Duplicating Success

Written on the 16 July 2009

Duplicating Success

More than 400,000 Australians are employed by a $160 billion franchise sector that is holding its own despite the crash and burn sentiment in the Queensland economy.

GOLD Coast entrepreneurs are duplicating the franchise trend with big brands such as Baskin Robbins, Donut King, Brumby’s Bakeries, Cookie Man, Espresso Essential, Hydro Dog, Zarraffas Coffee and Bartercard stamping national and international presence.

While several high profile franchises have collapsed ­— think Kleenmaid (owing $102M), Samsara, Strathfield Group and Kleins — franchising in Australia represents a dynamic small business sector that contributes around 14 per cent of the country’s national GDP.

South East Queensland is now a major contributor to the industry, equating to 28 per cent of Australia’s franchise system. On the Gold Coast, new service franchisors are arriving on the scene to create their own luck in retail and service-related industries.
Franchising is not a guarantee of success; rather it is an opportunity to establish a rewarding business with the support of a network focused on success. The old adage is true in franchising, where the sum of the whole is greater than the individual.
The continued growth and maturation of Australian franchising is impressive, particularly considering the economic climate.

The sector has faced close government scrutiny too. Not surprisingly, franchisors view the next 12 months as challenging, but conservatively estimate that sales and profitability will remain constant despite employment surging.
Professor Lorelle Frazer, director of the Asia-Pacific Centre for Franchising Excellence at Griffith University, was the first person in Australia to complete a PhD in franchising.

She is a member of the International Society of Franchising, which meets annually to debate worldwide franchising issues. Frazer urges prospective franchisors to exercise due diligence in the current climate.
“If a franchise system is sound, it will be sound through any economic uncertainty. Franchisors build brands, not just systems,” says Frazer.

“We have seen some examples of franchisors offering new franchisees incentives such as no fees upfront. Generally when unemployment is on the rise, we seen an increase in the number of people investing in franchises. There is always risk, but people don’t know what else to do.”

Mike Koolen knew exactly what to do. The Espresso Essential founder will increase growth by 25 per cent this year after brewing $20 million in revenue last year. Listed in BRW’s fast 100 in 2008, the company has catapulted onto the international stage with franchises in Australia, New Zealand, UK and Singapore. China is next, but it’s at home in Australia where domestic sales generate 80 per cent of revenue. There are now 40 franchisees and eight master franchisors managed by 16 head offices, including Tasmania.

Founded by Mike and Gayle Koolen in 2001, the business began in a garage, selling coffee machines and products from the boot of a car with start up capital of $5000. Koolen, who left the brand manager Retail Food Group in 1997 to set up Essentially Coffee, is confident — and with good reason. Export opportunities are about to be seized in China and deals with several NRL clubs are imminent.
“A lot of people fail to get that it’s the quality of the product that makes successful franchises,” says Koolen.

“Our machines have five blends of coffee and hot chocolate is a major part of the business. Essential Coffee machines are now prominent in BP service stations following an agreement with BP Reliance.
“There are now 6500 customers with convenience stores contributing to 50 per cent of all sales. ANZ Queens St Brisbane is trialling the system, as are medical centres and a range of chemists in South Australia.
“When we started I was looking for something to take over the café bar, where you put your money in and place the cup under as instant coffee and cream powder poured in. It has been a huge success story, but one that has been consistent. We are focussed on what we do and have a very simple business model.”

Espresso Essential is setting a frenetic franchising pace with 45 coffee vans Australia-wide and service and installation services increasing by the day.
Orders by Essential Brands alone equate to 45 per cent of the total output by the Italian manufacturer of its coffee units. The company roasts up to 14 tonnes of its own coffee each month.
Adding vigour to its stable of Essential Coffee and Essential Slush brands, it will soon launch a new product into the kitchens of homes around Australia with its I Love Coffee product.

“We are the perfect model. It is very sales driven but it sorts the wheat from the chaff. A lot of people hate having to go out and have to sell a product. But overheads are low, there’s no rent and no wages. We’re quite liquid, own our stock and we have cash,” concludes Koolen.

Beware the ex
There’s a new ‘ex’ capable of inflicting even more damage than an ex-wife or husband – it’s the ex-franchisee. Lorelle Frazer says the damage caused by ex-franchisees could be harmful to the system.
“From copycat concepts to negative media coverage and litigation, ex-franchisees can be a potential distraction for any franchise system,” says Frazer.

“Changes to the Franchising Code of Conduct mean ex-franchisees have more power than ever to influence the future success of a franchise system, with franchisors now required to disclose contact details of former franchisees.”
Franchisor and Award Group Australia CEO Deb Shugg, concedes that one of the biggest challenges faced by franchisees is a lack of understanding on how to run a business.
“Franchisors have a responsibility to educate their franchisees in a more holistic manner, taking into account some of the more fundamental elements of business ownership and operation,”
she says.

“Understandably, franchisors have been more focused on providing prospective franchisees with the technical skills required to run the franchise business to explore additional training programs in core business skills, like record keeping, financial management (such as cash flow and budgets) and negotiation.”

Shugg says that it’s time for franchisors to accept the broader responsibility that comes with their role as business advisors.
“In the past, trying to encourage franchisors to implement ‘business ownership training’ into their training programs has been challenging,” she says.
“I’ve been offering these types of training services to franchise systems for years, but franchisors really don’t want to know
about it.

The expectation is that the franchisee will have an accountant or advisor to help them with these day-to-day business management issues. Unfortunately, this is rarely the case.”

Challenges par for the course
A Federal Government discussion paper on consumer law proposes to redefine some small businesses as consumers, creating the possibility that franchisees could be classed as consumers, according to the Franchise Council of Australia (FCA).
FCA executive director Steve Wright, predicted it to be an ‘unwelcome development’ for both franchisees and franchisors, which enter into contracts with each other on a business to business basis.

“There are about 63,000 existing contracts between and franchisees and franchisors. The changes being discussed would create unnecessary and potentially costly confusion without there being any apparent benefit,” says Wright.
The consumer law initiative flows from a Council of Australian Governments (COAG) agreement to work toward a new national consumer law, to replace existing individual state codes.

Frazer concurs: “After four federal government inquiries, we would like to see some changes. It is already well regulated and Australia has one of the highest standards in the world, without being as ridiculous as the US, where laws differ from state to state. Most franchisors don’t want a crook franchisee,” she says.

“The industry needs more support for those that are getting into franchising for the first time, but we can’t mandate that people must do a course. It would be like setting a compulsory course for all small business owners.

“When you look at the ones that have collapsed, they have a bigger risk element. To enter a new franchise that does not have the runs on the board or the visibility is a risk. There are good and bad examples right across the sector. The average person is not aware of the due diligence that is required.”

Expansion to continue
Despite the uncertainty in the sector and the economy more generally, Australian franchising continues to expand. The sector experienced rapid growth during the 1980s and 1990s prior to the introduction of specific franchising legislation.
In the first survey in 1998, just 693 business format franchisors were identified. The Franchising Code of Conduct was introduced in the same year and the number of franchise systems did not rise substantially until 2004 when 850 franchisors were documented.

The growth has continued, with 960 franchisors listed in 2006 and 1500 business format franchise systems identified in 2008.

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