John Newton is the managing director of franchise chain Jumping J-Jays, which was established in 1997 as the first jumping castle franchise in Australia. Last time we talked to Newton, revenue was approaching $10 million a the chain was growing strongly in Australia and taking aim at the US market.
But the GFC hit the business hard. The US expansion was scaled right back and Australian franchise numbers fell. Revenue dropped to $5 million.
But now Newton is fighting back. Jumping J-Jay franchise numbers are increasing and Newton has a new franchise, called Stufflers.
Today he talks about surviving the GFC, the build-a-bear craze and why he’s going local with his marketing.
Are you starting to see something of a recovery in franchising?
Yes, look the recession hit all our franchise systems and things are starting to get a little bit more on track now. We’re starting to fill states back up with franchisees coming onboard to add additional income to their bottom line and we’ve taken it one step further. We actually launched a new brand late last year as well as another franchise system into the country as well. So we’re pushing forward with two mobile home based businesses.
What’s the second one?
The other one’s called Stufflers, it’s a build-a-bear type of business but it’s party based as well. I don’t know if you’ve seen a Build-A-Bear store where you can go in there and stuff a teddy bear. Well ours is a first of its kind where it’s a franchise, do it from home, they rent machines out, the customer comes and picks the machines up or they deliver it. They have their birthday party at home and the kids make their own bear and they take a bear home as their parting gift from the birthday party. It’s something that we launched and we built during the recession ready for us when the country started to become a little bit better off, which it currently is.
Last time we spoke with you revenue was around $10 million, but it’s fallen quite sharply. What happened?
Revenue is about half that to be honest and we’re obviously bringing that back up again. For us, our franchise numbers decreased, we pulled things back a little bit in head office, although our profitability in head office went up without a doubt. Like all franchisors did, we all started to look at everything that we’re spending on – our advertising, our franchise selling. We decided to basically hold off for a couple of years and now we’re back into it again, easing our way into it, I guess using smarter tactics these days in recruiting franchises than the flamboyant ways we used to do it in 2007 and in 2008 and when everybody was riding on a wave. With profitability, we’re at that 48-49% profit.
Did the drop off happen suddenly?
It did. I moved my company and nearly $1 million over to the US three months before the sub prime market crashed and nine months before the recession. So my crystal ball wasn’t too shiny when I went over there. And I left one of my key people in charge of the franchise system here in Australia, and I think a culmination of me being away, the recession, the drain on funds, and a bunch of franchises during 2007 or 2008 saying, “Hey, we’ve got other things we want to do now, we’re stressed at home, we’re worried about the recession” and basically just giving up on their franchises. Quite amazing.
So what’s happening in the US now, has that been pulled right back?
Yes, we have. We just have three people left over there and two franchises but we won’t go back there. We are in Texas over there and we’re sitting at 9.5% unemployment which is the record, so probably true figures of about 11% which is not good for any industry. The housing market is nowhere near recovering and with my business and a lot of us smaller guys who sell under $50,000 franchise systems, they rely on equity in a home. We persevered, we had Austrade behind us, we were spending a whole lot of money in the US trying to recruit, but the end result was that their economy just wasn’t stable enough, people didn’t have confidence in the market, they didn’t have confidence in their housing and a lot of them didn’t have any equity left in their home loans. So we’ve pulled it back to concentrate on our rental side of things there.
But we are going to take the new brand over there. The build-a-bear market in the US is already a $600 million industry for the retail stores. We’ll give it another year here in Australia to iron out the cobwebs and we will take that back there as our second brand. Obviously it will make our cost base much lower.
The last few years obviously zapped some of momentum of your franchisees, but how did you personally come through?
Look, I think franchising as a sector was very easily picked on during the recession. Everyone liked to show why it didn’t work. How did we come through it? We streamlined costs without a doubt, we pulled back our franchise advertising, we were doing some very good deals – free franchises, double franchise territories, advertising our second hand equipment as part of a franchise which we had never done before to lower the cost base for franchisees. Even put on a couple of people as employees who between six months and 12 months they had the option to then purchase a franchise in that area.
