SURVEY FINDS FRANCHISE SECTOR
RESILIENT & GROWING
in this article:
- the highlights |
- the issues |
- sector profile |
- age of franchise systems |
- size of franchise systems |
- number of franchisees & multi-unit franchisees |
- franchisee gender |
- franchisee age |
- franchisee longevity |
- part-time franchising & employment |
- franchise performance |
- franchise disputes |
- ongoing challenges |
- about the survey |
December 2010 - A long-awaited survey gives us a snapshot of the current state of franchising in New Zealand. Simon Lord reports
Despite the hardships that many businesses have faced over the past two years, the franchise sector is generally in good shape. That’s the verdict of Franchising New Zealand 2010, the first survey of franchising to be conducted in this country for seven years.
The 2010 research uses different methodology from previous surveys, drawing upon the experience of Griffith University’s Asia-Pacific Centre for Franchising Excellence, which has conducted a similar survey in Australia for many years. This approach will ultimately permit comparisons between the New Zealand and Australian franchise sectors and, as the survey is planned to take place every two years, it should become a useful indicator of trends over time. However, it is hard to draw useful comparisons with previous surveys because of the new methodology, and a number of factors also mean that immediate comparisons with the well-established Australian survey may not be reliable.
- There are 423 active franchise systems in New Zealand operating 450 brands.
- The average franchisor has 13 years franchising experience.
- 24% of respondents commenced franchising in the last 5 years.
- Despite the recession, the total number of franchised units increased by 5.3% from 2009 to 2010.
- The number of franchised units has almost doubled since 2003.
- Half of all franchised units are owned together with a spouse or partner.
- 26% of franchisees are over 50, only 4% under 30.
- Franchisees remain within a franchise system for a median of 6 years before exiting.
- 87% of franchised units did not change ownership during 2009.
- 41% of systems have part-time franchisees.
- The franchise sector employs over 80,000 people, mostly full-time staff.
- Substantial disputes were experienced by only 2% of franchisees and 19% of franchisors.
Before considering the survey results in detail, it’s useful to consider some of the issues that faced the researchers in trying to measure the franchise sector.
1. The researchers identified 423 companies that met their broad definition of a ‘business format franchise’ (unlike Australia, there is no legal definition of what constitutes a franchise in New Zealand). Of these, some operated multiple brands, leading the researchers to conclude that there are approximately 450 franchise systems operating in the country. Most observers would concur with this estimate, which confirms New Zealand as the most franchised nation in the world on a per capita basis.
2. Of these 423 companies, only 88 completed the lengthy survey – just over 20%. The researchers found this disappointing and made specific mention of the lack of response from the bigger retail firms.
3. Of those who did respond, 94% (82 respondents) were New Zealand-originated franchises. This is not representative of the sector as a whole. Previous surveys have found that around 25% of franchises operating in New Zealand originate from overseas, and a quick count through the franchises listed in the Directory in the back of this magazine alone will identify around 75 overseas-founded systems out of 250 listed. The survey must therefore be unrepresentative in this regard and, since many of the overseas systems are larger ones – particularly by turnover – and form a significant part of the Food & Beverage sector, in particular, this may have some impact upon the overall findings of the survey.
4. Perhaps the biggest disappointment for the researchers – and for all those who were waiting to see a truly representative measure of the franchise sector and its place in the New Zealand economy – was that, according to the survey report, ‘only a small number of participants were willing to disclose financial data. Hence, we are unable to report any findings about franchise system turnover.’
Despite the limitations of the first of this new series of surveys, however, there is much of value in Franchising New Zealand 2010.
The 2003 survey estimated the total population of business format franchises in New Zealand at 350; the 2010 researchers have positively identified 423 active systems. Both these figures are reliable as they relied upon identification and confirmation rather than returned responses. This represents an increase of 21% in the number of franchises operating within New Zealand over seven years. An average growth of 3% per year would not be surprising: the country experienced a franchise ‘boom’ throughout the 1990s with many successful local franchise systems being founded during that time (as the list of winners in this year’s Westpac New Zealand Franchise Awards proves). Growth would therefore be expected to have slowed down in the period since, and the long period between surveys may also hide what the researchers call ‘rollercoaster figures’ during the boom and bust economic turmoil.
