Franchise on the rise

Written on the 13 July 2009

Franchise on the rise

As a result of job insecurity and a shift in consumer sentiment to affordable goods and services, the franchising sector has been thriving in the last six months. Industry experts are optimistic in a sector that reaps the benefits of small business and brand recognition.

FRANCHISE Advisory Centre director Jason Gehrke says there has been a substantial rise in franchising enquiries recently which has been driven by a rise in unemployment, but he points to a number of reasons why not every franchise will be successful.

“Increased occupancy costs will make it more difficult for retail franchises, but mobile franchises aren’t affected by that – what can happen is that at the end of the first franchise term when the lease comes up for renewal some may not be able to afford it,” says Gehrke.

“People considering franchising should apply more caution to those sectors where the market is already fairly saturated with a variety of brands, so if you want to choose a coffee brand or a fitness product you need to pick one that offers a point of difference.”

Both retail and service sectors are also at risk from the tightening of discretionary consumer spending that comes from unemployment, but Gehrke says the golden rule for potential franchisees is to spend one hour of their time for every $1000 they plan to invest.

He also points to the rise of opportunistic businesses that act like franchises but call themselves something different to try and avoid regulations.

“They will call themselves licensed business opportunities or distributorships – they think that by calling themselves something other than a franchise that franchise regulations won’t apply to them,” he says.

“I see these signs that say ‘work from home, earn $5000’ – that’s just dodgy and it’s a sign of the economic times.”

Franchises cut the fat
The Franchise Council of Australia has noticed positive results for Australian franchises despite the doom and gloom predicted last year, but the organisation is critical of what might happen if some suggestions from the Federal Franchising Inquiry are taken on board.

Executive director Steve Wright says recommendations from the inquiry to add compliance requirements will not do anything to stimulate small businesses and will act as a red-tape disincentive for franchises.

“We think that now is a negative time to consider adding a compliance burden to any small business,” says Wright.
So far the recommendations are ‘in the inbox’ and are yet to be put into practice.

Wright says the recent rise in consumer sentiment will reinforce the trend towards an increase in franchising, in an industry that combines the benefits of recognised brands and small business ownership.

“In a company, the executives don’t necessarily have that ownership, but if your skin is on the line you’ll make that extra effort – you cut as much fat as you can to trim down for a time in the future, whereas an employee may not have that incentive,” he says.

“It’s about the brand and having a familiar product or service that has been tested and proven – you also have the advantage of being part of a network of businesses, which brings buying power and supply reliability.”

He discusses the value proposition of most franchises being less affected by falls in the discretionary spending of luxury goods and points to a number of Brisbane-based franchises that have shown why the business model can be so successful.

“A Queensland example is Mr Rental which is very much at the low cost of entry end of the spectrum – rather than buying new equipment those who are concerned about paying back loans will rent instead,” he says.

“Eagle Boys for instance have had growth despite the fact they are in a highly competitive area – they are at the value end of the chain and have a recognised brand.”

He also points to the success of Poolwerx as a franchising model that has thrived even though it is in a difficult industry.

“It’s not exactly peak season for pools but the point is they’ve gone through the discipline of questioning every aspect of their business and trying to get down to a more competitive advantage,” he says.

“It’s a sector that has been negatively affected, but they haven’t.”

Organising a disorganised industry
With 285 franchises and 700 people, Poolwerx CEO John O’Brien says his franchise is the biggest pool service provider in the world, although it only has operations in Australia at the moment.

His advice is that Brisbane-based franchises need to start with an Australia-wide view and an aim to establish a world class brand.

“Australians move on average every five years, so for instance if someone moves from Melbourne to Brisbane and they see the franchise in their new home then that’s really empowering for the brand.”

“A good franchise needs a national presence – it’s not enough to just be in a few states.”

His franchise was preparing to enter the US market last year before the downturn but decided to put the plan on hold, however he hopes to enter that market in the next 18 months.

The sales are up and the expenses are down for Poolwerx, with a profit that is up 28 per cent on last year, but he says the challenge for any franchise is to flatten out seasonality.

He admits he was nervous that the downturn would affect his business but while Poolwerx has lost more clients this year than any other year, it’s also gained more than any other year.

“If you’ve still got your job, with the lower mortgage rates, lower fuel and government handouts it’s saving some people about $15,000 a year and they’re not taking holidays – instead the holiday is in the backyard with people buying pools, big plasma TVs and so on,” he says.

“It’s a very interesting trend – I didn’t expect that.”
Poolwerx is not just aiming for profits with its brand, but also sponsors the Royal Life Saving and is aiming for a year where there are no toddlers drowning in backyard pools.
Franchises boosted by the mums and dads

McInnes Wilson Lawyers partner Mark Woolley has noticed an increase in sales for franchises recently, as well as more people becoming franchisees.

“I think that a few mum and dad types have either lost jobs or become nervous about the current situation, and used their super to start up franchises,” says Woolley.

“The amount of smaller owner-operated franchises has been increasing, as opposed to buying 20 staff – generally service-related and not as much in retail.”

“From a financing point of view it’s easier to obtain capital for something proven than a start up.”

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