AN INTRODUCTION TO FRANCHISING IN NEW ZEALAND
in this article:
New Zealand has more franchise systems per capita than any other country in the world.
Simon Lord provides a guide to this exciting sector
click images to enlarge
New Zealanders are a resourceful, independent lot. It was a New Zealander who first climbed Mt Everest (Sir Edmund Hillary) and who split the atom (Ernest Rutherford), and New Zealand was the first country in the world to give the vote to women (1897).
Small wonder, then, that such a good idea as franchising has taken hold in a big way. According to a 2012 survey, the population of 4.4 million is served by around 485 franchise brands with 22,400 franchisees, giving it the highest proportion of franchises per capita in the world. Perhaps 70% of these systems are locally-bred, but New Zealanders have also given a warm welcome to appropriate franchise systems from all over the world such as Anytime Fitness, Snap-on Tools, Speedy Sign A Rama (Speedy Signs), Jani-King and, of course, McDonald's.
New Zealand is a country about 10% larger in area than the United Kingdom and 25% smaller than Japan. It is situated 1200 miles/1920 kilometres to the east of Australia. Settled by the Maori people almost 1000 years ago, it was colonised in the nineteenth century by the British who valued its rich agricultural land and forests. The country is divided into two major islands, the North Island (which is home to the majority of the population) and the South Island. There are also many smaller islands. The landscape varies from sub-tropical in the north to alpine, and the total coastline is equivalent to that of the entire United States. Agriculture and tourism are New Zealand's two biggest industries, and the country has also established a reputation for fine wines and sporting excellence.
The country has a sophisticated economy heavily dependent on export trade. A consistent policy of deregulation has made it one of the best climates in the world in which to do business, according to international surveys. Government emphasis has focussed on creating a 'level playing field' to allow competition between companies on an equal footing. In keeping with this policy there is currently no specific franchise legislation, although franchise relationships are of course governed by normal commercial law. This contrasts to the position in neighbouring Australia, which introduced regulation in 1998 and has been amending it ever since to make it even more stringent.
The New Zealand economy performed extremely well following the painful market reforms of the 1980's, and the credit ratings of the country have been high. The country has followed a pro-trade economic path in recent years with the abolition of tariff barriers and free trade agreements with Australia, China, Chile, Malaysia, Singapore, Thailand and others. This policy has been followed both by right wing (National Party) and left wing (Labour Party) led coalition governments.
However, as a small country with an export-led economy, the strength of the NZ dollar is always at the mercy of outside forces. New Zealand suffered from the knock-on effect of the Asian economic crisis, but recovered surprisingly quickly. In the post September 11th climate, NZ performed strongly and was generally seen as a 'safe' destination. High interest rates imposed by the Reserve Bank to cool down the rampant housing market and strong dairy prices created a very strong NZ dollar, and this has remained very high throughout the recent recession. Although New Zealand came out of recession in June 2009, growth remained slow and the Canterbury earthquake in February 2011 set recovery back. Today, however, the country is enjoying a strong dollar and GDP growth of up to 3 percent. Read Westpac's Economic Overview here. Find currency converter here.
Franchising only really became established in New Zealand during the 1990's. Although there were several of the major overseas franchises, and some locally-developed ones, operating here before that time franchising was not really seen as an acceptable way to go into business by many. A couple of high-profile franchise failures in the 1980's had helped to make franchising a dirty word.
However, franchising flourished around the turn of the century and the country now has a good mix of overseas and local, mature and new franchise opportunities being offered. In general term,s the public (and legal and financial advisors) are now far better informed about franchising and therefore able to make better decisions when selecting opportunities.
New Zealanders have a high awareness of the option of self-employment and that makes the country a potentially fertile ground for the recruitment of franchisees. However, they do take some convincing about new franchise opportunities, and incoming companies can find it slower to take off than they might anticipate. This is particularly true if an incoming company is used to dealing with large markets - the total population of New Zealand is only 4.4 million, with the largest city (Auckland) accounting for 1.4 million. For some systems, expansion outside three or four major cities may prove uneconomic.
In addition, whereas Australia has a high inter-racial mix, New Zealanders are largely of European descent, with a substantial minority (15%) of Maori (indigenous New Zealanders) and Pacific Islanders. Although there has been considerable Chinese, Korean and South African immigration over recent years, this still represents only a small proportion of the population, largely in Auckland.
New Zealanders are well-educated, widely travelled, and are heavy users of the Internet. This gives them a wide awareness of international brands - for example, Starbucks was already well-known among its potential clientele even before the first outlet opened in Auckland, although the brand has fared badly against local competitors. The result is that entrepreneurs actively look overseas for ideas and trends which can be made to work in this smaller market, and this means that master licenses for the best franchises are often keenly sought when offered.
Companies looking to award a master franchise should beware of including New Zealand rights within an overall Australasian package. Australia and New Zealand are separate countries, and owners of joint rights tend to exploit the Australian market first. Once the idea is eventually brought to New Zealand, all too often they find that the idea has been copied and developed locally. Awarding master rights direct to a New Zealand company will usually produce better results in the New Zealand market.
Many of the major international franchises already have a presence in New Zealand. McDonald's and KFC have been well-established here for over 30 years, Burger King, Starbucks and KFC are well-known but not sub-franchised and Subway has grown dramatically over recent years.
