Franchisors look to increase number of multi-unit franchisees as recruitment gets tougher

A new survey of franchisor chief executives has found 60% intend to increase franchisee numbers by encouraging existing franchisees to open more stores, as the struggle to recruit of new franchisees continues.

The survey of Australia’s top 150 franchisees by franchise industry consultants DC Strategy, also found 40% of executives were considering acquisitions, with 25% prepared to own multiple brands.

However, DC Strategy executive director Rod Young has warned that both strategies need to be carefully executed and says the “bottom half” of Australia’s franchise sector will struggle to harness these grow opportunities.

As with other recent franchising surveys, the DC Strategy report suggests the sector is in good health.

More than 40% of franchise groups experienced an increase in per unit revenue of 8% or more, while almost 50% of groups are generating at least 15% EBIT.

However, Young says Australia’s franchise sector, which has just over 1,000 systems, remains divided between the haves and the have-nots. While the top 150 franchise systems are strong and well placed for growth, Young says the bottom half of the sector – where franchisors tend to struggle to get beyond about eight franchisees – is “marginal”.

“The reality is that the real action is probably in the top 15% of the market. I think there are significant growth opportunities for these top brands as they continue to grow and consolidate their position,” Young says.

That balance of power leaves the sector’s big players well placed to drive consolidation in the sector by acquiring the best emerging franchisors and building larger, multi-brand franchise system management companies.

“We are probably going to see any of those smaller emerging ones that have got any skill or talent being purchased by the bigger players.”

However, the acquisition strategy is not without risk. Young says an example like Allied Brands, where an ice cream chain, a water business and a cafe chain were put together, is an example of the wrong way to go about consolidation.

“There were just no management synergies between the brands. Bringing businesses that are not in themselves particularly strong doesn’t help the mix.”

But on the flipside, Retail Food Group, which includes a number of food-only retail businesses, has a much better strategy, because they are in a position to drive economies of scale across the group.

“They are all food services businesses. The result of that situation is that they are servicing 1,000 doors, but their back office systems and their IT are all integrated and focused.”

Encouraging multi-unit franchisees is also a strategy Young says should be approached with some caution, as not every franchisee has the ability to run two or more stores.

Young says franchisors must be sure a franchisee has the management systems in place to support multi franchisees, and the franchisor also must be confident that the franchisee has the managerial processes in place to allow them to run multiple stores without the direct involvement.

“We’ve seen multi-unit franchise attempts bring franchisees to their knees, not only in their new store but also in their existing stores,” Young says.

However, smarter franchisors are actively creating programs to nurture and develop franchises who want to take on multiple stores, particularly as the task of recruiting new franchisees becomes more difficult.

“What franchisors have realised is that here under their nose are good people they can potentially drive the growth of their business.”