Recovery sparks rush of new franchisors

The green shoots of economic recovery have resulted in a rush of businesses entering the franchise sector in the last few weeks in order to accelerate their growth plans. But a leading franchise expert has warned that companies considering a move into franchising need to ensure their structure and planning is sound.

Indian restaurant chain India At Home, Mexican restraint chain Mad Mex and organic café Wray Organic have all announced their debuts into franchising over the past week.

Rajesh Bhatia, director of India At Home, is launching a franchise model for his business that will see prospective franchisees pay between $350,000 and $500,000 for a new location.

Bhatia says franchising will allow his company to grow at a faster pace than he could manage on his own, but he also expects challenges for the new model.

“We’ve come to the point where individually managing a store is more important than growing, in the sense that I can’t be doing both. If we’re going to grow, franchising is ideal, because we can’t just invest all our money in this, other people need to do it too.”

“We have to make sure with the first store we franchise that we do it right. We don’t have much experience in this sector, so that’s why we’re developing professional guidelines and a rule book, so to speak, for our own business. Once we get used to it and know what we’re doing, opening a second and then a third won’t be as difficult.”

But Adrian McFedries, managing director of franchising consultancy firm DC Strategy, warns some business owners can be too eager to franchise their businesses and systems often fail as a result.

“I don’t know if there’s a large trend that’s spiked in any way. I do think there is a transition to franchising but I don’t know if it would be above or below the average trend. I know, for instance, that Mad Mex has been working on a franchising system for 13 months,” he says.

“Secondly, I think it’s important to remember there are two types of people coming into franchising. One group has already managed a profitable business, it’s grown well under a structured model and they do fine. Unfortunately, another group starts a business, gets an inquiry and the majority of the time runs with that. So nine out of 10 times the business stops because there’s a lack of consideration for a sensible growth plan.”

Franchising is popular in Australia, boasting about 1,250 franchising systems with a population of 21 million, compared to about 3700 franchising systems in the US with a population of over 300 million, McFedries says.

But he says this is a warning to prospective franchisees, many of whom have turned to franchising after losing their jobs during the downturn. He warns there is a “reasonably high degree of a ‘can-do’ attitude”, and that many businesses move too fast.

“Franchisees should be asking themselves – how good is the quality of the franchise? Many move too quickly, are underprepared and it forces you to do a lot of things on the run.”