Leaner times for franchising
Thursday, 1 February 2007
Last Updated: Wednesday, 22 August 2007
Slower growth and fewer recruits are changing the landscape in the most franchised nation on earth, says Jason Baker of IBISWorld.
Opportunities: Much more franchise growth will come from overseas opportunities.
Threats: Dearth of franchisees to sign up to franchises.
What is it with Australia and franchises? Australia is the most franchised nation in the world. In fact, with 56,500 franchises in a nation of just 20 million people, Australia has three times as many franchises per capita as the United States.
That is set to change in the next five years, however, with industry revenue growth expected to halve and franchisors faced with a severe lack of potential franchisees to sign up.
The key factors behind franchising’s success in Australia has been a strong economy, a growing number of baby boomers approaching retirement age wanting to increase their savings, retirees wanting to re-enter the workforce and people wanting the flexibility of being their own boss.
The success of this industry is reflected in franchising companies’ strong standing among Australia’s top private enterprises. Research by IBISWorld indicates that this year there were 41 franchise chains included in the top 500 private companies in Australia, whereas in 2004-05 there were just 19.
A key factor that attracts people to franchising is that they are buying into an existing business system. Many start-up businesses fail for various reasons, such as lack of brand awareness, limited customer base, lack of market research and so on. With a franchise, the franchisee has access to an existing business model, which helps reduce the risk of business failure.
Capital advantage
Potential franchisees are now able to borrow investment capital against the value of the franchise they are buying rather than against their homes. This has helped reduce the level of risk for potential franchise investors as they no longer stand to lose everything if the business fails. Interestingly, IBISWorld’s research shows franchised businesses are 2.5 times more likely to be successful than non-franchised businesses.
The past four years have brought good times for the franchising industry, with industry revenue growing at an annual average of more than 11% to reach $125 billion in 2006, up from $87 billion in 2003.
The next five years will bring leaner times, with IBISWorld’s forecast showing that franchising's revenue growth will slow to an average rate of 5% a year, taking it to $174 billion in 2011.
This relatively weaker rate of growth will be partly caused by franchisors encountering increased difficulties in recruiting franchisees with business or retail experience. The strong job market will also be a factor, with fewer potential franchisees opting to take the risk of starting out in a new venture.
Big problems can arise for franchisees if they are forced to deal with the demise of the franchisor. A recent report prepared for CPA Australia by a lawyer and academic at the University of New South Wales found that 40 failed franchisors in the past 15 years had affected 1090 franchisees. Difficulties faced by the franchisee have included a loss of their retail site, difficulties in obtaining a supply of products and trading difficulties due to consumer confusion about brand name.
At the domestic level, IBISWorld forecasts there will continue to be opportunities for growth due to the relative security and stability of the sector in attracting small business investors. At the international level, Australian franchise systems are expected to increasingly look overseas for expansion opportunities. As a result, much future growth will come from offshore opportunities.
IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au
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