Retail franchises often find the small and dispersed New Zealand market hard to get to grips with, and those chains which have not done their research properly often have two or three tries before getting it right. Successful entrants are more common in the food & beverage industry with Esquires, Domino's and Subway doing very well. Service entrants include V.I.P, Mr Rental, Speedy Signs and Touch Up Guys.
The home services franchises are the most public face of franchising. NZ's largest franchise in terms of numbers domestically is Green Acres, a company which offers franchises in lawnmowing, home cleaning, car valeting, carpet cleaning and garment care. They have a total of over 600 franchisees. There are several other major home services franchises, including the two largest Australian operators.
We are now seeing more and more of the commercial and mobile services coming into New Zealand. These are a logical development in a small market, as overheads can be kept low.
Retail franchises are often limited by the lack of available sites. There are only a certain number of retail centres and malls, and good locations can be expensive and hard to come by. The mall scene is dominated by a few major players (as in many other aspects of NZ business) but the recession has made good locations easier to find and more realistically priced.
There is no specific legislation relating to franchising in New Zealand, as the sale of businesses and business practices is covered by normal commercial law. Of particular importance to incoming systems are the Fair Trading Act, Health & Safety in Employment Act, Consumer Guarantees Act and the Employment Act.
Many observers believe it is inevitable that some form of regulation will eventually be brought in, and when that time comes good operators will welcome it as ensuring the continued development of ethical franchising in New Zealand. However, the dangers of what is called 'legislative creep' (where initially positive legislation becomes gradually more restrictive and costly, as has happened in Australia) mean that this is not a universally-shared opinion.
The self-regulatory Code of Practice introduced in 1996 by the Franchise Association of New Zealand contains many provisions similar to those of the Australian Franchising Code of Practice legislation, and incoming franchisors would be well-advised to acquaint themselves with its provisions.
The Franchise Association of New Zealand exists to promote franchising and to help and encourage franchisors and franchisees alike to achieve high standards of performance and excellence.
The Association has around 220 members including both New Zealand-based and overseas systems. Around a third of members are lawyers, accountants and other specialists who are welcome to meet, share information, solve problems and develop new ideas at meetings around the country and at an annual conference.
Members are required to abide by a Code of Practice which sets minimum standards for franchising. However, it should be noted that the majority of franchise systems (including many of the larger systems) are not members of the Association and are not bound by the Code - only around a third of all franchisors opperating in New Zealand are members.
The Association also promotes the New Zealand Franchise Awards. The Westpac New Zealand Franchise Awards are based on the international quality criteria of the Malcolm Baldrige awards, and have helped to raise the standards of NZ's best franchises to the highest international level.
Although the government agency Statistics New Zealand does not differentiate a franchise from any other sort of business the 2012 survey and Franchise New Zealand's own figures suggest that there are approximately 450 franchisors in New Zealand operating 485 franchise brands. This would mean that, in terms of number of franchises per head of population, as well as franchisees per capita, New Zealand is at the top of the world league table.
These franchises differ vastly in numbers from the 800-plus franchisees of Green Acres to the one or two of the new start-up systems. The 2012 survey conducted jointly by Massey University in NZ and Australia's Griffith University suggested that there are around 22,400 franchised outlets in New Zealand - a slight reduction on the 2010 figure.
The survey found that:
- There are approximately 446 business format franchisors in New Zealand in 2012, compared with 423 in 2010.
- The median total system turnover increased from $5.5 million in 2010/2011 to $6.0 million in 2011/2012.
- It is estimated franchised businesses contribute between $19.4 billion and $21 billion to the New Zealand economy.
- System growth has been static in 2011 and 2012.
- Franchised unit numbers have decreased from an estimated 23,600 in 2010 to an estimated 22,400 in 2012. The survey sample suggested a shift from franchisee-owned to company-owned units.
- Just over half the systems report increased sales activity in the last 12 months but a significant number experienced pressure on profit margins.
- Franchised businesses employ more people than ever - over 100,000 people in 2012, compared to 80,400 in 2010.
- The percentage of franchisees involved in disputes has risen, but more use is being made of mediation.
- Franchisees remain in a system for an average of 7 years.
Approximately one quarter of New Zealand franchises have already expanded overseas, often starting with Australia. Given the limited size of the New Zealand market, this is a logical step for NZ franchisors - it would also be fair to say that a franchise which can be made to be profitable here can often have tremendous potential overseas. Fastway Couriers, founded in the Hawkes Bay, is the world's largest courier franchise while New Zealand Natural ice cream has over 500 franchised stores in 13 countries. Burger Fuel and Esquires Coffee Houses (founded in Canada but now NZ-owned) are other examples of NZ franchises expanding globally.
Some companies have successfully exported technological developments (such as Lockwood Homes, whose innovative timber building system is both quick to erect and earthquake-resistant) or even leisure pursuits such as bungy-jumping (which as a commercial enterprise was originated by the AJ Hackett company in New Zealand's South Island) and fitmess programmes (Les Mills is arguably New Zealand's greatest franchise exporter).
Venture capital is often hard to raise in New Zealand, which can make overseas expansion difficult . Accordingly, both franchisors and non-franchised companies actively welcome joint venture or master franchise approaches from other countries.
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