The six key success factors for franchises

Research company IBISWorld has identified six key success factors for franchises in a report published earlier this year.

The report found the franchise sector recorded revenue of $158.7 billion last year but it highlighted a “difficult trading environment” for franchises with “static growth”.

IBISWorld’s research found the franchise operating landscape has been influenced by a slower Australian economy due to the global financial crisis and the economic uncertainty of the following years.

Revenue prospects have also been affected by trends in real household disposable income, consumer sentiment, the total number of employees in the labour force and the average weekly hours worked by all employees.

Stephen Gargano, senior industry analyst at IBISWorld told SmartCompany results have been mixed across different sectors.

“Franchises have historically benefited from strong branding and strong awareness amongst clients, so in areas where that is important they have been successful,” he says.

“But, for example in the food sector, customers are viewing this area as more of an experience and so are deterred by the cookie cutter nature of some franchises.”

Gargano says an example of this is Starbucks, which failed to gain significant traction in Australia as people want to go to an individual café as it is a leisure experience and they want good quality coffee. 

“But there are areas where franchising is very successful and preferable, for example in carpet cleaning, where individuals want to make a very quick choice without really thinking about it,” he says. 

IBISWorld’s research identified 240 key success factors for franchises but highlighted six as the most important:

1. Having a loyal customer base

A loyal customer base improves the likelihood that clients will become repeat buyers.

“If you can attract a client base and retain them that gives a strong basis to continued revenue,” Gargano says.

2. Having a clear market position

Franchisees need to follow the business structure as set out by their franchisor. With a defined market position, the business and its customers can aim for the same target market.

“You need to be able to provide a product that falls into an area where there is a need and really show customers how you are fulfilling that need for them,” Gargano says.

3. Business expertise of operators

Franchisees stand to benefit from the expertise of their franchisor, along with their guidance and leadership, in growing the business model into the future.

“There is a high reliance on the operator to have business knowledge and a strong work ethic,” Gargano says. 

4. Ability to control stock on hand

Operators benefit from controlling stock on hand to meet client demand, reduce inventory costs and ensure adequate stock turn.

Gargano says this is particularly crucial for food service providers as many run on a low profit margin, so being successful relies on minimising wastage.

5. Establishment of brand names

Many franchises have established brand names, and people buying into a franchise license the particular product or service.

“Franchisers benefit from having that really recognisable brand name that consumers are aware of and they know what they are going to get,” Gargano says.  

“If you walk into a McDonald’s or Subway you almost know what you are going to order before you walk in.”

6.  Workforce

Franchisees should ensure that employees have sufficient knowledge to provide sound advice and quality customer service.

“You want a base level of the workforce to retain the loyal customer base, provide the product and provide good quality operation,” Gargano says.

“But at the same time it does depend on the industry as to how it works, for example in fast food they rely on much younger workers.”