Challenging Times for Retail Franchises in Australia

Challenging Times for Retail Franchises in Australia

A series of recent high profile cases of retail franchises in Australia behaving badly has increased focus on the franchising business model itself. Having said this, we know there are many retail franchises that are thriving without poor relationships between the franchisor and franchisees. These franchises have a committed franchisor, a proven and evolving brand, and franchisees that are well supported.

The franchising industry in Australia is currently facing a range of challenges, including economic volatility, heightened international competition, and legislative challenges. In today’s crowded and highly competitive environment, success depends on swift management decisions, solid relationships between franchisees and franchisors, and the anticipation of future trends. When any of these components are missing franchisees can quickly become unprofitable and things can turn ugly.

We only have to look at recent media stories to highlight consumer focused retail franchises who are currently dealing with a range of challenges in these tough times. Some of the bigger issues include:

  • Increasing competition (market share)– a number of foreign-owned brands such as Starbucks, Burger King and Domino’s Pizza have now been incorporated into the local market. While this has a positive economic impact and gives consumer more choice, it significantly increases competition and puts more pressure on the performance of established Australian brands. The battle for market share is increasing, with businesses constantly finding new ways of satisfying customers who favour value for money and convenience over price and ambiance.
  • Shrinking customer disposable income– as the cost of living increases due to a number of economic factors, including low wages growth, consumers are beginning to spend less. This is one of the biggest threats facing the franchising industry.
  • Rising supply chain costs– the weather and farming conditions has had a direct impact on food price inflation, will significantly increase costs for franchises within the fast-food and restaurant sector. With consumers already struggling due to shrinking disposable income, it will be difficult for franchises to pass on these costs to them. Other costs factors, increasing electricity costs, interest rates, salaries, transport and maintenance costs are also putting more strain on the bottom line of franchises.
  • Falling staff morale– when business conditions are not great, some franchises can often not afford to hire more staff or bring in temporary staff, leaving employees severely stretched and demotivated. Job security issues are also heightened during this time as some employees may fear losing their jobs. Motivating staff and constantly updating them on how the business is doing is extremely important since quality customer service goes a long way during this time.
  • Tightening finance environment – with interest rates continuing to rise, franchises may find it difficult to service debt and borrow more money, leading to cash flow constraints.
  • Adapting to consumer needs– following a tried and tested model is no longer a guarantee for success in the franchising sector. Convenience and innovation in technology is increasingly becoming important to customers. Consumers now want the option of ordering meals online and getting them delivered to their homes. Moreover, there is an emerging focus on wellbeing, with consumers opting for healthier food options and preferring to patronise businesses with ethical and sustainable business practices.

What we advocate for any successful retail franchise, is that the franchisor’s own network of related entities and associates should be aligned with a franchisees’ success. However, in several high profile franchise disaster stories of recent times many franchisees have bought their business from one franchisor, but, following the sale of the network, have had to deal with a new franchisor with different motivations. Venture capitalists and public companies have shareholders with different priorities at variance with the ongoing success of franchisees’ businesses. Recent examples of franchise systems in Australia with these concerns include the 7-Eleven franchise and Retail Food Group.

The Australian Consumer and Competition Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) are responsible for regulating different aspects of franchises. The ACCC administers Australian Consumer Law and the Franchising Code, whereas ASIC administers the Corporations Act. Consumer Law gives franchisees that have been misled, deceived or treated unconscionably, or whose contract terms are unfair, the right to ask a court to sort things out. But court actions are slow and expensive and can end in business failure.

As the business landscape continues to evolve, it presents entrepreneurs with a new set of challenges and opportunities. Retail franchisors and franchisees who stay ahead of industry developments will continue to grow and remain a step ahead of their competitors.

We would encourage retail franchisors and franchisees to do their due diligence across a range of activities including:

  • Strategy & Vision
  • Governance Processes
  • Funding for growth
  • Franchise performance
  • Workforce culture
  • Business Risk management

There is a better way to work relationships between the franchisor and franchisees and as in any collaborative business partnership if there are not two winners it will not last and potentially end in tears.

If this blog has inspired you to consider using an experienced business advisor to help with your franchise business and franchisee relationships we would love to talk with you about your challenges and how to maximise the value of your franchise business. Call me on 0401767639 or send an email to john@lindfieldpartners.com.au. Good luck with your franchise and hopefully we will not read about a scandal with your franchise business in the media.

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