Franchise frenzy in year of Covid
From commercial cleaning to accounting, New Zealand is the world’s mostfranchised country, and interest is higher than ever in the year of Covid-19. For some people, it’s independence and a work-life balance, but for others it’s disappointment and even exploitation. Melanie Carroll reports.
The coronavirus pandemic has driven people who have lost their jobs to look at their options, and one they are turning to is franchising. But with a sizeable chunk of money needed to buy into a franchise, and no guarantee of success, what should people look out for?
The darker side of franchising emerged recently with the Bottle-O chain, owned by the giant Australian conglomerate Metcash, facing claims of employee exploitation.
Night ‘n Day was one of the first ever homegrown franchises back in the early 1990s, and there are now a wide range of options, from Driving Miss Daisy to Signature Homes.
Among high profile Kiwis to get involved, former cricketing great Adam Parore now owns franchisor Small Business Accounting, while former television presenter Mary Lambie owned a number of Subway franchises until 2015.
‘‘We’re getting between 10 and 15 inquiries a day from people wanting to buy a franchise,’’ said CrestClean co-founder and managing director Grant McLauchlan.
‘‘There’s definitely an elevation in inquiries. We’ve historically received 200 a month for years and years.’’
McLauchlan, formerly an accountant, cofounded the cleaning franchise in Dunedin 25 years ago with business partner Rene Mangnus, after seeing a gap in the commercial cleaning industry.
The pair piloted its first franchise system for a couple of years, refined it, and now there are 650 franchise businesses operating across the country.
The model was what they called a ‘‘full service’’ model, with comprehensive support systems and services available to all franchisees.
Author Pete Burdon, whose book New Zealand’s Top Franchise Leaders, Secrets Revealed looks at the sector, said it was not widely known that New Zealand was the most franchised country in the world.
‘‘It’s the Kiwi dream to own your own business, but most businesses don’t survive past a year,’’ he said.
‘‘With a franchise, you’ve got a proven brand, you’ve got a proven system that works, you’ve got a whole marketing team and everyone behind you, so it’s just so likely it’s going to work for you and it’s going to succeed.’’
According to a 2017 survey, the sector had estimated sales turnover of $46.1 billion.
‘‘Everyone assumes that’s McDonald’s and those kinds of things, but 70 per cent of our franchises are actually homegrown ones,’’ Burdon said.
Burdon and McLaughlan said it was important for people considering a franchise to do their research thoroughly, and make sure it was the right sort of business for them.
‘‘It’s really important that anyone goes and talks to existing franchisees to find out exactly what’s going on, and that doesn’t necessarily mean the ones the franchisor tells you to go and see either,’’ Burdon said.
‘‘Some are very strict, like if you go to a cafe somewhere, exactly the same muffins have to be exactly the same recipe in exactly the same place in exactly the same shelf, and stuff,’’ Burdon said.
Massey University school of business senior lecturer Dr Matt Roskruge (Te Atiawa, Nga¯ti Tama) said franchises were great incubators. ‘‘You can absolutely see how it could be a really nice nursery model, not that we have a shortage of self-employed or small businesses in New Zealand. And in lots of ways our biggest challenge is capitaldeepening and getting businesses to expand beyond being a small to medium business.
‘‘The franchisor’s certainly filling that niche, by expanding through franchises.’’
For the franchisor, it was a way of expanding without having to take on a lot of staff, and having perhaps a more motivated workforce, he said.
For the franchisee, they’ve got a support system, existing knowledge they could tap into, an existing customer base, and an opportunity to dip their toes in and start learning in a comparatively safe and organised environment.
Disadvantages included the upfront investment and ongoing payments, constraints on creativity, limits on the ability to capture the benefits of that
‘‘We’re getting between 10 and 15 inquiries a day from people wanting to buy a franchise.’’ Grant McLauchlan CrestClean co-founder and managing director
creativity, and possibly different goals for the franchisee and franchisor.
Roskruge advised people to look for established and reputable brands. If something’s too cheap to be true it’s probably not, but equally, the most expensive franchises may not be the best to buy into, he said.
‘‘I don’t necessarily think you need to have over $1 million to get into a good franchise.’’
There were more established and reputable franchises for sale for about $300,000, he said. One factor when looking at the price was the amount of stock that was also required.
You also need to think about how much risk you’re willing to take on, he said.
‘‘You obviously like some risk, otherwise you wouldn’t be looking at a franchise, you’d be looking to be an employee.
‘‘If you’re willing to take on more risk, you might look at a less supportive franchise that also offered more of an opportunity to grow and innovate on your own.’’
There was little data on success rates of franchises, but around threequarters of franchises lasted at least the length of their five-year agreements, he said.
That was a better survival rate than other small businesses, although it looked like about a third of franchises were not that profitable.
McLaughlan said CrestClean had longstanding relationships with its franchisees and customers, which he attributed to the strict vetting of prospective franchisees, and to the franchise model where everyone’s got skin in the game.
‘‘They go over and above, in our industry particularly. It’s very hard to deploy a successful model when you’ve got a disengaged workforce.’’
But he said some franchise systems were more successful than others.
‘‘I think there are people who join some franchises that may not be as scaleable as maybe the founders think they are.
‘‘And there may be people who think franchising is a sure bet to success, and it may be the franchisors aren’t doing their due diligence carefully and vetting the people to make sure they’ve got the right attributes to be successful in their franchise,’’ McLaughlan said.
He pointed to issues around large corporate franchises in Australia.
‘‘The big ones where it has become very transactional, they lose the culture, it gets lost in the corporate environment. It becomes just a numbers thing.
‘‘To a degree, the franchise systems that don’t give that full support may be the ones that get into trouble, because you are taking people who highly likely have never been in business before.’’
Negative stories coming out across the ditch include a rebellion in 2017 among Nando’s franchisees after head office moves to get them to renovate, or lose their stores. An investigation into 7-Eleven found convenience store franchisees were ripping off their workers, and Caltex launched an investigation into wage fraud by some franchisees.
McLaughlan said CrestClean franchisees made an initial outlay when buying the franchise, and they paid a royalty of 15 per cent of revenues, which covered ongoing training and support, including invoicing, and preparing GST returns and financial accounts.
CrestClean has terminated franchisees before for a material breach of the franchise agreement.
‘‘It’s a last resort, we don’t like doing it, but we have to do it to maintain our standards for the other 99.9 per cent of our people.’’
He advised prospective buyers to check if the franchise was part of the Franchise Association of NZ, which meant independent scrutiny of the business.
‘‘The good thing about our business is when people are fully up to speed and operational, and they’re into it, they’re making more money than they’ve ever had before in their life, and their work-life balance is better than ever.
‘‘All out of the really boring cleaning industry.’’
‘‘If you’re willing to take on more risk, you might look at a less supportive franchise.’’ Dr Matt Roskruge Massey University School of Business senior lecturer