The survey provides a very valuable picture of the various industries in which franchises operate. This is given for both all franchises identified and for survey respondents only.
It should be noted that some sectors are therefore over-represented and others under-represented in the survey. One figure that might surprise many is that statistically the second-largest sector overall is retail. This is partly a function of definition: the survey uses the Australian & New Zealand Standard Industrial Classification coding system, which has a broad definition of what constitutes retail (for example, retail businesses need not operate from premises). The 23.9% figure is consistent with the 22% figure in the 2001 survey which also used the ANZSIC system; the 2003 survey, which used more franchise-specific groupings, suggested the figure was 8%.
One of the big positives to come out of the survey was the increasing experience and maturity of New Zealand’s franchisors. The median figure for franchisors who responded is 16 years’ operational experience and 13 years’ franchising experience. The median time taken to pilot test the concept before franchising was one year, which is in accord with the recommendation of most consultants.
Over 60% of the sample had been franchising for more than 10 years, while the fact that companies are still adopting the franchise model for growth is evidenced by the 24% of respondents that commenced franchising in the last 5 years.
The economic turmoil of the last two years might reasonably be expected to have taken its toll on franchises, just as it has on many other sectors. This is certainly the case (see Franchisee Performance below), but there was still appreciable growth reported by survey respondents. The total number of franchised units increased from 3941 in 2009 to 4150 in 2010, which represents an impressive 5.3% increase.
In terms of the number of franchised units per system, this increased from a median of 19 to 21 over the two years studied. Retail franchise system growth has remained static over the past two years while non-retail systems have grown from 16 to 20 units – an increase of 25%.
Just over half (53%) of franchisors operate company-owned outlets in addition to franchised units. There was no significant change in the number of company-owned outlets over the two years.
The growth in new franchise sales for the 2009/2010 financial year alone is unsurprisingly modest. Franchisors reported an average of 5 new franchise sales and 3 franchise unit re-sales, which reflects a tightening in the pool of prospective franchisees due to the global financial crisis. 31% of franchisors reported no new unit sales during this period. Just over half the respondents (52%) reported no re-sales during this period, suggesting franchisees recognised it as a bad time to capitalise on their investment.
As a result of the survey, researchers estimate that there are around 23,600 franchised units in this country. This figure is almost double the 12,300 units estimated by the 2003 survey, although the earlier 2001 survey suggested a possible 14,000 units. Whichever of the earlier figures is correct, this is a certain indicator of the considerable growth of the sector in New Zealand and the increasing popularity of franchising among business owners. The latest figure suggests that franchised businesses account for 5% of New Zealand’s small-medium enterprises by number, although figures from overseas would suggest that if the share were measured by turnover then that percentage could be considerably higher. Sadly, this survey was unable to provide turnover statistics.
It should also be noted that 23,600 units does not mean that there are 23,600 franchisees, as some franchisees will own more than one unit. Multi-unit franchisees are a growing trend in New Zealand, as overseas – some 59% of franchise systems surveyed already have franchisees with more than one unit. Of the franchisors who had multiple unit franchisees within their system, 67% reported that they had between 1 and 5 such franchisees.
Half of all franchise units are owned together with a spouse or partner, rather than by a male sole owner (29%) or a female sole owner (13%). Within partnership arrangements, some 33% of men predominantly manage the franchise unit compared with 17% of women.
Confirming expectations, the majority of franchisees (71%) are in the 30-50 age range, with a further 26% being over 50. The researchers suggest that this may reflect the effect of an ageing population on the sector, although it should be noted that, for many people, buying your own business is not an option until you have the work experience, capital and assets to make it feasible. Only 4% of franchisees are younger than 30.
The survey suggests that franchisees remain within a franchise system for a median of 6 years before exiting. This is based on the experience of three-quarters of the franchisor respondents that had been operating for more than 5 years. There was only a slight difference in the tenure of retail franchisees (7 years) and non-retail operators (6 years), despite the generally larger investments required in retail. Given that, as the survey demonstrated, the average franchise agreement grants an initial term of 5 years (see page 73), this means that most franchisees renew their agreements at least once – a positive sign.
