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.