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Jul, 01 2007

Global Trends in Franchising

AS the world economy continues to grow, the commodity that is becoming more valuable than gold or oil is a motivated franchisee that is committed to building a business, a multi-store network, a region and/or country and the brand of a franchise network.

AS the world economy continues to grow, the commodity that is becoming more valuable than gold or oil is a motivated franchisee that is committed to building a business, a multi-store network, a region and/or country and the brand of a franchise network.

Just as the employee was a product of the Industrial Revolution to facilitate the production and distribution of goods manufactured by the inventors and industrialists of the time, and the small-businessman emerged to provide the many shop fronts and points of presence necessary to get those goods to market, the franchisee is emerging as the storm trooper of the 'Service Revolution' bridging the gap between an employee's shorter term commitment to the success of his or her employer and the enterprising but with limited resources, outlook and expertise of the independent businessman.

The 21st century will see the evolution of the franchised owner-operator as the most efficient last-mile-to-market business model yet developed, combining the service ethics of an individual who understands that the centrepiece of his or her goodwill is the lifetime value of each customer, with the strategic planning capability, buying power and marketing muscle of bigger networks and brands.

The true worth of the franchised business model in some parts of the emerging franchise world is being muddled by opportunist franchisor focused on selling franchises, rather than granting franchises to qualified operators and establishing profitable businesses. The more experienced franchisors have learned that a focus on establishing profitable businesses that create greater value at the customer end of the business are critical to building long term enterprise value for a franchise network. However, the trend of well run franchisors recruiting, screening and selecting better quality franchisees and those better quality franchisees gravitating towards well-managed franchises will drive the growth of substantial franchised networks on a global scale.

Growing retail, food, service businesses

Heavily populated emerging economies in Asia, Eastern Europe and South America are starting to create a substantial consumer class fuelled by manufacturing and service jobs being exported from western markets. In first world economies, wages and profits continue to climb and the outlook for global economic growth is bullish. Retailing, food and service businesses are feeling the benefit of this economic momentum and franchising is surfing this wave as the need for motivated owner-operator grows.

In the emerging economies, millions of new consumers are being created as jobs in manufacturing and service businesses are increasing average incomes. This growing aspirational middle class is creating a boom in retail activity in India, China, Mexico, South America and Eastern Europe and retail franchising opportunities are being established to service these emerging markets. For the thrifty Baby Boomers and the well remunerated DINKS (dual income, no kids) in the western economies, there seems to be no limit as to how many goods can be bought and accommodated in the one (or perhaps two) home/s many now own. The emancipation of women and the single female is also driving female-centric consu-mption of health and beauty services and franchising will provide the personal touch.

Established economies have allowed Western consumers the luxury of indulgence and there is no end in sight for the growing foodservice categories that are now starting to populate the business environment in emerging markets. Franchised food business will continue to offer up more and more niche products and the services that go with them. The spectacular global growth of Subway, Gloria Jeans Coffees, Domino's and Boost Juice are just a few examples of focused food service offerings that are attracting large numbers of consumers to these brands as the growth in discretionary out-of-home food consumption increases.

Man-in-a-Van franchises like PoolWerx, Molly Maid and Mr. Handyman, educated the time-poor consumer about the use of domestic services in the home. That trend will continue to grow and to broaden as a combination of a seemingly busier lifestyle and longer working hours demanded the satisfaction that seems to come when others are doing our chores.

This frees us up to consume franchised personal services in the form of weight loss services, day spas, hairdressing services, hair removal and hair restoration treatments, beauty treatments ranging from pedicures to facials, dating services and medical procedures including IVF services, cosmetic surgery and laser vision correction.

Demand for services are not only focused on ourselves, but will expand into the growing markets of child care and child development. As we wish more for the fewer children that singles and couples are having, we will be spending more on our offspring in all forms of child development and education. India is emerging as one of the largest markets for child development and education services in the world.

As baby boomers and their parents get older, the development of franchised in-home carers, and other Hospital-in-the-Home concepts will not only reinforce the opportunities for the cleaning and other home maintenance brands of today but created a raft of more tailored healthcare services designed to allow us to live independently well into our final years.

Financial services are undergoing a revolution, and franchising will provide a personal link between the huge financial service organisations and the service expectations of the emerging new rich and the established, well-heeled consumer. In the future, franchised mortgage broking networks will write over half of the world's mortgage business and more banks will have franchised branches and wealth managers to maintain and expand their networks and build better and deeper customer relationships.

