Four big franchising trends to watch

Franchisors are likely to share or outsource operational resources, seek franchisees who are prepared to have multiple brands, grow into new industries and grow overseas, if the following sector trends continue to unfold.

While some of these trends are more evident than others, all can be observed on a close assessment of the Australian franchise market. These trends are:

1. Pooling of system management resources
2. Entrepreneur class of franchisee: Multi-unit franchisees, cross-unit owners.
3. Expansion into new business categories
4. Export growth

A limited exploration of each of these factors appears below.

Pooling of system management resources

Systems that have substantially similar support structures may obtain considerable cost savings by combining their franchise support operations to reduce fixed overheads of rent, leases and personnel, as well as variables such as information technology.

While it could be argued that this model may represent a form of co-branding, it is not inconceivable that such arrangements could be entered into as a joint venture, or outsourced to a commercial provider.

Examples of this model already exist among well-known service and retail franchise brands.

Under this model, each participating franchise system can “buy” a level of support to provide to its franchisees, without undergoing the financial strain of managing its own incremental growth and associated costs as the franchise expands.

Entrepreneur class of franchisee: Multi-unit franchisees and cross-unit owners

Coupled with this shift in the operation of systems, is a similar shift in the nature of franchisees. While there will always be a market supply of traditional “mum and dad” type franchisees, new entrants particularly in the retail sector will be motivated entrepreneurs, many with previous business experience, and keen to expand beyond single-unit operations.

These franchisees will expand into multiple outlets after a qualifying period, while many franchisors will actively facilitate “growth from within” their system by reducing up-front fees to franchisees of second and subsequent outlets, or provide other incentives.

This will provide a “career path” in franchising to retain good franchisees who may otherwise become bored after a while and seek to leave the system.

Another method of business expansion to become more common among franchisees (either single or multiple unit operators) is a trend toward cross-unit franchising. This is likely to be most evident in provincial and regional locations where motivated and entrepreneurial franchisees may already saturate their market with one system and, in their desire to capitalise on opportunities, take on a franchise for another non-competing, complementary system.

Expansion into new business categories

The outsourcing of services has been the catalyst for the rapid growth of franchising over the last 20 years. Outsourcing continues to provide new opportunities in franchising, and will result in the development of new franchise systems in categories not previously considered capable of being franchised.

These categories are likely to include businesses requiring mid to high levels of business knowledge and skill, and may include some government functions. Franchises of this type would be highly sophisticated and potentially require significant start-up capital.

Export growth

The 2012 Franchising Australia survey found that more than a quarter of all systems in Australia are currently exporting, and that almost another quarter plan to export within the next three years.

While many franchise systems aspire to export and become international brands, the reality is that few are particularly good at it. Most franchise systems expand internationally by reacting to an inquiry from overseas and before the full process of vetting and selecting international partners has been determined.

However, there are significant risks for the unwary and even mature franchise systems have not succeeded in their export plans.

In order to export effectively, franchisors must be prepared to enter into long-term agreements and, if necessary, take equity in their international operations.

Conclusion

Franchising in Australia continues to evolve and innovate. These are just a handful of the trends that are emerging as the sector matures and may well be augmented by further initiatives in the day, weeks, months and years ahead.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.