Franchising starts a world revolution

WHAT THE PERFORMANCE OF SHARES TELLS US

The idea of franchising dates back to the middle ages. A King would give rights to individuals to engage in certain activities, including brewing ale or running a market stall.

From here, the idea of franchising grew, and it was formalised in 1851 by Singer. The sewing machine company granted distribution rights to franchises and, as a result, it is often referred to as the first modern franchise operation.

We’ve come a long way since those early days. Now, the International Franchise Association believes that there are 760,000 franchised establishments in the USA alone. In addition, PricewaterhouseCoopers believes that franchising creates 18 million jobs and yields US$1.53 trillion in economic output. In Australia, the franchise sector is worth $146 billion… and it’s growing.

The Growth of Franchising

Franchising has undoubtedly grown, and now some of the world’s biggest companies are franchises, including all 11,200 Dunkin’ Donuts shops, 18,775 KFCs, 35,690 McDonalds and 42,230 Subway stores (figures available from MSN.com). Franchising, once confined to the US before spreading to Australia, has gone global.

The US style franchising system has even become popular in countries such as the UK, which some critics thought was an impossibility. In the past two years, the number of franchises in the UK has increased by 14 per cent to 44,000 franchisee-owned units, with franchising now adding £15bn to the UK economy.

Franchising is now amongst the most dynamic and progressive business sectors in the Australian economy. It has revolutionised retailing in Australia and provided small business owners with resources that allow them to compete with much larger corporations. As such, franchising has evolved. No longer is it simply a means for Australians to benefit from foreign products and systems, now it is a method for many entrepreneurs to expand and develop their businesses.

Now, figures show that there are around 1,160 business format franchisors in Australia, operating 79,000 units. As such, the franchising sector in Australia alone employs almost half a million people. In addition, around 30 per cent of these Australian franchises have entered international markets, taking Australian finances global.

Franchising Success for Owners

Not only was it a good year for the franchises themselves, but it was a good year for franchise owners, too, with a record number (97 per cent), of franchise owned units reporting profitability this year. Of those, over half (56 per cent) said they were either “quite” or “very” profitable.

Business Model Advantages: Why Invest in Franchising?

There are many advantages to the franchising business model. For example, business owners who join a franchise are more likely to receive bank financing because they’re perceived as being less likely to fail than a regular start up business is.

It’s not just the idea of franchising that’s becoming popular, too. The way that franchises operate is also changing. Whereas most franchises used to simply be imported from the US, nowadays they’re spreading across the globe.

Franchising business models are attractive to investors because of one main advantage they have over a traditional model: you’re buying into a concept that you already know works. This lowers the associated risk; especially as you’re not starting a new business in the same market and already have the brand recognition that the public will respond to.

Top Performing Franchises

So, with this in mind, what type of performance are we seeing from shares in franchise models at the moment? What sort of opportunities are available at different price points? Let’s take a look at McDonalds, Poolwerx and Hilton Hotels.

McDonalds

Franchises don’t come much bigger than McDonalds. Described by some as a ‘dividend aristocrat’, McDonalds has 40 years of dividend increases under its belt, and that shows no signs of changing any time soon.

We’ve seen a strong rally from McDonalds’ stock over the last year, which has prevented it from being as undervalued as it once was. However, although this means that now may not be the best time to buy McDonalds stock if you’re a value investor, it’s still a good prospect if you’re an investor who needs current income, such as a retiree.

At the close of September, McDonalds announced a 5.6 per cent dividend increase, and investors who had long viewed McDonalds as strong dividend stock were incredibly happy with this. Challenges for the company remain, including a limited growth potential. This means now might not be the best time to buy McDonald’s stock if you don’t currently own any. But, if you do, the future looks very rosy indeed.

Poolwerx

Poolwerx were founded in Brisbane and they’ve grown to be Australia’s most successful pool cleaning franchise. Now, there are over 100 Australian franchises, consisting of almost 100 retail stores and over 300 mobile service vans.

Now looks like a great time to buy stocks in Poolwerx, particularly as it looks to expand into the American markets. Poolwerx aim to convert the American pool industry into a market that’s as organised as Australia’s, making it both efficient and reliable. If they’re successful, they could make some big waves.

Hilton Hotels

China’s travel market is booming right now, and companies such as Hilton and Marriot are seeing the benefit of this in a big way. Hilton may currently be trading 13 per cent down on its 52-week high, but it has a solid price to earnings ratio and a large window of opportunity. As such, Hilton’s stock has outperformed the S&P 500 by 0.9 per cent.

The company is forecasted to report earnings per share of around US$0.23 per share and over $3 billion of revenue for the 3rd quarter of 2016. As such, due to the market openings, particularly in China, now seems a good time to be buying shares in Hilton; especially as they’re continuing to perform well in tough economic circumstances.

For Hilton, the big challenge now is staying ahead of rivals such as Marriott and Air BNB. The market is no longer about high end hotels. Instead, it’s all about capturing the middle classes, something that Marriott seem well positioned to do.

To conclude, franchise businesses continue to expand globally, with huge successes in Australia, America, and notably the United Kingdom. However, this success isn’t all equal and, although McDonalds continue to soar, other companies such as 7-Eleven are still struggling. The business model associated with franchising has several notable upsides in comparison with traditional models, which means a number of opportunities in the stocks market are available. However, you need to do your research carefully before you buy.

Alexander Honeyman is a market analysis expert for Oanda, specialising in shares, currency, business news and financial trends. He has six years’ experience in the field and holds an MA in Journalism.

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