Franchise Industry Delivers Double Digit Growth

Franchises Outperform Economy

In a year where the economy has been finding its feet, the franchise sector has delivered stellar double digit growth, significantly outperforming the economy for the second consecutive year.

According to PwC’s Franchise Sector Indicator (FSI) released today, franchises have met the ambitious growth targets they set in 2009 growing revenue by 12 per cent and profit by 19 per cent.

Franchisees also did well with revenue growth of 7 per cent and profit growth of 6 per cent – double the growth of the Consumer Price Index (CPI).

The retail sector was the biggest driver of growth. There was also a strong performance from the services sector which bounced back from negligible gains in 2009 to double digit growth in 2010.
PwC’s Private Clients partner Greg Hodson says, "Growth in the franchise sector has been nothing short of outstanding. In the past 12 months the sector has proved to anyone who ever doubted it the strength of franchising as a business model."

The Franchise Sector Indicator is an annual survey of franchise systems with 20 or more units operating in Australia. It is estimated that the 106 respondents represent just over a third (36%) of the franchise community with 20 or more units operating in Australia.

Growth

Growth is the mantra of the franchising sector: not just over the past 12 months but into the short and medium term future, too.

Franchisors are expecting revenue to grow by 13 per cent in FY11 with profit up 18 per cent. Over a three year period franchisors expect profit to grow in total by over 50 per cent.

This growth is expected to come from within the existing systems as well as from expansion into new products and services and new markets both domestically and overseas.

Mr Hodson says, "Mergers and acquisitions will also re-emerge, with around a quarter of businesses looking to sell in the next two years. On the demand side, a third of all franchisors told us they are looking to acquire a business in the next three years."

Challenges

Mr Hodson says "A healthy appetite for growth and a strong business model is a good foundation for building the franchises of the future."

"Realistic franchisors told us though, that like any business sector, franchising is not without its challenges."

According to eight out of ten franchisors (80%), finding suitable franchisees – that is business builders who are the right cultural and personality fit - is the number one challenge. However 50 per cent of survey respondents have not changed their approach to franchisee recruitment.

There is also evidence in the survey to suggest a divide between desirable and actual age of franchisees. More than two thirds (69%) said 30-44 was the desirable age but less than half (42%) of current franchisees are in this age bracket.

Funding, particularly for potential new franchisees, is also a key concern as bank credit policies remain tight. Nearly two thirds (60%) of survey respondents agreed that access to debt funding for franchisees was a problem, with 88 per cent of these believing banks’ lower risk tolerance was a key contributing factor.

Thirty-nine per cent of the franchisors surveyed identified increased wage costs as a challenge. They believed increases to the minimum wage and changes to award requirements would reduce franchisees’ profit by more than two per cent – with retailers expected to be hit the hardest.

There are also concerns amongst retail franchisors about potential cost increases for retail sites.
Opportunities

Over the past 12 months a flexible mindset and approach has helped many franchisors turn challenges into opportunities.

Over two fifths (41%) injected additional funds into marketing, above and beyond the required franchisee contributions, to ensure brand awareness continued to grow at a time when many organisations were minimising their marketing spend.

Mr Hodson says, "The successful franchises of the future will be those that can turn the challenges into opportunities that they can capitalise on."

Top of the list is increasing the pool of suitable franchisees. There are all sorts of dynamics affecting the ability to attract suitable franchisees.

Mr Hodson says there is a need for the sector to be promoted as providing a diverse and rewarding career for candidates of all ages - particularly the business owners of the future such as Gen Y.

"The franchising brand needs to stand for being a dynamic sector where business savvy individuals can build personal wealth and work in a dynamic team environment."

"A sector-wide conversation is required – comprising franchisors, franchisees, key stakeholder bodies such as the Franchising Council of Australia (FCA) and advisors such as ourselves – to really work through these issues and help propel the franchise sector to the next level."

Further creativity is required to increase the pool of suitable franchisees. Franchisors should consider implementing alumni programs to stay in touch with employees of franchisees who, through targeted contact, could be the franchisors of tomorrow.

Attracting multi-site and multi-brand franchisees should also be a focus to bring business builders into the sector. These are the norm in the US but in Australia only 10 per cent of franchise systems are owned by franchisors with one or more site.

"This may mean even more highly systemised business processes to lessen the day to day operational involvement of franchisees, freeing them up to work on their portfolio of sites rather than in them." Mr Hodson says.

To increase the pool, funding creativity will also be needed whilst banks credit policies remain tight.

"One possible solution to help potential franchises may be to create some kind of investment trust - similar to a property trust - that invests in franchisee operations," Mr Hodson says.

"There is enormous opportunity for the sector to capitalise on its success. With the sorts of growth rates that have been achieved over the past 24 months and the forecast for the next 3 years, clearly franchising will continue to be a major growth driver for the economy."

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