After several low overall growth years for retail franchising, 2009 may well see a renewed vigour in the sector.

By Bruce Atkinson, journalist, Inside Retailing Magazine

There are indications that franchising might see a counter-cyclical surge in activity in response to the economic uncertainty and tighter financial markets.

According to a survey by the Griffith University, Franchising Australia 2008, the franchise sector has grown by around 13% over the past two years, maintaining the growth rate of the period from 2004 to 2006.

Over the past decade, the number of franchise systems has grown by around 47%, driven by a substantial increase in the number of service business franchises.

While there has been growth in retail franchising, it has been somewhat subdued in recent years particularly with full employment impacting on the number of prospective franchisees in the market looking for opportunities and alternative funding for growth available to businesses.

Retail franchising has also suffered from perceptions about the demands of extended trading hours on owner operators, the relatively high establishment costs associated with opening a store and a tightening in the return on investment.
Escalating retail rents together with rising labour, utility and government charges and upward pressures on inventory costs have all impacted on the bottom line for franchisees. This has been particularly evident in the past year with a brake on consumer spending and deep discounting by chains desperate to keep market share.
A number of franchise chains have struggled in the past year and have closed stores. The most spectacular failure in 2008 was the Kleins jewellery chain which collapsed with debts of around $20 million.

The most prominent brand to strike problems in 2008 has been Clark Rubber, a chain by both the economic malaise and prolonged drought conditions that have hit sales of its signature above-ground pools and related pool merchandise.

A former franchisor of the year, Clark Rubber expects to be around for the long haul with management cutting operating costs and working with franchisees to regain sales momentum.

For chains like Clark Rubber and the Queensland-based Kleenmaid electrical goods chain, 2009 is likely to be a year of consolidation, of finetuning the systems and product ranges and developing the retail skills of their franchisees.
Indeed I would not expect massive growth from most of the existing individual franchise networks in the year ahead but the sector overall could potentially see more franchise systems emerging with some established retail chains testing the water and new concepts being launched.

The key reasons why there might be a renewed interest in retail franchising include the possibility of an increase in unemployment levels and particularly redundancies in executive ranks on the demand side and funding pressures for both existing stores and potential new stores on the supply side.

Middle rank executives who lost their jobs when the major corporates caught the downsizing bug were prime recruits for franchisors.

Flush with redundancy payouts and sometimes superannuation proceeds as well but too young and, perhaps, even too committed to mortgages, private school fees etc, middle rank executives were prepared to back themselves in their own businesses.

A new wave of redundancies could provide a similar recruitment opportunity although there is uncertainty about bank attitudes to lending and a tightening in equity ratios in business ventures.

As well as executives who have been made redundant, there are people who have been forced to revise their retirement plans and their lifestyles after substantial paper losses, if not real losses, on the sharemarket and through superannuation plans.

Uncertainty about the security of employment could also increase the number of tyrekickers for franchise businesses, if not, the pool of qualified investors.

Managers in retail chains have been doing a lot of soul searching in 2008 and franchising is a business growth strategy that will have been considered in many instances.

The cost pressures associated with retail franchises in occupancy, inventory or labour will not fall, so companies thinking about moving into franchising will need to become more innovative and, no doubt, leaner and more efficient in the administration and support areas.

But franchising could offer an opportunity to add more stores at a time when obtaining loan or overdraft funding for expansion is likely to be more problematic and, perhaps, impossible.

It could also offer a retirement or exit strategy for owners of smaller to mid-size retail chains and an opportunity to re-structure and ride out any prolonged economic turmoil by divesting company stores and reducing investment levels while maintaining the scale of the business.

Until the meltdown in global financial markets this year, owners of many retail businesses had confidently expected they would be able to sell out and retire through a share float, management buyout, trade sale or private equity investment partner.

The stockmarket is unlikely to be a happy hunting ground for new company floats in the immediate future, private equity investment has been scorched and banks will be much less friendly than in recent times to management buyout proposals.

Trade sales will be possible but 2009 shapes as a buyers market, translating to bargain shopping or a very selective investment profile.

For retailers mulling over their retirements or exit strategies, the options have narrowed markedly for the short term and that is why the development of franchising systems will have regained some fashionability in management offices and boardrooms.

The brakes on franchising will be the need to develop dedicated support structures, the ability of prospective franchisees to secure funds for investment and the cost pressures related to retail rents, wages
and stock.

However, the establishment of a franchise network will now be a live option for many business owners who have popular or niche retail brands and good locations.

As well as retirement or business exits, franchising programs could also enable some chains to prune their store networks and reduce their direct investment while retaining the operating economies they currently have and, potentially, improving sales by tapping into the enthusiasm and skills of owner operators.

An economic downturn also provides a good opportunity to boost market share and to expand if the capital is available to fund the growth.

For retailers, 2009 may see vacancy levels rise in many retail properties and landlords with more modest demands on rents.

The availability of established retail brands that can open new stores through franchise programs will certainly be attractive to landlords, and everyone is on the lookout for new and innovative concepts.

Steve Wright, executive director of the Franchise Council of Australia, says the latest Griffiths University survey on the sector provides some confidence despite the challenging economic environment and a nervous consumer market.