Franchising Strikes a Cord Down Under
February 2007 Franchising World
The year 2007 promises to offer significant opportunities for U.S. franchise systems to test and enter the Australian market.
By Kate Wilkie
Franchising is alive and flourishing “Down Under.” In a market that offers U.S. companies a stable, transparent and developed business environment with world-class infrastructure, the concept of franchising has taken hold. Since 2004, franchise systems have grown by 12.9 percent to reach 960 systems, reflecting a confident, regulated franchising sector in a strong local economy.
Franchising in Australia took off in a significant way in the early 1970s with the introduction of such franchised U.S. fast-food systems as KFC, Pizza Hut and McDonald’s. Since then, the sector’s growth has been extraordinary. Over the past 20 years it has expanded to include virtually every product and service sector. Australia now has the most franchising outlets per capita in the world and three times more per capita than in the United States. Australian-origin concepts account for 93 percent of the market with U.S. concepts second at 5 percent.
A recent survey estimates that there are 61,860 franchised units operating in Australia including 5,660 company-owned units, which in comparison to a total of 54,000 units in 2004, illustrates the strength of the sector. In addition, there are approximately 5,700 fuel retail franchised outlets and 2,690 motor vehicle retail franchised outlets. These numbers are all the more significant when one considers that Australia’s entire population is only 20 million people.
Total sales turnover in 2005 of franchise units was approximately $96 billion, an impressive 14 percent of Australia’s GDP. This is made up of business-format franchises totaling $50.3 billion, motor vehicle sales franchises with an estimated $22.5 billion and fuel retail franchises with approximately $23.2 billion.
"Australianize” the concept The maturity of Australia’s franchise sector is reflected in the growth rate of company-owned units. Many franchise companies state that the current challenge for the sector is finding sufficient suitable franchisees to enable expansion of their systems. In spite of this, there are still many opportunities for new concepts providing they are adapted to local market needs and conditions. Therefore, U.S. firms may need to consider how they can “Australianize” their systems to ensure long-term success.
This is particularly important for food and beverage related concepts where tastes may differ from the U.S. market. For example, one of the largest U.S. pizza chains was unsuccessful in its three attempts to start up in Australia until it decided to modify its menu to suit the local palate. Now that the firm is one of Australia’s largest pizza chains, it has been able to introduce some U.S. menu items while maintaining its Australian menu. It is typical to find Aussie burgers with egg, pineapple and slices of beet.
Research and Location Considerations
The first step to ensure successful expansion is market reconnaissance and research. The research should be conducted not only to ascertain market potential, but also to investigate the competitive environment, along with any non-tariff and tariff barriers that may affect successful entry. For example, franchises that have medical and first aid applications will be subject to compliance with the government’s Therapeutic Goods Administration’s regulations.
Another issue for U.S. companies to consider in entering the Australian market is location. The old adage that “location, location, location” are the major factors affecting business success is even truer in Australia. The degree of franchising activity in Australia is directly related to the country’s demographics. As the map below indicates, the eastern and southern states are the key areas for franchising. Each dot represents 1,000 people. Consequently, the majority of franchising activity occurs in New South Wales (Sydney is its capital) with 34 percent of total units. Victoria (capital is Melbourne) holds 24 percent and Queensland (capital is Brisbane) holds 21 percent of franchising activity.
There are a number of questions routinely asked by U.S. franchise systems regarding existing franchise operations in Australia. Some of these include:
• Where are head offices commonly located? In a recent survey, slightly more than one-third (36 percent) of franchise companies stated that they located their head offices in New South Wales. Both Queensland and Victoria were the second most popular choices, each with 25 percent.
• What is the average sales turnover of a franchise system in Australia? There is large variation due to differences in business activity and system size. However, the average total system turnover (total sales for both company and franchised units) was $6.75 million. Retail systems reported an average turnover of $15 million compared with $2.44 million for non-retail franchises. Within the retailing segment, food retailers reported an average of $7.5 million.
