New Zealand is the world’s most franchised country per capita, with a 2012 survey by Franchise New Zealand showing 485 brands and 22,400 franchisees – with anecdotal evidence showing a significant increase in the last few years. Entrepreneurial spirit and relaxed regulations are some of the areas credited for New Zealand’s franchise success stories. Jai Breitnauer takes a look at how the system works.
In New Zealand, 97 percent of enterprises are small businesses with under 20 employees, according to a 2014 Ministry of Business, Innovation and Employment small business sector report. Yet 25 percent of business start-ups fail in the first five years, with only 50 percent still trading after a decade. If you’re an experienced investor with assests to throw around, those odds might not seem bad. But if you are one of the many mum-and-dad-preneurs NZ is famous for, a 50 percent success rate probably isn’t your bag.
This is where a franchise comes in. Put simply, a franchise is a network of businesses where all parties are united under a brand umbrella. The owner of the brand provides support in areas such as marketing, training and accounting, and in return the franchisee – or branch owners – run their business according to brand requirements and pay a fee for the franchisor’s services.
“When someone becomes a franchisee, their business is their whole world, they’ve often remortgaged their house and put every cent they’ve got into it,” says Andy Lucas, director and marketing manager of The Coffee Club. “It’s important as a franchisor to understand that, and know that part of the reason they’ve bought in is because of what we provide in terms of support, training and processes”.
Lucas and business partner Bradley Jacobs understand what it’s like because they’ve been there themselves.
“We own The Coffee Club master franchise for New Zealand, but we started in 2005 with one café in Wellington to test and prove the offering,” says Lucas. “When the GFC hit, we both had to sell our investment properties to support the business. It was a huge decision and removed our safety net. Suddenly, everything was riding on the success of The Coffee Club – there was no get-out clause.”
Jacobs, who is also chair of the Franchise Association of New Zealand, says it’s important to understand the psyche of the entrepreneur buying into your brand.
“They’re keen to own their own business, and they’re probabaly experienced in that business area, but they may not have the confidence to go it alone,” says Jacobs. “When they buy a franchise they’re buying into something bigger, a network of like-minded business owners and also the pull of the name.”
Michael Ash, owner of the award-winning Mr Minit franchise at St Lukes mall in Auckland, agrees.
“I started working for Mr Minit in 1999 as an employee, but when the franchise for the flagship St Lukes branch became available in 2012, I made enquiries straight away,” says Ash. “Undoubtedly the biggest pull for me and my wife Amanda was the brand name and location. I had all the skills to go it alone but Mr Minit is a household name, and they are in all the best spots. ‘Mike’s shoes and keys’ doesn’t have quite the same ring to it, or the trust of the public.”
Becoming a franchisee
Ash’s story of entering into the Mr Minit franchise is an excellent example of what a franchise network can offer to even an experienced business manager. Buying into a franchise isn’t just for the novice.
“There were about 12 different franchisee courses that covered things like recruiting and local marketing, and incentivising your team,” says Ash, who also noted the personal develoment courses covered areas he may not have considered as a lone operator. “I found the sessions on speaking with confidence, and personal effectiveness really helpful. Probably the most important module for me was financial planning.”
Ash also found the Mr Minit franchise model very accessible financially, with no requirement for a big investment upfront and fixed fees not related to sales performance. The financial accessibility of franchises varies and a quick check on the Franchise New Zealand website shows entry points ranging from $15,000 for something like VIP cleaning services, to $375,000 for Mexicali Fresh – plus your legal costs. Mr Minit has constructed its franchise agreement to help support staff who want to invest, and its buying group offers exclusive products at wholesale prices.
It’s this type of advocacy that makes the system attractive for the franchisee.
“At The Coffee Club we focus completely on our franchise business, we don’t own any property or sell our own product through our network,” says Jacobs, who believes that’s important to allow head office to keep the needs of their franchisees in mind. “If I’m in a rent negotiation with a landlord, they might be pushing for a 10 percent increase and I might be holding out for a maximum 3 percent for my franchisee,” says Jacobs. “How is that going to work if I’m also the landlord, and I’ve got the needs of my property business clashing with the needs of my franchisee?”
Whether you’re looking to franchise your own business, or become part of an existing network, building good, workable and realistic relationships is key.
“Entering into a franchise agreement is like marriage, it’s not just about the ceremony and the honeymoon but what comes after,” says Greg Nathan, a psychologist with specific experience around franchising relationships, and the founder of the Franchise Relationships Institute in Australia.
“When a franchise is purchased, the franchisor and the franchisee are entering into a relationship, that could last for 10 years or more. If both sides understand that, then there are less likely to be problems,” says Nathan.
