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Franchising - A Global Business Opportunity

Written by: Rod Young

Article Overview: Franchisors, franchisees and consumers recognise the benefits franchise networks offer; as the world gets smaller, conditions tighten and the demand for consumer and business products and services through branded outlets accelerates. As a result, franchising is gathering momentum, triggered by the slowdown in many markets that have stopped traditional business models in their tracks. This has caused the traditional single unit independent business people to wonder if they have a future.

Franchising - A Global Business Opportunity

While some sectors of the economy are experiencing pressure on revenues and profits after a bull run of sales growth, the majority of networks using franchising as the core of their business strategy are reporting comparative revenue growth. As the world economy continues to grow, the commodity that is becoming more valuable than gold or oil is amotivated franchisee owner-operator that is committed to building a business, a multi-store network, aregion and/or country, and the brand of a franchise network.

The franchisee is emerging as the storm trooper of the 'customer service revolution', bridging the gap between an employee's shorter term commitment to the success of his or her employer, and the enterprising but limited resources, outlook and expertise of the endependent businessman. This is similar to the employee who was a product of theIndustrial Revolution. To facilitate the production and distribution of goods manufactured by the inventors and industrialists of the time, the small businessman emerged to provide the many shop fronts and points of presence necessary to get those goods to market.

The 21st century will see the evolution of the franchised owner-operator as the most efficient last-mile-to-market business model yet developed, combining the service ethics of an individual who understands that the contrepiece of his or her goodwill is the lifetime value of each customer, with the strategic planning capability, buying power and marketing muscle of bigger networks, corporates and brand owners.

The true worth of the franchised business model in some parts of the emerging franchise world is being muddied by the opportunist franchisor focused on selling franchises, rather than granting franchises to motivated, quality applicants and helping them establish profitable businesses. The more experienced franchisors have learned that a focus on establishing profitable business that create greater value ar the customer end of the business are critical to building long term enterprise value for a franchise network. However, the trend of well run franchisors recruiting, screening and selecting better quality franchisees and those better quality franchisees gravitating towards well managed franchises will drive the growth of substantial franchised networks on aglobal scale.

Governments, businesses, executives, employees and consumers throughout the world are starting to recognise the benefits of franchising in creating economic wealth through enhanced service levels, job creation, profitgeneration andreduction in business failures. Franchising legislation being introduced in many countries will lead to better conduct in the franchising sector.

GrowingRetail, Food and Service Businesses

Heavily populated emerging economies in South East Asia, China, India, Russia and South America are starting to create a substantial consumer class fuelled by manufacturing and service jobs being exported from western markets. In first world economies, wages and profits continue to climb and the outlook forglobal economic growth has improved. Here in Australia, retailing, food and service businesses are feeling the effects, both positive and negative, of this economic momentum and franchising is surfing this wave as the need for motivated owner-operators with capital to invest in owning their own business grows.

In emerging economies, millions of new consumers are being created as jobs in manufacturing and service businesses are increasing average incomes. This growing aspirational middle class is driving the momentum of retail ectivity in India, China, Mexico, South America and Easter Europe, and retail franchisingopportunities are being established to service these emerging markets. For the thrifty baby boomers and the well remunerated DINKS (dual income, no kids) in the westerneconomies, there seems to be no limits as to howmany goods can be bought and accommodated in the one (or perhaps two) homes many now own. The emancipation of women and the single female is also driving female-centric consumption of health and beauty services, and franchising will provide the personal touch.

Establishedeconomies have allowed Western consumers the luxury of indulgence, and the growing food service categories are now starting to polulate the retail shopping malls and recreational environment in emerging markets. Franchised food business will continue tooffer up more and more niche products, and the services that go with them. The spectacular global growth ogSubway, Gloria Jean's Coffees, Domino's Pizza and Boost Juice are just a few examples of focused food service offerings that are attracting large numbers of consumers to these brands, as the growth in discretionary out-of-home food consumption increases.

"Man-in-a-van" franchises like PoolWerx, Jim's, VIP, Drytron and Bizzi Beez provide the time-poor consumer with domestic services in the home. That trend will continue to grow and to broaden, as a combination of a seemingly busier lifestyle and longer working hours demand the satisfation that seems to come when others are doing our chores. Retail, food and service businesses are feeling the benefit of this economic tipping poing and franchising is the logical HR strategy as the need for motivated owner-operators grows. This frees us up to consume franchised personal services in the form of wight loss services, day spas, hairdressing services, hair removal and hair restoration treatments, fitness clubs, beauty treatments (ranging from body sculpting and pedicures to facials and massages), dating services, and medical procedures (including IVF services, cosmetic surgery and laser vision correction).