• Where are franchise units usually located? While a fixed location such as a retail or commercial site is the most common location (44 percent), it is worth pointing out that 28 percent of franchisees operate from home and 22 percent operate from mobile operations (van, trailer and so on). Of course, the type of industry will influence the type of location used by franchisees.
• What is the average start-up cost of a franchise unit? The average total start-up cost for an individual franchise across all industries was $58,500. The average cost for a retail franchise unit has increased to $197,000 to include the fit-out costs. On the other hand, non-retail franchise systems’ start-up costs have decreased to $38,000; this decline may be a result of the difficulty in finding quality candidates.
• Why should U.S. franchise organizations operate “Down Under?” Franchising is a well-known and common business practice with its own association and publications in Australia. In addition to the positive market dynamics, Australia and the United States share a common language and very similar cultures (although there are some subtle differences to consider). Corruption does not exist and it has a well-regulated, well-educated and highly-developed franchising sector to enable U.S. firms entering the sector to do so with confidence.
Opportunities for U.S. Companies
There are a great deal of opportunities for U.S. companies. Most growth in the franchising sector has been within the services segment, predominantly in the personal and other services area such as video hire and gardening services. Services catering to the time-deprived, as well as financial service concepts are also very popular. Australia has a growing elderly population with many Baby Boomers moving into retirement. This presents many opportunities for concepts in home services, health care and mobile sectors.
The retail trade food sector (including fast food) also presents a number of opportunities for U.S. firms, accounting for 16.5 percent of franchise systems with a particular upsurge in the number of healthy food concepts. Like the Unites States, Australia is experiencing a problem with increasing overweight and obesity rates. A recent health study showed that 68 percent of males and 53 percent of females were overweight or obese. The problem is just as prevalent for children. Therefore franchise systems related to health foods and fitness could also find a receptive market.
Challenges As elsewhere, there are challenges in the Australian franchising sector. Results from a recent national survey indicate that the largest area of concern for existing franchise companies was attracting suitable and committed franchisee candidates. As Australia is such a developed franchise market, the pool of potential applicants is thinning. Another issue is locating casual and permanent staff due to the high levels of national employment. High leasing costs and site-usage restrictions (especially within shopping malls) also were major areas of concern.
Over the years, Australia’s franchising sector has experienced increased regulatory oversight. On July 1, 1998, the Franchising Code of Conduct was enacted and is overseen by the Australian Competition and Consumer Commission. Franchise organizations and franchisees are required to adhere to the code that covers such issues as:
• Disclosure of the pertinent information regarding the franchisor,
• Conditions contained within the franchise agreement, and
• Complaint handling and dispute resolution procedures.
Foreign franchise companies will be subject to the local civil and criminal laws regulating business conduct. These include legislation affecting corporations, taxation at state and federal levels, workplace and employment laws and so forth. As the laws in this area are constantly changing, professional advice should be sought to analyze the specific aspects of each investment or activity by a foreign entity.
The Franchise Council of Australia Limited is the national association for Australia’s billion dollar franchising sector. It represents franchisees, franchisors and service providers to the sector. The FCA is a nationally-incorporated, not-for-profit association with its national head office in Melbourne, Victoria. It provides localized member services through five state chapters, one in each mainland state of Australia.
The year 2007 promises to offer significant opportunities for U.S. franchise systems to test and enter the Australian market. With Melbourne’s Franchise and Business Opportunities Expo and FCA’s National Franchise Convention being held in October, IFA is now planning a trade mission to Melbourne and Sydney to take advantage these opportunities. Other franchise expos will take place throughout the year in various Australian state capitals including Melbourne and Sydney.
Kate Wilkie is a commercial specialist with the U.S. Consulate General-Melbourne. For more information on these events or on franchising in Australia, contact Wilkie at email@example.com or fax: +61-3-9510-4660.