Chapter 4 F ranchising in Australia and New Zealand

Chapter 4

Franchising in Australia and New Zealand

Rostom Manookian | Legal Practice Director DC Strat egy Lawyers

About the Author

Rostom is an experienced lawyer with in-depth knowledge and experience in many industries including, hospitality, restaurant and liquor licensing, franchising, and business and commercial property transactional work. Before joining DC Strategy Lawyers as the firm’s Legal Practice Director, Rostom operated his own legal practice and in September 2018, merged his practice with DC Strategy Lawyers to take advantage of the synergies between the two firms. Rostom is committed to delivering consistent quality and value to his clients and aims to establish and maintain reliable, trustworthy, responsive relationship with clients to ensure continued delivery of quality service that his clients have come to expect from him as their trusted advisor.

Franchising is a dynamic and progressive business sector

When you take a deeper look into the world of franchising in Australia and New Zealand, you will recognise several brands dominating the industry.

Home to almost 25 million people, Australia is no stranger to a scalable and profitable business system that franchising provides! There are around 1314 franchised businesses currently operating down under, with new franchise brands and networks expected to disrupt the sector and contribute to its annual growth in the coming years.

Similarly, franchising is a well-developed concept in New Zealand. In contrast, New Zealand has a population of nearly 4.8 million and is one of the most deregulated countries in the world for conducting business.

Many international franchise brands, such as McDonald’s, KFC and Subway, have all chosen Australia and New Zealand as part of their expansion strategy. Many Australian franchise systems have crossed the Tasman to establish their brands and systems in New Zealand because of the ease of doing business in New Zealand.

Australian franchising has also been the catalyst toward global growth for many of the ‘Australian-made’ franchise brands such as F45, The Coffee Club and Poolwerx. Franchise systems are found across a range of sectors, and the industry has evolved enormously since its inception in the early 1970s when US fast-food giants ventured across the Pacific to set up operations and influence the Aussie locals. Most of those brands can still be seen today, while new players in the market have created a rivalry and competition like no other. Many of these brands used Australia to venture their way into New Zealand to expand their brands because of the similarities of doing business between both countries. Recently, DC Strategy was instrumental in assisting Ben & Jerry’s expand into the New Zealand marketplace. Although there are similarities, the two countries are different in many ways and have their own intricacies of doing business, including legal requirements and operating methods. What may work in Australia may not necessarily work in New Zealand.

Franchising in Australia

While the Australian franchising industry has experienced both positive and negative media attention in the past year, there’s also no sign of the industry slowing down. According to the Franchise Council of Australia, known as the FCA, “Franchising in Australia may have initially provided a means for Australians to benefit from foreign products and systems, but it now is the chosen format for many Australian entrepreneurs to expand and develop their business. The great majority of franchise systems operating in Australia are homegrown, and increasing numbers of Australian franchise systems are successfully taking their systems overseas.”

With Australia’s growing international franchise presence, it gives other international

brands the key to success and opens the door for new brands to take on the current competition. There are a number of different points to consider when thinking about entering into the Australian and New Zealand franchise markets, which are outlined below.

Elements of franchising in Australia

Direct Franchising

Direct franchising from an overseas franchisor to an Australian single-unit franchise hasn’t been a common method of expansion in the past, as the distance and inability to support an individual franchise becomes very costly. By direct franchising, the franchisor is taking direct responsibility for recruiting, training and supporting a franchise network, through long-distance control from the headquarters, a subsidiary office in the target country or an appointed agent. In most cases, master franchising and area development are the most common vehicles used for international expansion of a franchise system into Australia. However, there appears to be a changing trend, and more franchisors are investing in direct franchising into Australia where they can retain the control of the roll-out of the system. This, in my opinion, is a better format to adopt as the franchisor will be in control at every stage of the development of the brand and system in the host country.

