The franchising sector has had better years... does 2010 promise rosier times ahead?  

A lthough the franchise sector abounds with hype and optimism, 2009 was not one of its landmark years.

A winding back in financial support packages for prospective franchisees, the slowdown in retail development creating fewer opportunities for new locations and uncertainty about economic conditions all constrained growth in retail franchising.

Australia’s better than forecast economic performance and lower job loss numbers over the year also contributed to subdued franchise sector growth with the number of potential investors with redundancy packages lower than expected.



There were not many new retail franchise concepts emerging in 2009 despite the accepted premise that the franchising sector often has counter-cyclical growth, generating more franchise opportunities and attracting more franchisees when the economy is sluggish.

Indeed the major developments in the sector in 2009 were the spectacular and inglorious collapse of the Kleenmaid group, the decision of the Federal Government to amend laws governing the sector after 12 months of deliberation and the continuation of a consolidation trend with larger franchise companies acquiring smaller brands.

Examples of the consolidation of the sector in 2009 were Dymock’s acquisition of Healthy Habits and Allied Brands’ acquisition of both Villa & Hut and the Bay Swiss and Freedom Café & Home business.

And one of the most surprising things about the franchising sector is the reluctance of the Franchising Council of Australia to comment publicly on issues impacting on franchising and its apparent failure to influence events.

Emerson appointed two academics and a lawyer to his advisory panel with no representative of the FCA.

Most of FCA’s media releases on the association’s website wax lyrical about industry award winners, some regurgitate government press releases, a handful explain the FCA’s position on key issues, including government inquiries, and none comment on issues raised by the Kleenmaid collapse.

Kleenmaid seriously damaged public perceptions about the franchise sector, leaving thousands of customers out of pocket in one of the largest retail collapses in years in terms of customer losses.

Significantly for the franchise sector itself, Kleenmaid’s failure, like the Kleins jewellery chain in 2008, saw franchisees forced to close their doors because the franchisor had collapsed rather than their own business.

Inside Retailing Magazine acknowledges that there are many successful retail franchise systems in the market but there is a fundamental problem in a sector which is so often self absorbed with its awards and hype and which ignores the lessons of failures such as Kleins and Kleenmaid.

The head-in-the-sand approach to any bad news leaves the franchising sector vulnerable to ongoing government scrutiny and more restrictive legislative changes and, inevitably, to curtailed growth prospects for the sector with landlords wary about leasing prime space and prospective franchisees looking elsewhere with their investment funds.


Interestingly, the Griffith University has been funded with a $300,000 grant announced by the Australian Research Council, Department of Innovation, Industry, Science and Research and the FCA to test the oft quoted theory that a franchised business is more sustainable than an independent business.

The Griffith University has examined the franchising sector over a number of years and the examination of whether or not franchising is a more sustainable business model for someone wanting to enter a small business will be headed by Professor Lorelle Frazer.

Frazer reported in June 2007 that research she had undertaken showed it was difficult to estimate true franchisee failure rates because the failures were easy to disguise or were regarded by franchisors as "only temporary".

Frazer said failed franchise units were often either taken over as company outlets by the franchisor or onsold to new franchisees with the departing franchisee not acknowledged as a business failure.

The study suggested that franchisors acknowledged recruiting unsuitable investors in the early stages of their franchise development but became more adept at selecting suitable franchisees over time.

It also found that prospective franchisees seemed to do inadequate research on franchise systems, including comparisons between different opportunities, and believed the level and type of franchisor support services and communication were below expectations and promises made at the time they signed up to buy a franchise.

Howard Bellin, an industry veteran and founder of the IF International Group that was a pioneer of the sector in the 1970’s, claims 60 per cent of small franchisees failed within 10 years of opening.



While some franchise systems seem intent on avoiding bad news, two major systems deserve credit for gains they have made in 2008 and 2009 after some earlier problems.

Clark Rubber’s Chris Malcolm, a veteran of the franchise sector, took decisive action to support his franchisees in 2008 after a number of stores failed and sales and earnings fell in most states with the only shining light in the West Australian outlets.

Similarly, 7 Eleven, resolved issues with some disgruntled franchisees during a period of transformation for the convenience store chain in areas such as the store model, ranging, marketing and supply chain.

Both chains focused on improving communication and worked to resolve the issues raised by their franchisees and Clark Rubber is now generating solid trading results nationally and 7 Eleven notched up another industry award as the FCA franchise system of the year for 2009, repeating its success in 2008.

The FCA is not the only body that deserves some scrutiny on franchising issues with the Australian Competition and Consumer Commission showing an inconsistent approach to breeches of the Franchising Code of Conduct.

The ACCC has initiated a class action against Allphones for unconscionable conduct but has not made any comment on the Kleenmaid collapse despite the remarkably high consumer losses that effectively equaled four months

revenue of the whitegoods group’s annual turnover and the recruitment of franchisees when the company was insolvent.

The Federal Government’s slow response to inquiries by the Joint Committee on Corporations and Financial Services, the Senate Standing Committee on Economics and sector reviews by both the South Australian and West Australian state governments was widely criticised because of the uncertainty the delayed response created.

However, the FCA welcomed the November response but maintained a caution on the final outcome that is being shaped by expert panel of Barry Horrigan, David Lieberman and Ray Steinwell currently who are further examining the unconscionable conduct behaviour.

The WA and SA state governments were critical of the Federal Government response and remain keen to see further reforms, including the renewal of franchise territory rights for at the end of a franchise contract term.

The state jurisdictions also have some enthusiasm for the incorporation of good faith provisions in legislation that might be used to evaluate the conduct of parties in a franchise agreement in negotiations at the outset or, possibly, when an agreement renewal is being discussed.



Other parties in the industry had expected and believe there is an urgent need for the Federal Government to address the Kleenmaid and Kleins issue where franchisees are forced to close when the franchisor collapses under the franchise and tenancy lease agreements used in some franchise systems.

Steve Wright, FCA executive director, claims the franchising sector has expanded with around 125 new systems launched in the past year for a total of 1275 but the statistic cross referenced figures from two different sources and included all systems without breaking down figures for the retail sector.

Much of the growth in franchising in recent years has been in services with some investors unenthusiastic about the fixed costs and long hours associated with retail franchises despite the fact most of the best known and longest established franchises are in retail.

Wright argues the franchising sector is travelling better than small business market generally, a claim that is probably accurate but will certainly be tested by Professor Frazer’s comparative review of the franchising model to independent businesses.

Wright is bullish about the year ahead and confident that the Federal Government’s legislative changes have addressed the most important issues in the franchise sector in a constructive fashion.

Inside Retailing Magazine’s annual update of the top retail franchises in Australia shows limited growth in 2009 in terms of the number of outlets trading, especially if the Metcash supermarket and liquor banners are taken out, banners that involve a franchise or license agreement but not structured in the same way as a Gloria Jeans, Autobarn, Subway, Bakers Delight or Boost Juice.

Wright and a number of retail chains in the franchising sector expect growth in 2010 although the financing and site availability constraints are likely to continue in the immediate future.

And the entire sector will be watching the political games in Canberra with an election likely in 2010 and legislation to change laws for the franchising sector yet to be timetabled for the Parliament and potentially at risk of delay until after the Federal poll.