A Focus on Franchising

Franchise Council of Australia

Jason Gehrke, Chairman of the Franchise Council of Australia (FCA) has the answer to these questions, and more. His organisation acts as the peak body for the Australian franchise sector and represents franchisees, franchisors and related service providers. The not-for-profit trade association strives to establish standards of international best practice for Australian franchise systems; provide information and education about franchising; and educate state and federal governments on issues relevant to the franchise sector.

History of Franchising

Many people assume that franchising is a phenomenon of the United States’ Post War economic boom. But, “the reality is that franchising has been around in one form or another since the days of the ancient Romans,” Mr Gehrke explains. A franchise is essentially a conditional grant bestowed upon someone. He uses the suffrage movement as an example; women fighting for the right to vote in the early 20th Century were technically seeking a conditional grant – in other words, they wanted in on the franchise.

“Franchising as we know it today – with the big brands and the glossy marketing, the ubiquitous outlets in every city – it did take off in the Post War economic boom in the United States,” Mr Gehrke adds. A handful of ambitious entrepreneurs took advantage of a strong economy and a sound business model to pioneer what would soon become a standard way of doing business. The most famous example: a humble hamburger stand owned by the McDonald brothers that skyrocketed to stardom with franchising assistance from Ray Kroc.

The franchise system caught on in Australia about twenty years later, with many of today’s popular food chains making their arrival in the 1960s and 1970s. Most Aussie franchises are not American imports, however. In fact, a whopping 93 per cent of our franchises are home grown, Mr Gehrke reports.

Why Franchise?

One reason that the franchise system is so successful is because it benefits each of the major groups within its business model: the consumers, the franchisees, and the franchisors. “Consumers benefit because they get products and services made available to them in a consistent manner through a variety of locations that meet their expectations in terms of quality, consistency, customer experience, and pricing,” Mr Gehrke explains. A visit to any Subway, for example, will provide the same popular sandwiches at the same reasonable price.

The model is particularly popular with people in unfamiliar environments. A weary traveller, Mr Gehrke points out, is much more likely to grab a Big Mac than the mystery meat the competing street vendor is hawking. “It gives [customers] some feeling of safety and security,” he explains. And, as anyone addicted to a Gloria Jean’s Caramelatte knows, consumer preference for a familiar favourite doesn’t just apply to international travel.

Franchising also offers franchisees a wealth of support that would be unavailable to them outside of this system. “It enables somebody to get into business for themselves who perhaps has no experience in business and wants to do something within a structured framework,” Mr Gehrke explains. “There is support, guidance, training, advice, marketing, buying power – all of those things which contribute towards a successful business.”

Franchisee success is not guaranteed, of course, but having access to an established support system “is certainly going to increase your chances of success,” Mr Gehrke points out. “Why go out and reinvent the wheel and run the risk of making major mistakes when you can benefit from someone else’s knowledge and system and way of doing things? That means you can hit the ground running from the start.”

Franchisors themselves benefit in two key ways. First, business outlets run by franchisees tend to have higher sales and higher levels of customer satisfaction than outlets run by an employee. The reason is simple. “Someone who has invested their own money in the business will always be more attentive of how well that business performs,” Mr Gehrke points out. The other crucial advantage for franchisors is access to capital. Business owners looking to expand on their own would need to put up a substantial amount of money to do so. But under the franchise system, franchisors seeking growth don’t have to worry about raising the money. “The franchisee brings the money with them.”

Things to Consider

Franchising can lead to huge success, but there are some important considerations to take into account before leaping into the system. For starters, franchisors often underestimate how challenging it will be to establish their business as a franchise. For example, “you can be really good at running an independent jewellery business, but it is a significant leap from being an operator of a jewellery shop to being a franchisor of a chain of jewellery shops,” Mr Gehrke points out. “It requires a different set of management skills.” And even though franchisors aren’t bogged down with the costs of opening individual outlets, they are responsible for funding and overseeing a comprehensive infrastructure. This requires a major investment in marketing, IT, staff, and operating systems.

One common mistake that franchisors make is selecting the wrong franchisee. Mr Gehrke compares the typical franchise selection process to a job interview. “People say the kinds of things that the interviewer wants to hear in order to get the job. That sometimes means that people who apply to be franchisees don’t always represent themselves as accurately as possible. And franchisors sometimes take people on at face value and then later discover that these people don’t have all the attributes that are necessary to be successful in their business.” This can spell big trouble down the road. Floundering franchisees “will require much more support and put a heavy demand on organisational resources,” Mr Gehrke warns.

There are several potential problems for franchisees to watch out for as well. The first is underestimating the time and effort required to run a successful outlet. “They might have developed expectations about how well the business will perform and how quickly it will become profitable that are unrealistic,” Mr Gehrke says. Franchisees who believe that they will get a free ride on the coattails of a successful brand are in for a surprise. “You are still going to have to work in your business,” Mr Gehrke insists. “And you are going to have to work hard. You can’t just sit back and relax and watch it happen for you. You have to be an active participant in making it happen.”

It is important for both franchisors and franchisees to remember that certain businesses inherently make better franchises than others. “Food does well because of its high volume, low transaction value,” Mr Gehrke reports. People can eat fast food or at a franchised food outlet multiple times a week – particularly as society is changing and people are cooking fewer meals at home and becoming more and more time poor.”

Professional services businesses, on the other hand, are difficult to franchise – but not impossible. The trick is to carve out a specific service, Mr Gehrke says. For example, a franchised hair salon likely cannot offer the full range of services that an independently owned salon can. A franchised accounting firm must specialise in a single service, such as income tax support, rather than the full gamut of money management services. Narrowing down the business’ focus ensures that all operators will be able to competently carry out their jobs. It also allows for a single, across the board pricing structure.

The Future of Franchising

Franchise legislation and regulation is arguably the greatest concern facing the industry today. “The regulatory landscape in Australia is very much in a state of flux,” Mr Gehrke reports. The Franchising Code of Conduct, the industry’s national regulatory framework, is currently being reviewed by the federal government. This review is to determine “if changes made in 2010 were adequate to provide an even stronger and more stable franchise sector in Australia,” Mr Gehrke explains. “What the government chooses to do afterwards – whether it acts on some or all or none [of the reviewers’ recommendations] – is anyone’s guess.”

The greatest concern, Mr Gehrke says, is the possibility of new regulations on the state level. “In addition to the current national review of the Code are also moves by at least two of our states to introduce their own regulations of franchising,” Mr Gehrke reports. “And that is a very unpopular suggestion in the franchise sector.”

The current national framework has been in place since 1998, he adds. “So 15 years later, why would we want to duplicate that legislation at the state level and have an additional layer of complication?” In fact, the FCA believes that this additional red tape would be downright detrimental to the industry. “It will make complying with the laws in those states so difficult that there will be places that franchisors don’t want to go,” Mr Gehrke explains. “Franchising needs a national approach because it is a national way of doing business. It crosses state borders.”

Historically, Australian laws have been very supportive of franchising. “Australia was the first country in the world to introduce national franchise legislation,” Mr Gehrke reports. “And that has actually been used as a model by other countries to follow.” The FCA is working hard to ensure that future legislation continues to support the industry as well. It is vital, the association believes, to keep the industry strong – not only to benefit franchisors, franchisees, and their employees, but also to bolster their local economies and communities.

Making Sense of Management

Management is the art, or science, of getting things done through people. Sounds fairly straightforward – except for the fact that people are not robots waiting to do our bidding. People have their own minds, motivations, and goals. So how do managers keep operations – and the people behind them – running as planned?

December 19, 2018, 9:25 AM AEDT