Respondents reported that 87% of franchised units did not change ownership during the calendar year 2009. Of those that changed, 8% were sold by franchisees. 3% had their agreements terminated or not renewed or were acquired by the franchisor, while only 2% of outlets ceased operating. Given the size of the franchise sector, this would amount to just 470 franchise units closing during that recessionary year.
In a recent article on Franchise New Zealand,we looked at some of the benefits offered by franchises that allow franchisees to work part-time. This is clearly a popular option: 41% of franchise systems have franchisees who operate part-time. Although some franchise systems are specifically designed as part-time business models, other systems may have encouraged part-time operations to provide flexibility for franchisees. The researchers report that franchisors should analyse the performance of their part-time operations, however, as many appear to be unprofitable for franchisors yet demand the same resources and support as full-time operations.
For franchisees, part-time operation is often a stepping-stone into full-time business, as it allows them to build up a client base before leaving existing employment. This may account for the 26% of respondents who reported that part-time operation was not profitable for franchisees.
The survey estimates that the franchise sector employs 80,400 people. Contrary to the impression some people have of franchises that provide ‘McJobs’, most of these (70%) are full-time employees, 25% work part-time and 5% are casual staff.
An interesting aspect of the timing of the 2010 survey was that it measured possibly the most difficult period faced by franchisors and franchisees since the emergence of franchising as an economic force in New Zealand in the 1990s.
Study leader Dr. Susan Flint-Hartle said the research suggested that most franchise businesses had come through the recession largely unscathed, which said much for the resilience of the sector. Asked about sales revenue, 50% of respondents had reported increases and 20% had reported no change, while 30% had reported a decrease.
This is not to say that the recession had no impact. 44% of franchisors reported a reduction in the product sales of franchisees and 47% reported a fall in franchisee profitability. Similarly, 45% of franchisors reported a reduction in the customer count of franchisees during this period. In some ways, the remarkable aspect of these statistics is that the majority of franchisees appear to have bucked the trend and are trading at similar or increased levels. Franchisors estimated that 80% of their franchisees were earning profits beyond their employee and owner wages, and some 22% of franchisors claimed that all of their franchisees were earning profitably. ‘This finding is a positive result for the sector during a period of economic downturn and recovery,’ the survey reports.
One of the most keenly-watched figures in previous surveys has been the level of disputes between franchisees and franchisors. The figure has generally involved around 1% of franchisees, although up to a quarter of all franchisors have reported that they have been involved in a dispute at some point during a 12-month period. Roughly equal numbers of disputes were initiated by franchisors and franchisees. A summary of the most common causes of disputes is shown right.
The 2010 survey defined a dispute as ‘a dispute with a franchisee that has been referred to external parties for action.’ This is a broader definition than used previously, but the figures were remarkably similar. Substantial disputes were experienced by 19% of franchisors within the past 12 months but only 1 or 2 franchisees per system were involved. The proportion of franchisees involved in disputes was 2%. The corresponding figures for Australia in 2010 were 22% and 1%, suggesting that 13 years of franchise regulation in that country may not have had a significant effect upon disputes.
Franchisors were asked what they considered to be their most significant ongoing challenges. ‘Interestingly, despite the time spent in 2009 debating regulatory issues, only 7% of respondents rated this as a challenge,’ commented the researchers. The most significant challenge, faced by 76% of franchisors, was recruitment of suitable franchisees. A related issue, funding for new franchisees, was third.
The survey was undertaken by Massey University Business School in collaboration with Griffith University. The authors were Dr Susan Flint-Hartle of the School of Economics & Finance, Massey University, and Professor Lorelle Frazer and Dr Scott Weaven of the Asia-Pacific Centre for Franchising Excellence at Griffith University.
Franchising New Zealand 2010 was sponsored by the Franchise Association of New Zealand, Davenports Harbour Lawyers, The Franchise Coach and Hayes Knight Accountants, and supported by Westpac.
The next survey is due to take place in 2012.
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