Master Franchise Agreement

Under a master franchise agreement, a franchisor grants a “master franchisee” a territory within which to sub-franchise to third parties. This structure might result in a certain loss of control for a franchisor and an additional party with whom profits and royalties must be shared. However, it is beneficial to a franchisor because the master franchisee can act like a local, self-sufficient party who organises franchise recruitment, site selection, construction, deal with procedural matters and conducts operational support.

Area Development Agreement

Under an area development agreement, a franchisor grants a franchisee the right to roll out multiple corporate stores but not sub-franchise without the franchisor’s express approval. Many franchisors adopt this model in Australia, as it reduces the management and training time for the franchisor, but allows the rapid roll-out of the concept in Australia. The difficulty of this arrangement is selecting the right area developer with the capital and infrastructure to achieve the development schedule without resorting to sub-franchising. A further difficulty for the franchisor is ensuring consistency of standards where multiple area developers are appointed within a State or region of Australia, given that Australia has a very large geographical area.

Franchisor/Franchisee Relationships in Australia

The Franchise Relationship: The Franchising Code of Conduct (the “Code”)

In Australia, the franchise relationship is a contractual one where the agreement between the parties determines their rights and obligations. In addition, the Code

applies to all franchise agreements operating in Australia regardless of whether the agreement refers back to the law of the franchisor territory. The Code is the regulatory Code that governs the operation of franchising in Australia. This is a national code. The legislation dictates what is considered to qualify as a franchise relationship. Based on the expansive definition of a “franchise” under the Code, there are likely to be many existing relationships that fall within the definition of a franchise. So, while “dealers,” “distributors,” and various “licensees” may not consider themselves franchises, under the Code, they may very well be.

Unlike some other countries, the Code does not require “registration” of the franchisor or the franchise disclosure document. There are, however, significant financial penalties for breaches of the Code, if the disclosure requirements are not met.

Some laws are specific to Australia, which international franchisors should be aware of, for example, taxation; consumer laws; employment, particularly in light of fair work laws; occupational health and safety; data collection; and privacy. Additionally, there may be other specific regulations that apply to certain industries, which you should research and review before finalising your marketing entry strategy. While these issues may not necessarily have to be incorporated into your legal documents, having a general understanding of your responsibilities under these different laws will help guide your operation of the franchise network.

Franchising in New Zealand

Like the Australian market, the New Zealand franchise market is also well-developed and expanding with many opportunities for franchisors. Many new overseas franchisors have entered New Zealand in recent times, including Chemist Warehouse, as well as international brands such as Zara and H&M.

Similar to Australia, there are laws in New Zealand that franchisors need to understand and be aware of, for example: taxation, consumer laws, companies act, cartel legislation, consumer guarantee laws, health and safety laws, privacy laws, trade-marks, employment relations, among other inter-related legislation that will impact franchisors when doing business in New Zealand.

Elements of franchising in New Zealand

Direct franchising is a common way for international franchisors entering the New Zealand market. They will usually issue a unit franchise agreement directly from the country of origin. If a franchisor is in Australia, they can choose to issue a franchise agreement from Australia to a local New Zealand franchisee. Alternatively, an overseas franchisor may form a New Zealand company in compliance with local New Zealand laws to enter into franchise agreements in New Zealand. Whichever approach a franchisor may determine to adopt, it is important to get the right advice and consider the market conditions on the type of entry plan best suitable for the franchisor. DC Strategy has assisted hundreds of businesses with the planning and market entry research for franchisors – having provided support and assistance for businesses such as Lollipop’s Playland & Café, Refresh Renovations, Sherpa Kids and Poolwerx.

Like Australia, master franchise agreements and area development agreements are also alternative options available to franchisors considering entering into the New Zealand market.

