Rising discontent and power imbalances won't stop franchise sector growth

Despite a rise in franchisee discontent and a few high profile cases revealing the power imbalances in franchise models, including one involving the Mortgage Choice brand, the sector is projected to grow steadily over the coming years, a new report shows.

IBISWorld’s Franchising in Australia Industry Report forecasts annualised growth of 1.3% over five years, to be worth $179.4bn. 

“With the franchising industry forecast to encounter steady trading conditions over the next five years, the industry is likely to benefit from stronger demand for service-based franchises, which includes that of finance/ mortgage broking franchise models,” IBISWorld senior industry analyst Bao Vuong told MPA.

That, coupled with a strong domestic economy and growth in disposable incomes, will continue to drive demand for franchised products and services, he said.

On Tuesday, Aussie Home Loans announced a record FY18 with settlements worth in excess of $18bn. The franchise also announced that it would be opening 14 new stores this financial year and ten more in early FY19.

Regardless of the growth and success of some franchises, the franchise model is being scrutinised. A parliamentary inquiry initiated in March and an increasingly negative perception of the sector has raised questions about the sector.

“This parliamentary inquiry into the franchising sector will examine the franchising regulatory framework and will focus on the power imbalance between franchisors and franchisees,” Vuong said.

It will also consider the problems faced by franchisees, such as remuneration models and sales targets.

Vuong said franchisee dissatisfaction has risen as a result of concerns over the lack of control they have in regards to advertising, marketing, in-store fit outs and the actual costs of running a franchise.

“With some franchise businesses, the franchisor will take a large cut of the franchisee’s profit leaving the franchisee to cover for large expenses, such as wages and superannuation, only leaving a small profit. Or, in some cases, leaving the franchisee with a loss,” he said.

Yet franchising continues to be a popular way for Australians to start a business, with 1,284 franchise businesses in operation turning over yearly revenue of $177bn, according to the report.

“It is a recognised and reputable way of doing business. It has provided small business owners with the competitive resources to compete against the large organisations that dominate Australian retailing,” Vuong said.

What should brokers consider when deciding to join a franchise model?

  • Demand: Is there demand for the product or service? Is there room for strong potential growth?
  • Competition: What is the level of competition in the segment you’re looking to buy in and how will this affect future potential earnings?
  • Investment: How much money is required to start a franchise? What are the ongoing fees? Are they sustainable? Are they fair?
  • Restrictions: How much control do you have over pricing? How much control do you have on how the store is run, when is it open and store design?

 

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