry into franchising

The franchising sector in Australia has run into some headwinds over the last year, with the Government instigating a Senate Inquiry into the operation and effectiveness of the Franchising Code of Conduct. The report released on the 14th March 2019 has given 71 recommendations which the Government will have to decide upon and implement accordingly.

The report released in March 2019 heavily criticises the actions of one specific company (RFG), and suggests that many franchisors need to give stronger support to their franchisees, and so restore confidence in the industry. The Senate Inquiry recommends that a Franchising Taskforce be established to consider the recommendations and implementation strategies, and most commentators do not envisage changes impacting until mid-2020 at the earliest. Mary Aldred, CEO of the Franchise Council of Australia, said the FCA welcomed the report and looks forward to engaging with the task force.

An international franchise presence in Australia

US franchises have grown strongly in Australia over many years. Australia has some great advantages for US franchisors, as there are no language issues (we speak “Australian”), and there is a strong legal system in operation to protect the investment. However, the expectation of some US companies can be over-zealous, and brands considering expansion into Australia should be aware the total Australian population (25 million people) is just slightly below the population of Texas, and about two thirds that of California.

In the opposite direction, many Australian franchise systems are having great success heading overseas, probably currently led by F45 Training, an Australian-grown franchise now operating in over 40 countries across the world. Others, such as like 2017 Australian Franchisor of the Year Poolwerx, Bakers Delight and the Foodco Group are all expanding in the USA and elsewhere.

Processes to enter into Australia

There are no prohibitions to international ownership in Australia, unlike countries in Asia and the sub-continent who demand local ownership and controls. There are locally-based experienced franchise consultants and very well-established legal firms to assist inbound franchisors in all issues regarding the legal process and managing expectations.

The normal process recommends having involvement in operating some level of company operations in order to give credibility to a new System, and we have seen many franchise systems fail because they believe an investor will put up all the funds, with the franchisor unprepared to commit.

One aspect that often creates issues for US franchisors is our labour laws and the minimum wage that employees must be paid. We can only say labour is probably more expensive than in the USA, especially in the food and hospitality industry because of Australia’s Award wages system. This often results in some differences in the forecast P&L modelling and revenues and margins that need to be met.

One US pizza company has been coming over for more than 15 years, always looking for a rich master franchisee to open their business in Australia. Our advice to them over the period has always been, if you are so confident in your processes and system, then open one or two stores yourselves to demonstrate that the system will be a success. So far that has not occurred.

Many US systems with reasonable backing by the franchisor have had great success over the years in Australia, whether that has been QSRs like McDonald’s, KFC, Subway and Dominos, convenience stores like 7-Eleven or fitness franchises like Anytime Fitness, Orange Theory and Extend Barre.

New systems are also coming into Australia, and these are not always in the food and fitness business. OsteoStrong and Carl’s Jr are examples of well-financed expansions into the country. Some systems have come and gone – and are returning again! Taco Bell has entered Australia twice previously and is setting up again, as has Cinnabon, which came to Australia in 2002. We can only wish them success this time around and hope they have learned from their previous experiences.

Franchise Council of Australia

Australia has a strong body pushing franchising forwards in the form of the Franchise Council of Australia (FCA). The FCA has Chapters in all mainland states, and runs a three-day National Franchise Convention every year, which is seen as the peak industry event, culminating in the Gala Awards Dinner and the announcements of the awards including Franchisor of the Year – won in 2018 by Hire a Hubby, Australia’s largest handyman system.

Education is one of the cornerstones of the FCA, and they and Griffith University have worked with the ACCC to ensure there is free online education available for anyone considering taking on a franchise. Many experts in the industry have contributed to create a strong level of education.

To further assist in education of the industry, the FCA has also adopted the Certified Franchise Executive (CFE) system from the US. Around 100 people have been awarded their CFE, and this number is growing rapidly.

Finding Franchisees in Australia

The biggest complaint from franchisors has been the quality and financial capacity of prospective franchisees. Whilst many are willing, the financial requirements to join a good system are quite high, and out of practical reach.

Australia has a strong banking system, and banks are reluctant to loan monies to prospective franchisees against the goodwill of the business. FRANdata has recently expanded in Australia to assist in this process, by encouraging the banks to evaluate systems and be prepared to loan monies to well-run franchise systems and their potential franchisees.

Following a Royal Commission into the Banking and Finance Industry being released in February 2019, banks have been criticised for undertaking levels of irresponsible lending, which has effectively tightened up money-lending for potential franchisees. Many systems are finding good potential franchisees are unable to raise the necessary funds to join their systems at present.

The shortage of franchisees has led many companies to seek hard-working people who wish to come to Australia to apply. This has led to a considerable amount of business immigration.

Regulated markets

Franchising has become a mature distribution method for many major companies. The Federal Government has stepped in to place some forms of national regulation over it, by legislating a Code of Conduct, which is administered by the Australian Competition and Consumer Commission (ACCC). The Code of Conduct aims to:

* Be fair to both parties
* Ensure a proper Disclosure Statement is provided to would-be Franchisees
* Ensure the Franchise Agreement is reasonable to both parties
* Minimise legal actions by bringing an arbitration process in before legal actions are taken

Any company wishing to franchise in Australia must comply with the Code of Conduct or risk prosecution by the ACCC.

There has been some push from various state governments over the last 10 years to introduce their own separate regulations, however, this has not come to pass, meaning that we have one set of regulations Australia-wide. The huge advantage of this is to minimise red tape. This sets Australia apart from countries such as the USA where states may have their own franchise regulations, Complying with registration and fees from one state to another can be very complex.

Summary

Franchising is moving slowly forward in Australia where we have a relatively mature market, and a great variety of systems working under the franchise format. Australia is open to business for international franchise systems to enter the market with minimal foreign ownership constraints. The main point of difference to many other countries is our relatively mature legislation which is aimed at ensuring the franchisor acts responsibly and encourages franchisees to be properly funded and act in a responsible and legal manner.

If you are looking to enter Australia, we recommend you liaise with the Franchise Council of Australia, and look at using a responsible consultant to assist you, and a legal firm which specialises in Australia’s Franchise Law. We look forward to welcoming you and your business into Australia. Come on over, and we’ll throw another shrimp on the barb!

ABOUT THE AUTHOR

Peter Buckingham is the Managing Director of Spectrum Analysis Australia Pty Ltd, a Melbourne-based Geodemographic and statistical consultancy. Spectrum specializes in assisting clients with decisions relating to store and site location, strategic network planning and territory planning using various scientific and statistical techniques across Australia and New Zealand. To contact Peter email peterb@spectrumanalysis.com.au or call on 61 398300077.

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