Franchisor/Franchisee Relationships in New Zealand

Unlike in Australia, there is no specific franchising code operating in New Zealand that regulates franchising. The Franchise Association of New Zealand (FANZ) imposes a Code of Practice and Code of Ethics on its members who must comply with both Codes. This Code will apply to those franchisors that are members of the FANZ. There is no obligation on franchisors in New Zealand to become members; however, membership reinforced the credibility of the franchisor. Those that belong to the FANZ must comply with the Code of Practice, whereby each member of the FANZ will (https://www. franchiseassociation.org.nz/rules-and-codes/):

Operate according to the Rules and Code of Practice of the Association in all its requirements and according to all relevant laws

Uphold the Code of Ethics for all Members Promote membership of the Franchise Association of New Zealand Incorporated and adherence to the Code of Practice

Adopt the highest standards of competency, practice and integrity in all matters pertaining to franchising

Respect the confidentiality of all information, know-how and business IP concerning a franchised business with which it is involved

Act in an honourable and fair manner in all its business dealings, and in such a way as to uphold and bring credit to the good name of the FANZ.

Similar to Australia, a franchisor in New Zealand must provide to each prospective franchisee, a disclosure document at least 14 days prior to signing a franchise agreement and the disclosure statement must be updated annually. The regulatory requirements between both countries are similar, including legal and business practices. However, although both countries have many similarities, this does not mean that consumer habits are the same and prospective franchisors need to carefully consider and research market entry conditions.

Conclusion

The 2019 IbisWorld franchising report highlighted how consumer trends have directly impacted the franchising industry, showing that Australian’s disposable income has supported consumer demand for franchised goods and services. This increase has enabled consumers to spend more on goods and services provided by franchised operators, such as food, footwear and clothing. Furthermore, solid growth in online shopping and retail shifts has fuelled demand for courier and delivery services that are supplied by franchise businesses and brands. Similar trends are apparent in New Zealand.

Now is the perfect time to start planning and researching your market entry strategy into Australia or New Zealand. You could quite possibly find your international brand (big or small) influencing the Australian or New Zealand franchising industry sooner than you think!

If you intend to expand your franchise network internationally, whether into Australia or New Zealand or any other country, DC Strategy’s full-service and dedicated franchising team can assist with your expansion plans and legal compliance requirements.

DC Strategy - The Franchise Experts - www.dcstrategy.com

DC Strategy was founded by Rod Young in 1983. It is an Australian end-to-end consulting, legal, recruitment and brand and marketing firm created to assist entrepreneurs from start-ups and SMEs to NGOs, government bodies and large corporations to develop sustainable franchise networks. DC Strategy is focused on building valuable and sustainable franchise networks, which create profitable outcomes for clients and their franchisees.

DC STR ATE GY

1300 682 657 www.dcstrategy.com

Chapter 5

Is it about price or value w hen choosing a Franchise?

FC Bus in ess Solut ions

About the Author

FC Business Solutions is the only integrated consultancy focused exclusively on the franchise community. Our team of professionals has been providing specialised and expert services to Franchisors & Franchisees for many years. The FC Business Solutions team are actively involved members of the Franchise Council of Australia regularly attending events, participating in committees and assisting in raising the profile of franchising in Australia.

Franchising is a business in a box. It’s a brand, a product, a process, systems, and advice bundled up with a price tag (cost of buying franchise and ongoing franchise fees). The trick is to work out the value proposition. Both in terms of what you get but also in terms of what you want.

What do you want?

Are you buying a job or a business? If it’s a business, with a goal of genuine wealth creation, then you need to be very honest with yourself about what is involved.

What are you prepared to risk in terms of money? What time are you prepared to invest? Are you ready for the (hopefully) short term impact on your personal life? Do you have the mental resilience to not get overwhelmed by your mistakes but to learn from them?

Buying a franchise in your area of expertise or passion is a great start. Passion is the secret ingredient to any business success and expertise is a great shortcut. This is not to say that you can’t build a business in an area that is new to you, but having good knowledge of your product or service reduces many hours of research and learning.

What should you pay? What’s the right price for your franchise investment?

There’s no correct answer to this question except to say that in broad terms the more you pay, the more respected and well recognised the brand should be and the greater the support offered. The brands that are top of mind when it comes to franchising are often in the food industry and they are examples of where you are paying top dollar for a complete system. Everything is cookie-cutter from the look of the shopfront to the menus, to the ingredients. All your systems and procedures are set in stone and with great support for the uncontrollable element – your staff. For a significant outlay you receive an above average chance of business success.

