Franchisors tip 18% profit growth in 2011, but recruitment remains a challenge

Australia’s franchisors have emerged from the downturn in robust shape, beating forecasts to post profit growth of 19% in 2009-10 and forecasting profit growth of 18% for the year ahead.

But a new report into the franchising sector from PricewaterhouseCoopers suggests the perennial growth hurdle for franchising – and lack of prospective franchisees – is once again threatening to put the brakes on the sector’s expansion.

PwC’s Franchise Indicator, which involved a survey of 106 franchise systems (all of which have more than 20 franchisees), showed franchisor revenue grew by 12% in 2009-10, just below the forecast of 13%.

Average franchisee revenue growth was 7% (against a forecast of 9%) but the impressive profit growth of 19% was something of a surprise even to PwC’s lead franchising partner, Greg Hodson.

“The last 12 months was just so much harder than anyone anticipated and no one really knew how things were travelling. We heard all sorts of reports of how some sectors were performing quite poorly, but you don’t really know until you actually do a survey for this.”

Looking forward at the 2011 financial year, franchisees remain bullish about repeating the strong performance.

Franchisor revenue is tipped to increase by 13%, while franchisor profit is expected to rise by 18%.

Average franchisee revenue is tipped to jump 10%, while profits are expected to rise an impressive 13%.

Most franchisors expect to increase franchise numbers by an average of 14 units.

Hodson says while the growth expectations are strong, there are few big hurdles around getting new franchisees into a franchise system; 75% of respondents said recruitment of suitable franchisees remains a challenge, while 73% said problems with potential franchisees securing credit continue to prevent growth.

Hodson says one of the reasons franchisors are struggling to attract suitable prospects is the image of the sector, which he says still concentrates on the mum and dad operators, the redundant worker looking for a new start or the person trying to buy a job.

Hodson says that given the strong growth the sector has shown through the downturn, franchisors need to market themselves better as having a strong business model that can great real wealth for smart entrepreneurs.

“I think when you look at the results that we’ve got over the last two years, it probably deserves better promotion. Let’s show that it is a viable business model to invest in.”

Hodson says that in heavily franchised markets such as the US, it is common to see franchisees who own multiple franchise units within on franchise system, and multiple franchises brands across different segments.

However, just 10% of franchises in Australia are owned by multi-unit franchisees, and Hodson says the sector should do more to attract and support these entrepreneurs who become a kind of expert franchisee.

Another problem franchisors are facing in recruitment is the age of prospects. While just under 70% of franchisors said the ideal age for a franchisee is between 30 and 44 years, the bulk of franchisees are aged between 45 and 64 years.

Hodson says there is a growing group of franchisees trying to tap into Gen Y through methods such as special funding and ownership arrangements, and he expects this to continue.

“We are seeing more franchise systems be a bit more creative about how they help people into these systems if they are a great candidate and I think we might see a bit more of that,” he says.

Other strategies franchisors are using to help franchisees of all ages obtain finance include allowing joint ownership or partnerships, partial store ownership arrangements (whereby the franchisor retains some ownership of a franchise) and profit and income guarantees.

One other idea Hodson has floated is a sort of franchisee investment trust, where investors could invest into a trust that then supported young people to buy a franchisee.

He also says franchisors will need to look at their models and see how much flexibility they can put into them, including methods such as providing young franchisees with cover when they need a holiday.

With franchise recruitment likely to be a struggle, franchisors are increasingly looking to acquisitions and offshore expansion to drive growth.

One quarter of respondents said they will look to expand offshore in the next 12 months (44% plan to do so in the next three years) while 23% plan to acquire another business in the next year (37% over the next three years).

While a number of Australia’s large, multi-brand franchise operators have made acquisitions in the last 12 months (including Franchised Food Company and Retail Food Group), Hodson says smaller one-system franchisor owners are now looking to buy or merge to gain economies of scale.

“We are having a lot of conversations about that at the moment and it’s not just the large brand managers looking to buy.”

In terms of offshore expansion, franchisors are concentrating on English-speaking markets of the United States and New Zealand.

“You go back a couple of years and they were all focusing on China and India and the Middle East, but and now it’s back to those low-risk countries they know well.”