Monday, April 2, 2007/
Market saturation in some areas means potential franchisees need to tread with extreme caution.
Beware the churn
If you are looking for a franchise and you think that a big brand franchise is a safe bet – think again.
Recently, a contact of mine in the franchise industry told me he thought there are a number of big names suffering “indigestion” because they have “bitten off more than they can chew”.
Rumours are circulating in the industry that some of the biggest names in franchising are feeling the pressure as they reach saturation in Australia and are finding it harder and harder to recruit new franchisees.
Some of these chains are addicted to growth. Each time a franchise chain signs up a new franchisee or opens a new store, its revenue grows – both initial franchise fee revenue and ongoing royalty fees.
Over the past 10 years, we’ve seen some spectacular growth from franchise chains such as Boost Juice, Bakers Delight, Gloria Jean’s and Jim’s Group as they capitalised on the popularity of franchising and the boom in demand for their offerings – coffee, juice and personal and home services.
These growth rates are almost impossible to sustain. Once a chain has established more than 80 stores, it has filled the biggest shopping centres in the country and it needs to explore riskier locations. Once a service franchise has sold all its best territories, it needs to explore less lucrative locations – or start offering different services.
The temptation to keep growing by opening sites in marginal locations – or in a climate of a shortage of franchisees to sell to less qualified potential franchisees – is too great for many to refuse. (Although I’m not trying to suggest any chain in particular is engaging in this practice.)
The outcome of this can be dire for the franchisee – and the franchisor. It leads to churning. This is where the franchisor sells into a site or territory where the franchisee cannot make the business profitable, and fails. The franchisor reclaims the site or territory and then sells it to another franchisee – who also then fails. And the cycle goes on.
In some cases, stores have been known to be recycled several times over several years, and each time the franchisee loses their investment – and sometimes their home.
Some failed franchisees disappear into obscurity, but others develop a passion for punishing their former franchise chain and the internet is helping them get their message out. There are a number of “anti-[insert franchise name here]” sites around if you know where to look.
The Federal Government responded to agitation about this issue in the franchise community last year when it ordered a review of the code, and again this year when it accepted many of the review’s recommendations, including one that franchisors be compelled – subject to privacy laws – to provide the names, location and contact details of previous franchisees.
When it becomes law, this will be an important new right for franchisees. In their due diligence, they will be able to find out whether anyone has failed before them, and get a perspective on the business – other than the sales pitch they will get from the franchisor.
Let’s hope that they take advantage of it.
Michelle Evans writes: While Bendigo bank presents as an institution working for the small member it can be manipulated by outside forces to go after the little person.
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