Franchise sector bullish, say top CEOs

Nearly half of Australia’s leading franchise businesses outperformed the broader economy over the last 12 months, growing by more than eight per cent, more than double the recorded three per cent GDP, and generating a minimum 15 per cent profit, according to the results from the annual Franchisor CEO Survey by leading franchise consulting firm, DC Strategy.

Whilst happy with their success the leading CEO’s said the biggest challenge over the next 12 months would be franchisee recruitment, despite seeing a higher quality of candidates many of whom are also considering taking on multiple units.

The largest of its kind in Australia, the survey sought the views from the country’s top 150 retail, food and service franchise groups, based on number of stores and total profit. The top CEO’s provided insights on a wide range of topics including network growth and performance, international opportunities and key challenges.

Rod Young, Executive Director of DC Strategy, said overall the results were very promising with many CEO’s being bullish in their outlook and growth opportunities in the Australian market over the next 12 months.

“The results clearly validated the strength of a well developed franchise system. The franchise sector has succeeded in creating stronger performing and more valuable businesses. Well developed, mature and well managed franchise systems fared much better growing very quickly whilst the less mature systems were still growing at a reasonable pace,” said Young.  “The top franchise groups are attracting more franchisees and this is likely to lead to further consolidation in the sector which will see, over time, the bigger systems engulf some of the smaller ones.”

Growth opportunities
Sixty per cent of CEO’s indicated multi-unit franchising was their key growth strategy. More than 70 per cent of respondents also listed organic growth strategies such as brand and product development to be one of their highest priorities in the coming months. “Results show there are three key priorities for growth, with CEO’s focusing further on their brand and product development, expanding the number of domestic markets and expanding the depth in those markets,” Young said.

A state-by-state breakdown revealed the top groups were experiencing difficulty growing in South Australia and New South Wales whilst Western Australia and Queensland were leading the charge as the most profitable states.

Australian franchise systems world leading
International expansion favours highly among the top franchisors, with 35 per cent indicating they were exploiting global markets and approximately 22 per cent looking to grow internationally within the next three years.

“Australian businesses face some of the most difficult operating conditions in the world – high rents and ever increasing labour costs which place a great deal of pressure on business models and management expertise,” said Young.  “Foreign markets don’t generally present such difficult operating conditions and it’s little wonder a significant proportion of leading franchisors are intending to expand their operations internationally.”

Michael Paul, CEO of leading franchise group Pack & Send International, reiterated offshore expansion was a key element of his company’s growth plan over the next few years.

“Pack & Send expanded to the United Kingdom and New Zealand in 2008, 15 years after we opened our first store in Australia. Being a logistics business, we export across the globe; New Zealand and the United Kingdom were the two biggest export markets so it made sense to go there. We’re now focused on a two to three year plan that will see expansion to Singapore, Germany, Canada and Mexico,” said Paul. “The company lives by the principle ‘slow is smooth and smooth is fast’. This is particularly relevant when ensuring you have a dynamic business growing at the right rate.”

Recruitment a key challenge
Franchisee recruitment was identified as a key challenge for businesses growth. “During the economic downturn, many groups believed the anticipated increase in unemployment would be beneficial to the franchising sector. This was not the case, with the unemployment rate remaining stable meaning the number of potential franchisees has fallen,” Young stated. “On the upside the business experience and quality of candidates is actually improving with many aiming to own two or more franchises. Candidates are generally better capitalised which is a positive for the sector, particularly when combined with an increased willingness to invest in the $50,000 to $250,000 range.”

Young mentioned there had been significant movement in the gender make-up of the prospective franchisee pool, with males accounting for almost 80 per cent and females just above 20 per cent. “Groups need to consider a clear strategy to attract female franchise candidates to ensure they do not limit their growth to an even greater extent,” he said.

“There is clear opportunity to increase the average transaction value across franchise networks. Some groups are doing this very well but others need to focus more on up-selling,” Young advised. “There needs to be a clear distinction between the need to attract more customers and increasing the spend of current customers.”

Only a small number of responses mentioned social media as an effective tool for customer engagement and brand awareness. “We encourage franchisors to consider the rapid and demonstrable effects sites such as Facebook and Twitter as a highly effective marketing tool that is currently under utilised by the majority of franchisors,” Young said.

DC Strategy is a specialist franchise consulting and law firm, focused on building better and more valuable businesses.  

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