He developed the concept of the Franchise E-Factor, where the relationship starts with ‘glee’. Over a period of two to six years, it descends into the franchisee questioning what it is they get from head office, and why they are paying their fee. If both parties can negotiate their way through this difficult period, they will find themselves in the ‘we’ stage, where they have an open, honest and realistic relationship based on negotiation and respect.
Whether you get there or not is largely about how the relationship is managed early on, starting with purchase.
“There’s a certain mindset in some larger franchises I wouldn’t encourage where franchisee recruitment is treated the same as selling a product – this is inappropriate,” says Nathan. He also reminds us that the average franchisee tenure is seven years – twice as long as a company exec, meaning franchisees will likely have more corporate memory. This aspect of the relationship needs to be managed with care.
Getting the right fit at the start is essential to brand culture and identity.
“I try to get in front of the potential franchisee early on,” says Jacobs from The Coffee Club. “I might meet with them up to six times during the process, and if by the third time I find we still haven’t developed a personal relationship, where they are happy to tell me about their family or share anecdotes, then alarm bells start to ring.”
It’s important for the franchisee to ask themselves some serious questions before they enter into a franchise agreement too, says Katrina Hammon, an associate and franchise specialist from Duncan Cotterill solicitors.
“Ask yourself, am I coachable? How do I manage feedback? Being a franchisee is not the same as owning your own business – there are standards you have agreed to uphold,” says Hammon. “You need to be used to structure and systems, and to be able to listen and keep a mind open to change.”
Becoming a franchisor
So, should your business become a franchise, and if so, when is the right time?
“Franchising is a huge $20 billion dollar industry in New Zealand. The growth rate of franchised businesses has been well above the national growth rate for the last decade,” says Daniel Cloete, national manager franchise for Westpac.
He says the café industry, particularly fast/casual dining, is the sector that has seen the most success in recent years.
“There’s not necessarily a right or wrong time to franchise a business, more important are the reasons why you want to use a franchise business model in the first place,” says Cloete. “It allows a business to expand quickly and strategically to fill gaps in the market and make use of opportunities before the opposition does. By using other people’s [the franchisees] money and resources, it solves one of the biggest stumbling blocks to business expansion, namely adequate capital. It allows retail based businesses to increase sales, driven through owners’ interest. Corporate businesses converting to a franchise model regularly show increases of sales in excess of 20 percent, even where they sell to the existing manager.”
Franchising can improve staff motivation, due to the personal investment of the business manager, all while maintaining the benefits of a large corporate such as marketing and brand awareness, and joint purchasing power, says Cloete.
This has certainly been the experience of the Mr Minit group, which began rolling out a programme to change its corporate-owned stores into franchises in 2002. It’s now 100 percent franchised in New Zealand.
“The decision was customer-centred,” says Maria Walton, national franchise manager for Minit Australia, NZ and South Asia . “We felt the only way to offer our customer’s maximum quality of service was for the service provider to have a stake in the business. We’ve seen a huge improvement in KPIs – the franchise model works better than incentives in a corporate structure.”
That doesn’t mean it’s the right model for every business. Although franchise fees can offer an upfront capital injection in addition to the ongoing royalty stream, it’s not a silver bullet for a failing corporate-owned enterprise, says Hammon.
“My view is that you should never franchise unless you’ve got proof of concept,” says Hammon. “The business concept has to work, and a responsible franchisor shouldn’t go down that road unless they can demonstrate financial viability for the franchisee and franchisor.”
New Zealand has no specific franchise law, but the Franchise Association of New Zealand acts as a voluntary regulatory body for responsible franchisors, providing a voluntary code and rulebook, networking, learning opportunities and advice. Hammon recommends joining the association, saying it can help your business negotiate a smooth path through franchising.
“[If your business is struggling then] unless you are making other fundamental changes to the business concept, franchising could damage the brand, not improve it. A franchisee that is experiencing financial hardship will often resort to underpaying staff, and perhaps cut corners elsewhere such as not putting sales through the POS as a means to survive. Obviously this is unacceptable conduct. A franchisor who has made representations about the franchise’s likely profitability or has otherwise mislead franchisees may find franchisees have basis for a claim against the franchisor.”
For the successful business looking to expand, particularly overseas, franchising provides a great model, says Hammon.
“Imagine you want to take your product to Hong Kong. Having a franchise partner allows you to leverage local knowledge, understand things like rents and cultural idiosyncrasies, and take your brand beyond our borders without a huge financial risk to your existing business.”
Callum Floyd, managing director of Franchize Consultants, agrees: “If you’ve got a wonderful business model here in New Zealand, and you believe it will stack up and be strong overseas, then there is no other way of leveraging that model in the most efficient way than by franchising.”
