Published on 19/02/2016 by Punchmedia

Buying a Franchise - Will it Work for You?

Buying a franchise can sometimes be the most cost effective way to own and run your own business - but is it a good option? How are franchises fairing in Australia at the moment? We take an in-depth look at the franchising industry, where it sits at the moment and its projected growth throughout this year.

Overview

The Franchising industry has faced mixed results over the past five years. A slower Australian economy during the early part of the five-year period, caused by instability in global markets, affected trading conditions across the franchising market. In particular, continued uncertainty across the domestic economy influenced the small business sector, which is a key component of the franchising market. A solid recovery in industry conditions over the second half of the five-year period created more buoyant trading conditions for operators. As a result, industry revenue is projected to exhibit steady annualised growth of 2.8% in the five years through 2015-16. Trends in real household discretionary income, consumer sentiment, average weekly hours worked and interest rates have driven consumer demand for franchised goods and services. Industry revenue is expected to grow by 3.3% in 2015-16, to reach $172.2 billion. Key growth areas for the year include aged-care services, courier services, health services and food retail.

Trading Landscape

Growth in real household discretionary income has supported consumer demand for franchised goods and services over the past five years. An increase in discretionary income has enabled consumers to spend more on goods and services provided by franchised operators. Key industry products and services that have benefited from growth in discretionary income include retail trade, accommodation and food services, and personal services. The size of these segments has increased as a share of industry revenue over the past five years. While income growth during the period has aided spending on a range of franchised products and services, volatility in consumer sentiment has negatively affected actual spending. Instability in global financial markets had significant repercussions for the industry. Growing uncertainty across the domestic market caused sentiment to drop in the early part of the five-year period. As a result, consumers became more conscious of their spending, leading to slower industry sales. While consumer sentiment recovered, a further contraction over the second half of the five-year period dampened demand and consumer spending, particularly on non-essential products and services.

Industry Profit

Industry profit has increased modestly over the past five years. Operating costs, business plans and competition have influenced differences in profitability among operators. Some operators have exited the industry as success has been largely dependent on replicating the original business idea (including layout, systems and processes) and securing a suitable location. Some franchisees may mistakenly assume that they can simply own the store and it will run itself. However, purchasing a well-known franchise brand does not guarantee profit and new franchisees may have to wait months before posting a profit. Other reasons for poor profit performance include failure to follow the systems and procedures set out by the franchisor, and over-capitalising by trying to operate numerous franchised stores simultaneously.

Operating Structure

The Franchising Australia surveys indicate that the number of industry enterprises is expected to trend upwards over the five years through 2015-16. Following solid growth in enterprises during the early part of the five-year period, the number of franchise systems in operation across Australia then contracted. The majority of enterprises entering the industry were retail-based operators, while those exiting the industry were service-based businesses. The data indicates a turnaround for the retail sector, compared with the earlier part of the five-year period when retail businesses suffered as a result of the economic slowdown. Establishment numbers have trended upwards over the past five years, largely due to growth in individual franchise systems. Despite this, employment numbers have declined over the same period. Contracting employment can be attributed to a significant rise in casual employment in the years following the global financial crisis, which substantially skews the results for the five years through 2015-16. While casual employment returned to a more normal distribution in 2012 and 2014, the industry has followed the broader trend in the general economy with greater employment in part-time positions. The contraction in employment is expected to reduce wage payments for the industry, causing wages to drop as a share of revenue over the five years through 2015-16.  

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Curtis is a leading expert in the business-for-sale industry, serving as a senior content creator at anybusiness.com.au.

With a career spanning over fifteen years, Curtis has accumulated extensive knowledge in the domain of business sales, acquisitions, and valuations. His deep understanding of market dynamics and his ability to translate complex industry jargon into accessible insights make him a trusted resource for entrepreneurs and business owners looking to buy or sell businesses.

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