Room to grow

Intheblack, Sep 2008 by Parker, Derek

THE AUSTRALIAN WAY OF FRANCHISING HAS CAUGHT ON ACROSS ASIA, AND SHOWS NO SIGN OF SLOWING DOWN

People might know them as the place to pick up a quick takeaway coffee on the way to work, or the person who mows the lawns, cleans a swimming pool, washes the dog or dispenses fast food. These are the familiar franchise chains that are an integral part of the retail landscape, but they have now turned into a major export commodity, particularly to Asian countries. Australian franchisors have also planned ahead and bought not only the Australian rights to a franchise brand, but the wider regional rights as well.

One aspect of the changing economic profiles of most Asian countries is an increase in the presence of franchise chains, both international and Australian-grown. The Australian-based franchise chains that are a key part of this expansion, range from coffee to fitness, cake stores and pool cleaning.

Behind the scenes there is another crucial export, namely the regulatory principles and industry framework that allow a franchising sector to grow. "Australia has long been a leader in franchising expertise," says Steve Wright, executive director of the Franchise Council of Australia (FCA). "In terms of numbers of franchise systems and their turnover, we are second only to the US, which is remarkable given our relative population size." Wright notes that the chairman of the Franchise Council of Australia, John O'Brien (who is also CEO of the Poolwerx franchise chain) is co-chair of the World Franchise Council and chair of the Asia-Pacific Franchise Confederation.

Some of the franchise chains that have successfully moved into Asia include Gloria Jean's Coffees, Howard's Storage World, Fernwood, Cartridge World, and Poolwerx.

The usual method of international expansion is for the core company to contract a master franchisee, who then operates the franchise on a national or regional basis, with supervision and involvement from the head office.

Franchising has the advantage of allowing for the fast development of a branded chain. A potential franchisee "buys into" a brand established by another entrepreneur, usually with an up-front payment and an ongoing royalty stream. In return, the franchisor provides products, training and support, as well as use of the brand.

The relationship is defined by a contract that sets out the obligations of both parties.

In Australia, the franchise sector is worth around $128 billion, and there are about a thousand franchise chains and 70,000 franchisees. The key regulatory mechanism is the franchising code of conduct, which sets out a range of standards, including the level of disclosure about the business by franchisors to franchisees and potential franchisees. The code was originally established by the FCA, but in 1998 its administration was handed to the Australian Competition and Consumer Commission. As a result, the code operates with legal force. "We don't pretend that the system is perfect, just as no regulatory system is perfect," Wright says. "But it works fairly well, in my view. Ninety-seven per cent of all franchise agreements are renewed, and only 1 per cent of franchise systems have a dispute under way at any given time."

Guiding model

When franchising started to take off in Asia during the 1990s, especially in Malaysia and Singapore, the Australian experience was seen as an important guide. "It started with Australian participation in a number of conferences and delegations about franchising, as well as the involvement of Austrade," explains Wright. "That resulted in several Asian industry bodies approaching the FCA for recommendations on drawing up a set of rules, using a mix of elements of voluntary code, regulation and legislation in different countries. In several cases, a code, or something similar, has been adopted by a government regulatory authority rather than initially being administered by an industry association.

"It is also relevant that in many Asian countries there is, in practice, a preference for solving disputes between franchisors and franchisees through what might be called robust commercial negotiations. Franchising in Asia is evolving and growing in some areas as it did in Australia 10 or 15 years ago, and in others, it is catching up more quickly. There is definitely a shift toward a more regulated environment, with a code or set of rules already in place."

Generally, the franchising concept takes hold first with food and then diversifies into non-food retail and services. In Malaysia, for example, the first wave of franchises included groups such as the Eden Bakery chain and the d'Tandoor restaurants, but more recently there are businesses such as Jukebox Shoes and Forest'secret, which deals with halal herbal body products.

Wright notes that trade shows and exhibitions about franchising are very popular in Asia, and can be an excellent way to display goods and services, and to make contacts. "But they are not the end point of a good recruiting process," he says. "Experience shows that a franchise relationship works best when both parties spend a good amount of time getting to know each other, and understanding in depth what each can bring to the table.