This also applies to expansion within your existing market. Recently Stirling Sports, one of the pioneers of franchising in New Zealand, launched its new Stirling Women brand in Ponsonby and Sylvia Park.
“The first store was opened by a husband and wife team who already have two Stirling Sports stores,” says general manager Wayne Turner, who felt it was important this new concept was taken to market by existing franchisees that understood the business. “We don’t have the income to keep opening doors, but this is a way to expand and grow.”
Hammon agrees that using existing franchisees to grow your network locally, particularly if you have recently acquired another business, (for example Stirling Sports acquired dying chain Sportsworld) is a good way to maintain brand culture – but cautions against putting too much pressure on existing franchisees.
“Often the magic a franchisee brings to their store is directly related to their presence and that will be affected if you ask them to spread themselves to thinly.”
As with all aspects of franchising, balance and remembering you are part of a complex team are essential to success.
Three great organisations to support a franchisor
Franchise Association of New Zealand
With no specific laws around franchising, New Zealand is an easy environment to set up business as a franchisor, but it leaves them without the credibility of a regulatory body. This is where the Franchise Association comes in.
“Credibility is one of the biggest reasons franchisors join,” says Robyn Pickerill, CEO. “Once [you are] a member, your franchise can use the logo, and we would advocate to anyone looking to purchase a franchise to look for a member.”
Franchise Association members sign up to a voluntary code of practice that protects their interests and those of the franchisee, and the association can mediate if there is a dispute. They also provide essential networking, learning opportunities and their annual awards ceremony. They lobby government and advocate for the franchise system as well.
“By joining you get access to a lot of people, history and knowledge of franchising,” says Pickerill. “And as we are an associate member of the World Franchise Council, we can provide information on global best practice as well.”
One of the most important aspects of a franchise is branding: it’s a major part of what franchisees are buying in to, and brand reputation will ultimately make a business a success. But branding isn’t just about store fit-out and signage, it’s also about customer experience – and that starts with how staff are trained.
“The best outcome for franchises is when the corporate body or head office make a decision to implement [a training programme] across the whole business, rather than it being optional for individual branches,” says Anya Anderson, CEO of training provider RedSeed.
Leaving recruitment and training of staff to the franchisee holder can result in training delivered in a different way, to different standards, or not at all.
“When it comes to training, if the franchisors really believe in changing the behaviour or culture of their team, then the cut-through is always much higher if it’s driven from the top and not left up to franchisees,” says Anderson.
Developed by retailers for retailers, Do-It comprises a suite of cloud based services that can be accessed remotely by your franchise network in order to maintain consistent presentation of tickets and marketing materials, streamline delivery, manage product catalogues and more. This helps with brand consistency, and makes compliance easy.
“By being able to deliver marketing resources to remote franchises while at the same time returning consistency and control gives you the confidence around compliance and brand message,” says Chris Graham, product manager for Do-It. “The system means that franchisees don’t have to worry if their materials have been printed in the right colour, or whether they’ve got the most up-to-date logo – it’s all there at the touch of a button.”
Do-It offers a service that is fast, repeatable, reduces waste and is under the control of head office. It allows franchisors to get franchisees up to speed quicker, says Graham.
“Ultimately Do-It is a tool franchisors can share with franchisees to facilitate success.”
The Westpac New Zealand Franchise Awards
The 22nd annual awards are about fostering a franchise community, says Franchise Association of New Zealand chief executive Robyn Pickerill. The awards presentation and gala dinner was held this year in Auckland on November 12.
Pickerill says the awards are part of FANZ’s work to “promote, protect, educate and celebrate” franchise businesses.
Entries for the awards are judged by evaluators from the New Zealand Business Excellence Foundation, who look for evidence of best practice as defined by the Baldrige Excellence Framework.
Pickerill says the process of entering the Westpac New Zealand Franchise Awards results in improved performance for participating business each time they enter. This is the result of the feedback they receive from judges, and from “studying” their business while compiling their entry.
“It’s not just an exercise of awards entering, it’s them taking time out and focusing on their business,” says Pickerill.
The Westpac New Zealand Franchise Awards aren’t just about the big names, either. Pickerill says anyone in the franchise community is welcome to be part of the event, saying it’s a chance for smaller regional businesses and everyday, hardworking New Zealanders who might not usually seek out the spotlight to celebrate their efforts.
It’s important for businesspeople to take time out to recognise their achievements, says Pickerill.
“Take stock and celebrate your successes, because there’s a lot of hard work going on here.”
This story originally appeared in NZ Retail magazine issue 747 December 2016 / January 2017