“Things ain’t cooking in my kitchen, strange afflictions wash over me ….”
A song many in the hospitality sector have been singing over the past 2 years?
I was in China town Melbourne for a yum cha on a Saturday morning recently and the sheer number of closed restaurants and graffitied buildings, was a shock.
We have also seen ”high end” restaurants close due to cost of living pressures and increased operating costs such as Rosetta (Neil Perry) la Luna bistro ( Adrian Richardson) the legendary Ginger Boy and more recently Botswana Butchery closed their doors in Melbourne, Sydney and Canberra. We have also seen that landlords are now no longer giving much leeway on rent concessions as they did during the pandemic.
Amongst that doom and gloom, the franchise sector continues to hold its own and in fact is showing growth in the hospitality and fast food sector with many new and overseas systems opening up.
As they say when one door closes, another cafe opens and from adversity there is great opportunity! (actually, I said that) !
What’s happening in food and franchising?
Here are some numbers that are interesting ( source IBIS World ):
- Revenue has decreased to $185bn down 2.4% over the past 5 years.
- Profit has decreased 7% over that same period.
- The next 5 years projection is that there will be little, to no growth.
Franchised businesses pre covid were slow and steady, helped by rising disposable income and positive consumer sentiment. Since then, there have been cost of living pressures, wars, supply chain issues, and increased operational and supply costs have made it difficult for business and affected consumer confidence. The increased costs have also impacted on profit.
The bigger franchise systems such as Metcash, Harvey Norman, Subway, Dominos, and McDonalds can adapt to the changed conditions and consumer trends as they have the resources ( financial and systems) to manage these challenges, whereas newer franchise systems may not have the same resilience.
On the plus side Australia is a multicultural society, embracing foods from many countries from noodles to pappadums, pasta to sushi, kebabs to gyros, burgers to pho and this diversity in offering has also encouraged many overseas franchisors to enter the Australian market.
Should I buy an existing franchise or go into a new ‘greenfield” site?
The great benefit of buying an existing franchised business is that from day one you have revenue coming in which hopefully means you need less working capital for the first 12 months of operation. Of course, you are then buying a going concern business with goodwill and the cash outlay is generally higher than a greenfield site.
The key thing to look for when buying an existing franchise are:
- The Lease – what term is left on the lease, is there any option ? Does the lease cover the term of your franchise – what are the annual rent increases.(Note- many leases provided for annual CPI increases which was good for the tenant when CPI was low however over the past 2 years the CPI has increased substantially so rent reviews to CPI now favour the landlord not the tenant !).
- The Plant and Equipment – check it is fit for purpose and functional as the cost of upgrade or replacement can be expensive.
- Refit or rebrand – check if the franchisor or the Landlord requires you to refit the premises or rebrand shortly after you buy the business as again that can be a substantial extra capital cost.
The benefit of establishing a new ”greenfield” site is that you have the latest fit out and you may be able to negotiate a reduced rent for the first 12 months, but this may also pose a greater risk than buying an established franchise as you have to build the business from scratch which may need greater working capital for the first 12 months of operation.
Franchisees should weigh up the option of taking up a new franchise system or buying into a long established brand and seek appropriate financial and legal advice.
New players in the market
For new franchisees there are some new brands that you may not have heard of worth a look such as Sankalp Indian (12 outlets), Dosa Hutt (16 outlets) Monkey King Thai, Thailander (8 outlets ), Dragon Hot Pot, The Lok Lok Dumpling Bar, misschu (aka Miss Chu) to name a few.
We have been engaged to assist a new Canadian based franchise Punjabi Chaap Corner enter the Australian market.
The Franchisor has had great success in Canada serving vegetarian food with tastes from Punjabi. For those that are not familiar a “Chaap” is little like a shashlik. It is known as the best Chaap Franchise in India. They are looking for a Master franchisee in Australia and any interested party should contact our office.
We believe this is a good opportunity and be highly successful in Australia with consumers looking to eat less meat and more tasty vegetarian options.
In franchising over the years we have seen many cycles and trends such as the Pizza era, chocolate and ice creameries, and coffee franchises, burgers, chicken and then many B2B services now on offer.
Burgers and Coffee
We continue to see increased competition and new players in the burger segment with an increase in plant based burger chains and also new “boutique burger” brands, such as Burgertory and Betty’s Burgers.
This reminds me of the time when it was all about pizzas and my article “How many pizzas can one country eat?” The same could be said about Burgers today !
Australians continue to have a love affair with their coffee, whether it’s from a café, a van or a hole in the wall .. provided its good coffee!
There is a myriad of franchise offerings from low cost mobile franchises such as The Coffee Guy and Xpresso Mobile Café and Bean Lab where the investment can be from $60,000 to Hudsons Coffee, Degani and Coffee Club which require an investment from around $350,000 plus.
Choosing your franchise
For new franchisees we recommend that you look at a franchise that suits your lifestyle and skill set, and one that you can see yourself doing longer term as many franchises have a certain “life span” after which the franchisee will want to sell or exit. So, ask yourself if you can see yourself selling smoked chickens in three years down the track.
Consider your exit plan at the same time as going into the franchise and also consider if it has long term appeal and it is not just a passing fad.
Once you are in a franchise there is no easy exit and there are only limited options to exit the system. It is also important to ensure that you can take a reasonable salary out of the business as you go as there may not be any large capital gain or profit at the end.
So do your cash flow analysis before you commit and get financial advice to make sure the business is viable and can cover your costs and salary. if the numbers don’t work, we suggest you walk away and look elsewhere as there are many franchise systems out there.
Good New Week!
With all of the challenges confronting business there remains positive opportunities and this can be seen in the resurgence of restaurants and the fast food sector in shopping centres, shopping strips and CBD areas and the influx of new franchise systems from overseas.
Before you jump in !
- Do your due diligence on the franchisor just as much as they do their due diligence on you.
- Is it a greenfield site which may be a higher risk than an existing site?
- Are you being offered an A, B or C grade site?
- Is the Franchisor big on technology and innovation? if not, how will they compete in the market sector they are in.
- Is the store fit out due for an upgrade and refurbishment?
- Is the plant and equipment new or will it need replacement?
- Will you hold the lease or hold under an occupancy licence.
- Be clear about your budget – what can you afford?
- Ensure they have adequate working capital to cover the first 6 to 12 months of operation (particularly if a new greenfield site).
- Factor in rent increases and fit out upgrades in your cash flow forecasts.
- Make sure you can take a salary for your effort along the way.
Above all to make an informed decision and limit your risk, seek advice from a Specialist Franchise Lawyer who is a Member of the Franchise Council of Australia (FCA) and independent financial advice before you jump in !
Robert (Hound Dog) Toth | Special Counsel | Accredited Commercia Law and Franchise Specialist
Robert Toth is Special Counsel and Franchise Specialist at Sanicki Lawyers, with over 35 years of experience in franchise, licensing and distribution law. Robert is also an Accredited Commercial Law Specialist and regularly publishes articles on line on Franchising and Licensing and acts for Overseas Franchisors and Master franchisees and in disputes mediations.
email: robert@sanickilawyers.com.au | mobile: 0412 67 37 57