30/05/2012 - 10:17

Talent squeeze limits franchise growth

30/05/2012 - 10:17

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Western Australia’s resources boom may be driving the state’s economy, but it’s also restricting the franchising industry’s potential for ongoing growth.

Western Australia’s resources boom may be driving the state’s economy, but it’s also restricting the franchising industry’s potential for ongoing growth.

FRANCHISING can be an attractive way for those looking to start their first business to get a foot in the door. With a bit of capital, almost anyone can buy a franchise and become their own boss, without having to come up with an original business idea. 

It was a popular option during the GFC, with job security low, many who lost their employment looked for alternative sources of income.

Only a few years later and there’s a noticeable shortage of new franchisees looking to start a business. And quite ironically, it’s the stronger economy that’s copping the blame.

Franchise Council of Australia WA state president, Mike Stringer, said finding appropriate franchisees was the biggest challenge facing the industry, and the resources sector had a lot to answer for.

“If you got all of the franchisors together they would all say the biggest problem is a shortage of good franchisees,” Mr Stringer told WA Business News.

“If you can just go and get a job in the mines for X amount, then why would you bother investing in a franchise and taking on that additional responsibility?”

About 80 per cent of franchisee enquiries come through online forums dedicated to matching franchisors and franchisees, but the talent pool is still short of numbers, Mr Stringer said.

The shortage directly correlates to WA’s lowest unemployment rate for years; with unemployment sitting at only 3.8 per cent in March (down from almost 6 per cent in 2009), the pool of potential franchisees has drastically reduced, thus restricting growth.

Mr Stringer owns two of WA’s largest locally originated franchises, Car Care and Housework Heroes, which began in 1987 and 2001 respectively.

The mobile car detailing franchise now has 30 franchisees running operations across WA, while Housework Heroes has about 35 franchisees and 60 people working under the brand.

Both are among WA’s top 10 largest state-originated franchises (see list), but Mr Stringer said they could easily be expanded.

“We could double those numbers and fill franchisees up with work in two to three months, but there’s just such a shortage of appropriate franchisees,” he said.

Recruitment

The defining factor is availability of ‘appropriate’ franchisees; franchisors won’t simply allow just anyone to become part of their business.

Founder of The Mortage Gallery, John Bignell, said he had discovered the best way to grow the business and increase the number of franchises was from within, rather than relying on advertising.

Twenty-two of the firm’s 26 existing WA franchises were started by people who had been employed in a Mortgage Gallery franchise and wanted to go out on their own.

Mr Bignell said that had reduced the potential for variable service standards, which may come about if an outsider was bought in to run a franchise.

Earlier this year the Mortage Gallery was bought by national firm Smartline, which was named the top Australian franchise by online rating group TopFranchise.com.au, based on factors such as franchisee intention to renew agreements, recommendations, return on investment, and level of support from franchisors.

Success Tax Professionals, ranked fifth in WA’s largest local franchises, has used advertising to attract franchisees since Darren Gleeson founded it in 2003. 

But Mr Gleeson said the franchise still had difficulty attracting the right people, and that he turned away about 80 per cent of enquiries from people wanting to become part of the company because they don’t fit the bill.

“They either don’t have the capital investment required, or the qualifications ... or in some cases they just don’t have the right attitude,” he said.

“The franchise is a 20-year relationship; it’s a long-term thing, so we have to have the right relationship between them and us as well. Some people just like to do their own thing and go crazy, whereas a franchise is very structured.”

Success Tax Professionals is the second fastest growing franchise in WA: in almost 10 years since launching it has expanded to 35 franchise branches in the state, 10 in Victoria and four in Sydney.

Mr Gleeson’s goal is to reach 100 branches in Perth alone, but he holds a commitment to only growing with appropriate franchisees.

“We don’t want to grow just for growth’s sake,” Mr Gleeson said.

 “(The biggest challenge) is getting the right people; that’s the key. We probably get about 20 enquiries a week, but we only put on about 15 new franchises a year.” 

Mr Gleeson said it was a different story during the GFC because there were more people looking for alternative revenue streams and the pool of potential franchisees was of “higher quality”.

But while some franchisees may have benefitted from the GFC, national statistics show an overall decline in the number of franchise-based businesses; in 2008 it had reached a total of 1,100, but in the two years to 2010 it retracted to 1,025.

Griffith Business School dean Lorelle Frazer said that retraction was mostly immature systems involved in retail.

The school is currently undertaking its most recent biennial survey, which Professor Frazer expected to show a growth in franchises.

Professor Frazer said attracting enough suitable franchisees was always a concern but the current economic climate had made it more difficult.

