The future of franchising may be brighter than it seems

| June 18, 2018

Off the back of the recent parliamentary inquiry into the Australian franchising sector, industry research organisation IBISWorld has found that the future of franchising is not as ominous as it seems, with growth projected for service-based franchises such as gardening, house cleaning, nutrition, and wellbeing services.

The Franchising industry’s complexion has changed dramatically over the past decade. Where once the industry was known for its prosperity, the franchising model has recently been called into question following financial market instability and high-profile instances of franchisee dissatisfaction, such as that of Retail Food Group (RFG), Domino’s, 7-Eleven, and Caltex.

RFG and Caltex are two well-known Australian franchise businesses that have recently experienced difficulties. RFG, a franchisor and owner of several food retail businesses including Donut King, Michel’s Patisserie and Gloria Jean’s, announced just last week that it expects to face a full-year loss of $87.6 million for the current financial year.

The company has stated that it is suffering due to difficult retail market conditions, unsustainable rent and a sharp decline among domestic franchise renewals. As a result of this struggle, the company plans to shut down up to 200 of its stores by mid-2019.

In February this year, Caltex announced that it would bring all of its petrol stations under company control by 2020, bringing an end to the company’s franchise model. Following a two-year internal review of the franchise model, the company found that the best way to achieve its retail growth objectives was by controlling its core business through a company-owned model. Consequently, Caltex will spend up to $120 million to take control of the remaining 433 franchise sites, run by 237 franchisees, by mid-2020.

Despite these negative examples, the Franchising industry is still forecast to grow at an annualised 1.3% over the five years through 2018-19, to be worth $179.4 billion. Growth in real household disposable income has supported consumer demand for franchised goods and services over the past five years.

IBISWorld Senior Industry Analyst, Bao Vuong, expects the Franchising industry to encounter steady trading conditions over the next five years, with revenue projected to increase at an annualized 1.7% over the five years through 2023-24, to be worth $195.4 billion.

“This growth is likely to stem from increased demand for service-based franchises such as those that provide health, nutrition and wellbeing services and household services. A stronger domestic economy is forecast to contribute to growth in disposable incomes, driving demand for franchised products and services.

“Rising incomes are likely to bode well for service-based franchises, particularly for those that serve time-poor consumers with high incomes. These consumers can pay for domestic services, such as gardening and house cleaning services, reducing the number of tasks consumers must carry out themselves,” said Mr. Vuong.

“Several other aspects of the industry may also drive growth, including capacity for change and innovation, a proven and replicable business model, extensive operational and marketing support, branding, marketing and buying power,” said Mr. Vuong.

An example of change in the Franchising industry is online retailing. Online retailing is currently being used by 36.7% of franchise systems, with a further 32.7% stating that they plan to participate in online sales in the future.

“Numerous franchised systems, such as finance and travel consultants, are likely to implement online models for their businesses. Online retailing will enable franchisees to access new selling regions, such as rural towns, that have no physical stores,” said Mr. Vuong.

IBISWorld has identified 250 key success factors for a business. The most important for the Franchise industry are:

Having a loyal customer base: Franchises that have a loyal customer base are more likely to have clients that are repeat buyers.

Having a clear market position: Franchisees must follow the business structure as set out by their franchisor. With a defined market position, the business ensures it projects a clear and consistent image of the company.

Business expertise of operators: Franchisees can benefit from the expertise, guidance and leadership of their franchisor to help grow the business.

Ability to control stock on hand: Operators benefit from controlling stock on hand to meet client demand, reduce inventory costs and ensure adequate stock turnover.

Establishment of brand names: Many franchises have established brand names, and people buying into a franchise license the particular product or service. Having an established brand name is more likely to attract customer attention, as brands guide many shoppers.

Experienced work force: Franchisees should ensure that employees have sufficient knowledge to provide sound advice and quality customer service.