International Franchising Report

This article appeared in Issue 3#4 (May/June 2009) of Business Franchise Australia & New Zealand

In the most dramatic time for the world economy since the Great Depression, we are seeing some interesting developments in franchising.

Despite the dark clouds hanging over financial markets and the gloom in areas of manufacturing and exports, there is a strong light shining in franchising.

Former US President Bill Clinton showed the level of recognition of this fact when he addressed the globe’s biggest franchising event — the annual conference of the American association, the International Franchising Association (IFA).

“Franchising is a fantastic business model,” President Clinton told the conference, in San Diego.  “It has a history of outperforming other business models, and I believe it will do so again, even in this very difficult economy.  It is the very element of the economy that could get our engines running again.”

The economic power of franchising was underestimated in the US administrative capital, President Clinton went on to say.  “And I think that as a representative group, you need to remind people in Washington of that very fact,” he said.

President Clinton’s remarks were echoed by former Hewlett Packard CEO Carly Fiorina, herself a possible candidate for office in the Republican Party (the direct opponents of President Clinton’s Democratic Party).

Ms Fiorina also urged policy attention to the role franchising and small business generally could play in economic recovery.

A month later, the US administration has responded.  US President Obama has announced significant steps to unlock credit for small businesses in the US.  Specifically, the President announced that the Department of Treasury and the Small Business Administration would provide $15 billion to directly purchase securities backed by SBA loans; reduce or eliminate lending fees paid by borrowers; and increase the loan guarantee amount to 90%.

This announcement, coupled with a recent package announced by Mexico to assist their franchise sector, provides an encouraging indicator of Government willingness to directly support small business.

In Australia, direct stimulus to address the weakened economy has been focussed on consumers and financial institutions.  There have been small measures which have allowed a tax break for small businesses (such as the 30% deduction for capital purchases), but no direct stimulus.  It is time the Australian policy makers took a leaf out of the US book.

On the topic of credit availability, American banks have effectively shut up shop.  In Australia, the major banks reassure the small business sector, and particularly franchising, that they will continue to lend to good business proposals in franchising.  However, anecdotal evidence indicates that they have been lifting the bar on equity requirements and credit assessment.

At a recent meeting with the FCA and other small business organisations, representatives of the major banks pledged to keep the doors open to small business lending. They also acknowledged that small business lending rates were higher than customers would like and had not fallen as much as mortgage rates.  They pledged to pass on any further reductions in the official rate set by the Reserve Bank.  The FCA will be doing its best to keep them to their promise.

And it is an important promise, as most economists believe there will be further interest rate cuts in the coming months.  The Reserve Bank paused its aggressive rate reduction program in March, but Australia’s rates are still much higher than those in the US, UK, Europe and most of Asia, so we can expect further reductions.

The really good news is that franchising continues to fare well and further reductions in interest rates will provide additional stimulus as consumer spending capability increases.  Despite the atrocious economic conditions for most of the American economy, the IFA anticipates only a 0.5% drop in franchising production.  In Australia, we have seen pockets of pain, but production in the overall franchising community is showing no signs of distress.  In fact, many systems reported strong trading conditions for the three months to the end of February.  Some had record months.

The FCA’s online business directory has reported increased visits to the website for each month this year, compared with corresponding months in 2008.  Advertising has escalated as franchising businesses sense an opportunity for organic growth, with big business redundancies adding to the pool of potential franchisees.  Franchise systems are on the front foot in their marketing because franchisee inquiries are rising.

A survey by research company 10,000 Feet due to be released by the time this magazine goes to print shows remarkable resilience and optimism in the sector.

According to the Franchisor Expansion study, 90 per cent of Australian systems posted positive revenue growth for the full year 2008, including 15 per cent which posted revenue growth above 45 per cent.  That is a strong statistic when you consider that the current economic malaise was being forecast in the second half of last year, and hit home severely in the last quarter.

This ‘systemic optimism’ was well and truly on display at the IFA annual conference in San Diego.  The Franchise Council of Australia (FCA) led an enthusiastic delegation of 22 people (a mix of franchisors, suppliers and even two franchisees) to the IFA annual conference.  All came away with a very positive impression.  The conference was attended by over 2500 people.  And Aussie know-how was on display, with two delegation members leading workshop presentations — Greg Nathan (Franchise Relationships) and Kate Groom (Profit Soup).  Greg’s session on getting franchisee buy-in to system marketing programs and Kate’s was on performance metrics for franchisors.

This FCA organised ’Australian Delegation Seminar’ provided the delegation with 3.5 hour session jam packed with advice, tips and education from US franchise professionals including IFX Chairman Dan Martin, IFA Government Relations Director Jason Straczewski, Franchise development consultant and economist Dave Hood (iFranchise Group), US Attorney Rupert Barkoff, and Denver-based Austrade official John Klyne.

Australian franchise systems participating in the delegation and considering expanding into the US, or ramping up their expansion in the US, included ecowash Mobile, Touch Up Guys, and Hire-A-Box.  The Realise Group also had a number of meetings with potential clients/business partners during their stay in southern California.

Another international event on the radar is the The Franchise Association of New Zealand’s annual conference called ’Strategies for Success’ which is being held 10-12 July in Queenstown.  FCA Chairman George Yammouni is presenting, and will be leading an Australian delegation.

To join the delegation, contact FCA membership manager Kristen Sheehan on 1300 669030 or at kristen.sheeehan@franchise.org.au.  Members of the Australian delegation will get a significant discount to the delegate price.