Further down the scale the franchised market is filled with brands offering varying packages and prices. Franchising has infiltrated many varied business sectors from teaching people to drive, to looking after pools, so finding a product you can be passionate about may be relatively easy. In fact in 2018-19 there were 1,314 different franchised enterprises with 98,650 outlets producing a revenue of $181.8 billion (IbisWorld Pty Ltd.)

Ascertaining value

This is the labour intensive, but absolutely critical part of your decision making. Having decided on which sector you want to operate in, you can then assess all the brands playing in that marketplace. Meet with their franchise development managers. Find out

what their joining fee is, what that ongoing franchise fees are and what additional costs you are likely to have. Find out details of their support – systems, processes, product, workplace safety compliance, human resources, marketing, social media, technology, training, business mentoring. Plug it all into a spreadsheet. After discounting those brands that you can’t afford, or don’t have a territory that suits, become a detective.

Speak to past franchisees about their experience – why did they leave? Speak to current franchisees – is there innovation, is there great franchisor support? What are the downsides of the brand or the local market?

Look at the gaps between what the franchises you can’t afford promised, and those you are considering. What will those gaps cost you in time, materials and money?

Visit a range of locations, observe the culture and without becoming too stalkerish, chat to staff about how they like working there.

Visit stores in locations similar to where you want to operate with similar levels of competition. Is there a distinct advantage displayed by the brand you are considering?

Investigate the sustainability of the brand. Is it growing, stagnant or is it slowing?

Additional costs and their value

While a franchise will offer you what seems to be a complete “out of the box” system, there may be a few things missing that you need to allow for, such as:

• Working capital above the franchise fee. Business will be slow initially, but you still have to pay for your trading expenses including rent, product and wages.

• Insurances. These are not negotiable. A good franchisor will have done the homework and be able to offer you providers that have policies that suit at a group discount.

• HR support and guidance. This is an area of real danger if you don’t do it right.

Apart from the legal compliance, a toxic workplace will cost you money.

• Goal plan. If your franchisor doesn’t offer it, engage the services of someone to work with you on a realistic (but ambitious) strategy or goal plan. Visit it regularly and update frequently.

• Local engagement and marketing. Good local marketing and engaging social media will help build your brand. Share your story, personalise your business. Hit the pavements, the local schools and sporting clubs. Get to know your potential customers wherever they may frequent.

• Training. Your franchisor should provide you with training, but you also need to be doing supplementary training, learning from interesting and motivational speakers outside the normal training calendar. This will help grow the expertise of your team and help them stay with you.

Get an expert sanity check

Your lawyer and accountant will be invaluable in helping you work out whether this is a good move or otherwise, what you can afford, what is a good investment and where the value is. For example:

How much are you really investing, the total amount for the first three, six, nine and 12 months

Is the investment going to take time to give you a return? When will it start paying itself off? When will you be able to take an income out of the business? Will you be able to reinvest? Ongoing, what does reinvestment look like? What if it starts slow, what’s the back- up plan? How do you pay the bills? What are you prepared to give up in your lifestyle for this business? Should you have to?

The magic equation

At the end of the day you are looking for this mix of price versus money:

A product or service that you are passionate about (value)

A franchise set up fee and ongoing costs that you can afford (price)

A brand that will give you a kick-start to your business with its highly respected proposition (price/value)

Top level support from the Franchisor (value)

A lesser fee but you provide your own support elements (price)

Continual innovation in product (value, at a price)

Technology that will improve the experience of you, your team and your customers (value, at a price)

Franchising systems can take the guesswork out of becoming small business owners. Do your homework, listen to experts and evaluate your passion. It is up to you to squeeze the value out of what you pay.

FC Business Solutions

(03) 9533 0028 hello@fcbs.com.au www.fcbs.com.au