Expect profits and disputes to be the big issues in franchising in 2007.
Here’s my prediction for 2007: profits and disputes will be the big issues for the $80-billion franchising sector.
The proportion of unprofitable franchisees in chains is growing, according to research I did recently for BRW. Typically, franchise chains will have about 5% of franchisees in a marginal position, struggling for profitability. But my survey of 60 of the nation’s fastest-growing franchise chains found that for almost one in five, between 11% and 25% of their franchisees are unprofitable.
If these figures are representative of the rest of the industry, which spans 960 chains and 61,680 franchise units, Australia has a huge number of unprofitable franchisees. This will surely lead to conflicts about franchisors collecting royalties on sales.
Many high-profile disputes have already erupted. In 2006, newspapers reported 7-Eleven, sub chain Quiznos, and mortgage broker Mortgage Choice were all in dispute with some of their franchisees. The Midas car care franchise dispute with several franchisees remains unresolved.
Disgruntled franchisees have found a sympathetic ear with the federal Small Business Minister Fran Bailey. Last June she announced the appointment of a taskforce led by KPMG partner Graeme Matthews to review the disclosure provisions of the mandatory franchising code.
There is still no sign of the report or a government response. But it is rumoured that a new registration system for franchisors will be implemented, to be administered by the Franchise Council of Australia. This sounds expensive, but will it make any difference?
The disclosure regime is all about what franchisors tell potential franchisees before they sign up. The franchisees under pressure are already signed up. No amount of pre-sale disclosure is going to make a marginal franchisee profitable if the site is no good, demand is patchy or the franchisee does not have the skills to make the business work. And should the franchisor be blamed for this anyway?
Whatever the review’s findings and the Government’s response, the pressure will be on the franchising industry in 2007 as unprofitable franchisees fight back.