Because I spent I guess $500,000 in advertising over two years in the US, I just couldn’t throw any more money into franchise advertising or recruitment advertising. We just had to fall back on our core values which is our rental market, keep that strong, bring profitability up at head office so we could sustain and manage the franchise system. We got rid of some bad eggs, some underperformers and kept the strong performers who were here for their franchise term of eight to 12 years.
I was here in around 1998 when the last sort of ripple happened in the economy. We’re all on the cycle and it will come back through again.
Local area marketing has been a key to our business. There are eight programs our franchisees follow get them into that local community which national marketing can’t touch. We are also playing with a lot more I guess lower cost advertising, email marketing, SMS marketing. Touching our customer base more often will get them to remember us.
Will you keep that low-cost approach going for a little bit longer as that recovery starts?
Another year I think at least. Brisbane had a bit of a halt on their housing market which I can already see the effects of just in our rental business. It’s quite amazing how something can flatten out like housing prices and all of a sudden rentals stop. Franchising enquiries are up which is great, but we have to see it rising for another year before I think we start to move forward again. And we’re a lot harder on franchise recruitment now as well because I’m back in the top seat. I’m looking for people who can be with us and work with us for eight years, whereas in the past we’ve all had sales managers and a group of sales people out there selling and unfortunately what that usually brings about also is not so perfect people coming into the system, because everyone can’t have the same values.
It sounds like one benefit from the GFC was that it gave you time to develop the Stufflers business.
Without a doubt.
Have you taken any different approaches with this one?
We did. We’ve been doing jumping castles for 12 years. I mean, in 1997 we basically started the industry, there were a couple of random performers out there but we put a system in place, we formatted it, we brought people on, we brought on territories, we built the whole system. During that 12 years I’ve definitely learnt a lot, but during the financial crisis we’ve learnt to do things a little bit leaner.
Local area marketing has now doubled in time for our franchise. With J-Jays they have to contribute one day a week to their local area marketing program but with Stufflers it is two days because I completely understand that local traffic and local relationship building works very well. Our business now concentrates and focuses on how many children under the age of 10 our franchisees can have on our direct mail and email marketing database. As they increase that number, those people are much easily targeted than going through the Yellow Pages, Google and all those other things. So Stufflers is all about getting 6,000 children, as an example, on their database within the first year. So it’s all about local area marketing.
Our business is focused at women. From 12 years with Jumping-Js I can see quite clearly how sometimes a husband and wife working together may not be the best result. The GFC showed me that stress at home can lead the to all of a sudden giving away the business that they just paid $50,000 to $100,000 for.
So are you studying ABS data to figure out where the biggest populations of children under 10 are?
All of our territories have been mapped based on children under the age of 10. That’s our qualification only for a territory, that a franchisee must have 40,000 children under the age of 10. Because every child has a birthday party and both my brands cater for birthday parties.
It was interesting what you’re saying about the Queensland market slowing after the floods. You’ve probably actually got quite a quick way of assessing what the economy is doing. What’s it telling you outside of Queensland?
South Australia is very good at the moment I think they’ve got a mining boom going to come through which obviously people are already starting to talk about, so South Australia’s been good with us in both rentals as well as franchise sales. Same with Perth. Queensland I think will turn around, we’ve got that $5 billion [in reconstruction funds] that needs to be used to rebuild the country. So I don’t think we’re far away but definitely another year.
With Sydney being so multicultural now I don’t think my franchise system is developed enough, I’m not marketing to all cultures in Sydney which is probably stopping me more than anything else. I know that my franchisee applicants that are applying online and through other methods have changed completely to 10 years ago when I used to sell Sydney.
And on franchise recruitment, how’s it tracking?
Franchise recruitment is definitely up. We use mainly online now, that’s it. What we’re doing is focusing on our customer base who rents from as our prospective franchisees and online advertising. Completely different to 10 years ago. Ten years ago I had full print pages everywhere, I had to be in Sydney weekend papers, I had to be in local papers. But we just don’t think that’s required anymore.
Fair enough John, it sounds like you’ feel your getting back on track with a low-cost approach and Stufflers.
Look, Stufflers is something completely different in this market. There’s not too many franchise chains out there that have started a brand new industry. You can say “I just opened up a new franchise chain” as a salon or pizza chain or cleaning mob but there’s nobody that’s done mobile bear business. For us it’s unique, like jumping castles were. There’s nothing to copy so we’ve got nothing to lose.