Demand for services are not only focused on ourselves, butwill expand into the growing markets of child care, and child development and education. As weprovide morefor the fewer children that singles and couples are having, we will be spending more on our offspring in all forms of childcare, nanny services, development and education. As baby boomers and their parents get older, the development of franchised healthcare, pharmacy, in-home carers, andotherhospital-in-the-home concepts will not only reinforce the opportunities for the cleaning and other home maintenance brands of today, but create a raft of more tailored healthcare services designed to allow us to live independently, well into out final years.

Financial services are undergoing a revolution, and franchising will provide a personal link between the huge financial service organisations and the service expectation of the emerging service requirements of the average banking customer, the new rich and the established, well-heeled wealth services consumer. In the future, franchised mortgage broking networks will write over half of the world's mortgage business. More banks will have franchised branches and wealth managers to maintain and expand their networks, and build better and deeper customer relationships. Foreign franchisors are attracted by a target country's position regarding political stability, educated workforce, business transperancy, economic prosperity and a well developed legal system that protects intellectual property and upholds contractual obligations. As a result, Australia will see more foreign brands looking to enter this market.

Opportunities For Franchisees

So how are these global trends being leveraged by existing and prospective franchisees? The first step is setting your personal criterial for the franchise you want to operate. For example, the level of capital you are prepared to invest, the geographic location of tha franchise, the hours of operation, the number of staff you want to deal with, and what income in wages and profic you want to draw from the business. This will provide a template on which to base your decision before you start comparing franchises. Successful franchisees understand the importance of doing research to determine which of the franchise opportunities fall into the category of better, lower risk business opportunities.

Frachisees should also consider emerging franchise systems that are not yet as big as the major brands but have cut their teeth in a challenging environment. These emerging networks include Matchbox, Grill'd, Secrets, Banjo's Bakehouses, Brazillian Butterfly and Salsa's Fresh Mex Grill. Managing risk will be high on a good franchisees agenda. Buying an existing franchise from a current franchisee or even better, buying an existing company owned store currently operated under management, are low risk ways of getting into business. This is because both eliminate the risk of establishing a new location or service from scratch.

Franchising Can Develop Big Businesses

This development includes franchisees progressing from a single business unit to becoming a multi-unit franchisee by acquiring a second, third or more franchises in the same network and/or by buying out underperforming franchisees. Many multi-unit franchisees are earning exceptional incomes and are mini corporations in their own right. Seven figure incomes for these franchised owner operators are not unusual.

Master franchising is a further progression good franchisees often make as they move up the business ladder. Many master franchisees that now control regions or even whole countries started out by owning just one franchise. They learnt that franchised business ropes, and either progressed with that same network or sold out and bought into another network as a master franchisee or area developer.

The Future

Over the next five years, the franchise sector will grow at an annualised rate of at least 10% per year. There will be a continued increase in the number of franchised owner-operators, many of them being multi-unit owners, regional or master franchisees at the one level as well as the many employees and business executives dislocated by the global financial upheaval. They will emerge as a powerful lobby group enjoying higher profitability levels than their independent counterparts, and will require sophisticated management by franchisors.

Many governments have introduced franchising legislation that will lead to better conduct in the franchising sector and there are only a few countries without a National Franchise Association . Acess to information is creating better decision making. There are more accountants and lawyers who understand both domestic and international franchising, and are better able to advise prospective franchisees. For example, DC Strategy has a specialist legal team to advise franchisors and franchisees. This franchising education is diluting risk.

Networks and brands will become more valuable as the number of franchised networks grow more slowly than the number of franchisees in those networks. Franchising know-how will become a bigger business, but more mainstream and commoditised, requiring service providers such as bankers, accountants, consultants and lawyers to become much more knowledgeable and specialised. The executive with specialist franchising know-how on his or her resume will be sought after as growth oriented enterprises, bigger businesses, public companies and governments include business format franchising in their business models.

The most valuable link in the franchising chain will be quality franchisees who accept that their profitabiliy and future asset growth depends on how they operate their own franchised businesses, rather than relying on the franchisor to make profits for them. Franchising is healthy and the prospects for continued global growth look good.

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