Field of Dreams
REGIONAL FRANCHSING IN BLOOM

In recent years, major franchise brands have sprung up in rural cities and the sector’s regional presence appears to be coming into full bloom. While local traders may feel the pinch with top notch competition playing the field, now is an opportune time for franchisors to adopt a regional strategy – and motivated franchisees to bask in their sunlight. Typically, franchises are crowded out in capital cities while the restructure of regional city economies means emerging trends, particularly in the household services sector, are paving the way for existing brands and enterprising newcomers to cast seeds to the wind and watch their franchise systems grow.

According to the Griffith University, Queensland, Franchising Australia 2006 survey there is 960 unique business format franchise systems in Australia! That’s a 14.6 per cent growth since 2004 and equates to 62,000 businesses and more than 400,000 jobs. Sales turnover from the entire franchise sector in 2005 was estimated at $218 billion, up $48 billion from the 2004 survey (clearly we love our franchises!) and the sector contributed a whopping 14 per cent to Australia’s Gross Domestic Product (GDP) – more than the agricultural and mining industries combined.

“The majority of franchising activity occurs in New South Wales (34 per cent). Victoria represents 24 per cent and Queensland 20 per cent …. These proportions reflect the relative populations in each state. The pattern of franchising activity has remained constant over the past decade,” the survey said.

Consistency is indeed a characteristic of the franchise sector and figures released two years ago showed 91 per cent of franchise units did not change ownership at all and that the average minimum amount of time a franchisee will stay with their business is between 10 and 16 years.

It’s no surprise then that franchise systems are so attractive, particularly to first business owners. Such a robust and mature business sector offers a high degree of stability with reduced risks and ongoing support and training.

“[In 2005] fewer than two percent of franchised units ceased to operate, giving credence to the notion that franchise failure rates are low,” said Richard Evans, CEO, Franchise Council of Australia.

Where ‘franchise’ was once a dirty word, rife with charlatans’ making a fast buck, the sector cleaned up its act in 1998 with the help of a strict Franchising Code of Conduct which as recently as August 15, 2007, was tabled again in parliament. Regulations were tweaked to boost the Code’s transparency and increase the timely quality and timeliness of information provided to franchisees. It will go into effect on March 1, 2008.

“This is a great step forward for small business,” said Fran Bailey, Small Business Minister. “Prospective franchisees will have greater access to better information before signing on the dotted line. This will assist people to make the right decisions before investing large sums of their money in a business. These changes will boost the long term sustainability of the industry.”

The Regions: A Field of Dreams

Clearly the statistics suggest that sustaining the industry makes good economic sense and that’s a plus for cities like Tamworth, Bathurst, Orange, Dubbo and Wagga Wagga which have something franchisors want. Firstly, they offer viable markets of 50,000 people and the ultimate gem: local owner / operators who are motivated members of their community focused on the customer end of the business.

Australia’s premier franchise consultant Rod Young, Executive Director, DC Strategy Pty Ltd, Melbourne told Regional Business Magazine: “Many of [the major brands] have got most of the metro areas covered and are now moving to more fertile centres which are not as competitive but can make them the best game in town.”

“Big city marketing techniques along with better quality shop fit outs and a large commercial approach to marketing means franchises are fairly comfortable competing with the local competition,” said Rod.

“Franchise growth has traditionally been focused on urban centres but when organisations such as Boost are maxing out on retail locations, they’re looking to get out of the metro and into country centres,” he said. “Where you’ve got these large regional towns which are strong economic centres such as Wagga Wagga, Dubbo, Tamworth, Bathurst and Orange; the economic mass to support capital investment for franchises like Gloria Jeans, Subway or Boost Juice is a benefit.”

However, finding the right people in the country who are also prepared to invest in a good operation can be a big hurdle for franchisors. Buying into a franchise can cost under $20,000 but major brands will expect an investment of $250,000 to $300,000, or above. This covers such criteria as franchise fees, equipment fixtures and fittings, support and training.

Grant Geraghty, National Business Development Manger, Just Cuts, the largest hairdressing franchise in the southern hemisphere which currently operates 136 salons in Australia, 21 in New Zealand and is expanding into India said: “There is always room for growth in regional areas.” In the last financial year, Just Cut’s revenue increased 5.7 per cent with a $72.5 million turnover. The projected increase in salon numbers by 2010 is up to 230 throughout Australia, New Zealand and India. The company operates on the philosophy that remaining focused at the local level is of major importance.

“Typically we look for a town population of around 30,000 and somewhere that has a centre with a minimum of 30 specialty shops. We’re planning to open 10 regional stores between 2007 and 2008,” he said.

