Service franchises trump food retail in popularity stakes

Service-based businesses have trumped food retail as the most popular type of franchise for new franchisees, new research reveals, due to smaller start-up costs and stronger trading conditions.

The research, released by the Asia-Pacific Centre for Franchising Excellence at Griffith University, is based on the responses of 2,000 participants in a pre-entry franchise program.

Launched in July 2010, the program was developed by the centre and funded by the Australian Competition and Consumer Commission.

The program was developed after centre research found a major cause of franchise conflict is unrealistic expectations on the part of the franchisee when entering the franchising sector.

Seven months ago, the centre began asking participants what type of franchise they would be interested in if they were looking to buy a franchise.

Nearly a third of participants indicated they were interested in a service franchise, while 27% were keen to invest in a food retail franchise.

Lorelle Frazer, director of the centre, says the results aren’t surprising because service franchises are less expensive to enter than retail franchises, so they often attract first-time franchisees.

A report titled Franchising Australia 2010 reveals the average start-up cost for a retail franchise is $275,000, compared to $89,000 for a non-retail franchise, including service franchises.

“[Food] retail and the service sector are also travelling a little better in the downturn, with a slump in non-food retail, which may be why people are avoiding the retail non-food sector,” Professor Frazer says.

According to the centre’s research, non-food retail interested a fifth of participants, while mobile franchises attracted the interest of just 4%.

Meanwhile, 13% of participants were “unsure” about which type of franchise they were looking to buy. According to Frazer, this level of uncertainty should be seen as a positive.

“It’s positive to see a reasonable number of people ‘unsure’ of the type of franchise they’re looking to buy,” she says.

“It demonstrates people are beginning to get a better grasp on franchising before deciding which franchise to buy, and are more like to a make a business – rather than emotional – decision.”

“The more due diligence prospective franchisees conduct, and the better informed they are before they buy, means they’re more likely to invest in a franchise that suits their… goals.”

According to Carolyn McManus, who was recently named Multi-unit Franchisee of the Year by the Franchise Council of Australia, it can be difficult to separate emotion from business.

McManus and her husband David operate five The Coffee Club franchises in Queensland. However, they knew they needed to change their management structure for the stores to survive.

“The biggest thing I learned is that by that fourth store mark, I needed to bring more people in that are heavily business focused,” Carolyn McManus told StartupSmart.

“[As a franchisee,] you still have a lot of emotions attached to your stores… I needed someone to separate the emotion from the business.”

This article first appeared on StartupSmart.