Consolidation, acquisition, IPOs, private equity gathering pace

As competition intensifies in each market segment, the top players will seek to establish market dominance by acquisition of competitors and customers to push growth past that was provided by organic development. In the past, we have seen this occur when Nestle purchased Jenny Craig Weight Loss centres in the US, Domino's purchased the Pizza Haven network in New Zealand and the giant Italian-based eyewear manufacturer Luxotica purchased the optometrist networks OPSM, the licensed Laubman and Pank network as well as the franchised Budget Eyewear chain in Australia as well as other networks in Asia. This demonstrates that the blending of franchised and non-franchised networks will see franchising become a much more mainstream management and marketing tool.

Linked to the globalisation of brands will be the market-entry strategy of the 'buy rather than build' approach by foreign companies, both franchised and non-franchised and the purchase of foreign franchise networks by franchisors seeking a faster entry into overseas markets.

The competition for acquisitions will not just come from competitors. There are three other emerging trends that are driving franchise network growth.

One trend is emerging from downstream suppliers seeking to secure distribution and the more attractive margins and brand value as a product or service gets closer to the consumer. An attractive feature of a franchise network is that a franchisor can also be a supplier to the franchisee, creating a tied distribution network. The example of many US-based networks now owned by venture capital groups further blurs the franchising lines and demonstrates the value that it is being created by franchised networks around the world.

The second trend is the private equity and venture capital groups, who understand the value of branded networks. As more of this capital looks for a home these groups will facilitate or participate in acquisitions and mergers of franchised networks, which will help to drive consolidation in the franchising marketplace.

The third trend is being driven by financial markets thirsty for new IPOs. The private equity and venture capital groups will look to create liquidity in the assets they have secured and the Wall Street's of the world will continue to look for small cap floats among franchise brands that have eight-figure earnings and prospects for substantial growth on a national and international basis. Consolidation of networks will bulk up profits to make IPOs more successful.

Globalisation of franchised brands will drive economies

The world will see more competition from foreign franchisors attracted by a target country's position near the top of the list of most desirable nations in which to grant a master franchise, as measured by a combination of the Graft Index, political stability, educated workforce, business transparency, a well developed financial system and a legal system that protects intellectual property and upholds contractual obligations. For example, while Australia is a small market it punches well above its weight in terms of profit per unit and has proven attractive to US-based McDonald's, Burger King, KFC, Subway and Jani King while Indonesia and some eastern European jurisdictions will lag in franchise growth until certainty of franchise contracts and other matters of a commercial nature can be assured.

As more and more of the thousands of franchise systems that currently operate in their local markets start to consolidate and maximise their businesses in their domestic market, they will reach a point at which they have already opened more locations in that market than they will in the future. From that point they face slowing growth unless they develop a new strategy to continue to leverage the know-how and expertise that they have created and refined.

International Master Franchising.

The world is awash with capital and there are many groups or individuals with substantial net worth, who are searching for the next big idea in their country or region. Many franchise systems have pioneered internationalisation of their brand and demonstrated that master franchising can help a company grow on a global scale. International franchising will become a bigger part of the revenue stream of more successful franchise systems with emerging markets like China and India creating opportunities for world domination alongside the European, Middle East and North and South American markets.

Governments and financial institutions have recognised that franchising creates economic activity, opportunity, jobs and profits. Delegations of government and semi-government officials from emerging economies are actively encouraging overseas franchise systems to establish franchise networks in their jurisdictions. Countries such as Singapore and Malaysia have proactively supported franchise development for many years and today, politicians in most countries understand the link between franchising and economic prosperity.

Future trends

Over the next five years, the franchise sector will grow at an annualised rate of at least 10 per cent per year. There will be a massive increase in the number of franchised owner operators, many of them being multi-unit owners, regional or master franchisees. They will emerge as a powerful lobby group enjoying higher profitability levels than their independent counterparts, and will require sophisticated management by franchisors.

Many governments have introduced franchising legislation that will lead to better conduct in the franchising sector and there are only a few countries without a National Franchise Association. Access to information is creating better decision making. There are more accountants and lawyers who understand the domestic and international franchising and are better able to advise prospective franchisees. This franchising education is diluting risk.

Networks and brands will become more valuable as the number of franchised networks grow more slowly than the number of franchisees in those networks.

Franchising know-how will become a bigger business, but more mainstream and commoditised require service providers such as bankers, accountants, consultants and lawyers to become much more knowledgeable and specialised.

The executive with specialist franchising know-how on his or her resume will be sought after as bigger businesses and public companies include business format franchising in their business models.

Franchising is healthy and the prospects for continued global growth look good.

The author is Executive Director, DC Strategy, widely recognised as the region's leading strategy and franchising and international consulting group. DCS has developed networks and brands of many successful businesses in the region. He can be contacted at rod.young@dcstrategy.com or check the website www.dcstrategy.com

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