Just Cuts salons can currently be found in Albury, Bathurst, Dubbo, Griffith, Orange, Tamworth, Taree and Wagga Wagga. “There is less competition for trade in regional centres than in big, international cities. Continuing to expand Just Cuts into regional areas gives customers’ greater choice; whether you live in the city or country, people deserve choice.”

“In most regional centres there is one main shopping centre that brings everyone’s needs under one roof. It also provides Just Cuts an opportunity to offer employment in regional areas,” said Grant. The question for the potential franchisee to ask, however is if the investment is worth the risk. “Real estate in metropolitan centres has enough equity from recent growth in property to allow borrowings for putting into a business, less so in the regions,” suggested Rod Young.

“However, secondary funding is coming from the big banks who have franchising finance. The Commonwealth Bank, ANZ and BankWest have franchising divisions which can lend up to 70 per cent of the value of the franchise. Funding by the banks is going to assist to close the gap between that which the franchisee may have in capital,” he said.

Although the drought has put pressure on the rural economy, regional business communities and populations have responded by consolidating and bringing real structural change.

“The great opportunity is to build an economy that is not solely focused on the rural economy. There’s now more corporatised farming and while people have left the land; [corporatised farming] is bringing surety and growing infrastructure.”

“We’re seeing a growth in the rural economy as it is trading more with itself, particularly in the service industries; dog washing; house cleaning … it’s circulating the money in the town and an economy is developing that is not rural based. The more businesses that can be established, the more employment can be created.”

As the demand for services does increase in response to busy lives where there is little time or inclination to also do household chores, regional centres are likely to see more franchises emerge like VIP mowing and mobile carpet cleaning.

Bark Busters Australia, a network of dog behavioural therapists and trainers, is a prime example of a service oriented franchise with regional application. This year it was named Australia’s fifth fastest growing franchise. Launched in 1989 in Canberra it now has 180 franchisees in the USA and enjoys a reputation of authority in the area of correcting dog behaviour.

Bryan Edwards, owner of Bark Busters Australia does base his strategy for appointing franchisees on population but confirmed the company is targeting specific regional areas around the country. “We have to make sure that the franchise can generate enough income to support the franchisee. But compared to establishing a franchise in a metropolitan centre, setting up in a regional centre has no less or more advantage. Both models have strengths and weaknesses,” said Bryan.

“We have offices in the South Coast and Northern regions of NSW, and are currently negotiating for Dubbo and Narrabri. We have opened an office on the Far North Coast of Queensland and are negotiating for Townsville,” he said.

This is great news for business people seeking new opportunities but what about existing local traders and the pressures it puts on them having to market share in local areas? According to a paper published by DC Strategy, the landscape of regional towns has constantly been a debate over the influence and presence of big city corporate brands and the role of local independent business built on a foundation of relationships.

“Increased pressure on supply chain costs and efficiencies are making it more difficult for the independent to compete and the fixed cost base required to support company operations in regional areas is becoming unsustainable.

“There are a number of sectors where the specialist labour force required are becoming increasingly difficult to not only source but importantly retain. The recent expansion of Escape Travel into regional areas is a good example of the use of franchising as a human resource strategy. The role of local relationships and the fact potential pool of employees in regional areas is less, and in many cases shrinking, poses some interesting challenges for groups looking to secure market share or increase their distribution,” the paper said.

“If you can’t beat them, join them,” suggests Rod Young. “Networks like Forty Winks have gone out of their way to build 80 stores of which most are conversion of existing businesses. It makes sense to join a larger group and get access to systems such as point of sale technology than try to compete.”

The alternative is to turn your business model into a franchise system. “There is opportunity for growth. Think beyond the borders of your town and look at similar pools of population. Being from a country location gives you an advantage because you know your market. I’d be recommending taking the business model that’s made you successful in your own town could become a franchise in Bathurst, Orange, the fringe of Canberra, Wollongong etc,” advised Rod.

“Play to your strength. Build your base first. You could create 10 to 15 economic units across towns like Tamworth, Maitland, Dubbo, Orange, Bathurst, Wagga Wagga, Albury Wodonga, Mildura, Ballarat, Bendigo … I wouldn’t recommend attacking Sydney. It’s a fractionated market under stress, but rather move across borders into Victoria and Queensland. If you must go to Sydney, flank the city markets in Sutherland or Penrith until you better understand it.”

While there are not many regional-based franchises successful brands have originated here, such Eagle Boys Pizza and Fermwood Women’s Health Clubs which have grown from a regional to national presence, but none have made the journey alone.

“If you’re going to develop business strategies you’ll need to hire the best and pay for it especially to grow nationally. I think there are some real opportunities out there. I’ve seen franchising drive economies and provide a process for teaching and training in business fundamentals. It can create more jobs and opportunities for consumers,” said Rod.