“Nearly half of franchisors (in a recent survey) indicated that they had received royalty relief requests from franchisees, indicating that business had certainly been tough,” she said.

Finance issues

The cost of franchising, and the reluctance from banks to lend to small businesses following the GFC, is another issue curbing franchise growth.

It costs about $11,000 to acquire a Success Tax Professionals franchise, which Mr Gleeson said was probably why the company hadn’t experienced the same level of difficulty in attracting interest as other franchises.

On the other hand, becoming part of WA’s largest locally launched franchise, Gull Petroleum, can cost up to $600,000.

Established franchises working to a common business model was often considered enough to give investors confidence the investment would be low risk.

Mike Stringer said franchising provided a roadmap for new business owners, setting out a route for them to run a profitable business based on a proven model.

“What we’re trying to do is take away some of the risks involved; we’re saying if you follow this system you’ll get this result ... if you don’t follow the system we don’t know where you’ll end up,” he said.

Mr Stringer said the basis of a good franchise was to have systems and procedures in place to quickly pick up on any potential problems before it gets to a franchisee losing money.

Mr Gleeson said Success Tax Professionals was yet to have an instance of a franchisee losing money, which could be attributed to the way it determined whether potential owners were suitable.

“If they can’t raise the initial $11,000 capital investment required then we say it’s probably not the right time for them to become a franchisee; they’re probably not right to take on a successful business,” Mr Gleeson told WA Business News.

He said too many franchisors relied on making the bulk of revenue from the initial investment in new franchises, which encouraged them to increase the price and expand too aggressively.

Success Tax Professionals operates a 20-year licence to give franchisees confidence the company was invested in the business for the long term, and reduce concerns over potential rogue franchisors who opted not to renew licences and then re-sell the franchise.

Perceived rogue franchisors prompted Liberal backbencher Peter Abetz to introduce the Franchise Bill 2010; which intended to correct the perceived imbalance and protect franchisees from franchisors who may decide not to renew their licence.

The Bill failed to secure enough support to be passed.

Belmont-originated Muzz Buzz cafes requires an initial investment of about $380,000 for one of its turnkey outlets, which executive chairman Warren Reynolds said had proved difficult for some and limited the company’s growth potential. 

In this regard he apportioned some of the blame with the banks and other finance providers.

“There’s a lack of support from financial institutions for franchising, period; or for small business for that matter,” Mr Reynolds said.

‘‘So we’re seeing franchisors now starting to create financial trusts which will enable them to self-fund franchises.

“I think that’s inevitable in the future and I think that’s the sort of thing that we will also do.”

Muzz Buzz was rated 10th on TopFranchise.com.au’s list.

Snap-on Tools, which was founded in the US in 1920, was rated Australia’s fourth top franchise in the TopFranchise.com.au survey.

It is one of the few to have moved to operating an internal self-financing mechanism for would-be franchisees.

Gordon Douglas has been running a Snap-on truck since 1991 and was part of a committee that decided to move the business to the franchising model in WA. 

He came on board prior to it beginning internal financing and said gaining the level of investment even then was difficult; but he doesn’t complain about the return on investment.

“It has been fantastic. I’m a firm believer that you only get out what you put in, so I’ve worked very hard to make my business a success,” Mr Douglas said.

Topfranchise.com.au’s head of intelligence, Ian Krawitz, said there were certain characteristics that made a franchise successful. As well as providing franchisees with support, there was also a need for a sound, recession-proof, business model.

“Take Snap-on Tools for example. Their business model was built in the Great Depression in the 1930s and so is very robust through tougher trading conditions, the model itself is underpinned by providing greater customer service on an ongoing basis,” Mr Krawitz told WA Business News.

Passion

Getting franchisees passionate about the brand was also a determining factor in whether it would be successful.

“There are two things to get right. Firstly selecting franchisees who can get passionate about the brand. The second element is then keeping franchisees passionate about the business on an ongoing basis and keeping the passion burning,” he said.

Mr Krawitz used Muzz Buzz as an example of a franchise that worked hard to keep franchisees passionate by undertaking promotions as well as ongoing training to keep staff excited about the product.

While there are still risks involved, franchising can be a rewarding and profitable career. 

For more than 10 years Marcus Delany has been a franchisee with the Chooks Fresh & Tasty group (now owned by Quick Service Restaurant Holdings, which holds Chicken Treat, Red Rooster and Oporto under its banner).

He purchased his first store and has been able to grow his portfolio to seven stores from the profits he’s made through the early franchises.

He said he would never have even contemplated opening his own business because the franchise model was so solid.

“You can see the future a little bit more clearly when it’s up and functioning and there’s also the aspect of having assistance,” he said.

 

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