Lessons for Australian franchising from the USA

Greg Nathan, Founder, Franchise Relationships Institute

I recently returned from a few weeks in the USA, attending the International Franchise Association convention and servicing some of our North American clients.

Because the USA often reflects the shape of things to come, it is an interesting market to study.

While Australian franchising is world class in many areas, certain trends in the USA are worth sharing because they affirm the more healthy aspects of our own sector. In some cases, trends in the USA have not been all that desirable, also providing us with important lessons.

Trends in the franchise relationship

The USA franchising sector is huge - around 10 times the size of the Australian sector. While this is not surprising, given the population is also around 10 times that of Australia, the dynamics of the USA sector are also different because it is more mature. While Australian franchising was building momentum in the mid 1990’s, the USA market had already been in full steam ahead for 20 or so years.

For instance it is far more common today for USA franchisors to be publically listed companies or owned by venture capital firms. The founder entrepreneurs of most large USA franchisors are long gone and many franchise networks have changed hands several times.

This has had significant implications for the organisational cultures of these networks. One phenomenon to emerge has been Franchisee Associations. These are a kind of franchisee union, often formed to protect the interests of franchisees who felt they were at the mercy of new brand owners who may have introduced strategies to create a quicker return on their capital, sometimes at the expense of franchisee profitability. Another implication of having a new impersonal franchisor owner was the ‘family’ culture, that tended to exist where a founder was still the leader, often disappeared. As you can imagine the franchise relationship in these networks then became more prone to suspicion and conflict, which in turn provided a lucrative market for franchise lawyers to flourish.

In fact, while the USA franchise sector may be 10 times the size of Australia’s, the USA legal sector of franchising is probably 20 times or more the size of Australia’s. Not surprisingly this has created a greater tendency for franchisors and franchisees to engage in litigation.

Whereas mediation is now an accepted and effective way to resolve differences in Australia, this is infrequently used in the USA. Where alternative dispute resolution is used, arbitration is the most common technique. Unlike mediation where the parties resolve their differences to suit their needs with the help of a mediator, arbitration involves the arbitrator making a ruling, sort of like a judge. This is more expensive than mediation and, like litigation, creates winners and losers.

In this sense the culture of franchising in Australia is more collaborative. I believe this has created greater levels of internally led innovation within franchise networks and has also meant less money and energy is typically spent on litigation.

Interestingly a new generation of USA venture capital firms with more of a longterm, win-win approach to the franchise relationship has emerged in recent years. These companies specialise in acquiring franchise networks and work hard to respect and preserve the internal culture and values of the brand.

Another positive shift in the franchise relationship has ironically been brought about by the Global Financial Crisis, where USA franchisors have worked harder than ever before to look after their existing franchisees. This combined with less of a dictatorial approach to leadership, has meant USA franchisors are now consciously trying to create more collaborative relationships with their franchisees. Also many Franchisee Associations are taking a less hard line approach than they did years ago, seeing their franchisor more as a business partner than an adversary.

One lesson here for Australia is, while we can expect greater numbers of franchise networks to change hands, hopefully new brand owners will take an enlightened approach to how they manage their newly acquired assets, respecting existing cultures and the needs of their franchisees to also make a reasonable return on their investment.

Technology’s contribution to business

The number of suppliers at the recent IFA Convention offering technology related solutions for franchising companies was amazing. In particular technology would appear to be making significant contributions in the following areas:

  • Providing franchisees with convenient access to training for themselves and their staff through e-learning platforms which deliver material, test for comprehension and enable the tracking of participation.  
  • Improving franchisor access to franchisee financial and performance data, enabling franchisees to benchmark themselves against their peers. Not only is this useful to assess the productivity and efficiency of a business, it can also be a powerful motivator to drive franchisees to higher levels of performance. 
  • Improving franchisee access to high quality marketing collateral so they can instantly customise promotional materials and put these to use in their own local marketing programs.  
  • Online recruitment tools to assist both franchisees and franchisors in collecting relevant information about the suitability and capability of potential staff or franchisees.

While on the topic of technology, most established retail franchise systems in the USA are now using the internet creatively, both as an alternative sales distribution channel, and as a way to complement how customers are interfacing with their stores.

Australian franchisors have, as a rule, been slower to create a viable “bricks and clicks” strategy. An exception would be companies like Domino’s, who have fully embraced technology to give them a competitive edge and enhance their customers’ experience. Many franchisors could take a leaf out of Domino’s book and invest more seriously in this area of their business.

Multi-unit franchising

Another franchising trend that continues to flourish both in Australia and the USA is multi-unit franchising. This is where existing franchisees acquire additional businesses within a franchise network. In the USA over half of all franchisees are multi-unit operators, the majority owning more than five units. Many own over 100 units. A recent multi-unit conference in the USA last week attracted over 1000 people. In Australia 23 per cent of franchisees are currently multi-unit operators with an average of three units. I suggest this will increase to 35 per cent by the year 2015 representing 60 per cent of all the revenue generated by the franchising sector.

While multi-unit franchising may appear to be an attractive growth option for both franchisors and franchisees, there are also many pitfalls. For instance, the skills needed to succeed in operating three businesses are different to those needed to succeed in one business.

An important lesson is that franchisors need to be selective in which franchisees they allow to expand, ensuring they not only have the capital, but also the people and financial skills to manage a larger more complex enterprise.

State verses Federal legislation

A final trend in USA franchising worth noting has been the emergence, over the past 20 years, of State-based franchise legislation alongside Federal legislation. In the USA, 15 States have enacted separate franchise legislation, which has created a complex commercial and legal minefield for all stakeholders in the sector.

I recently facilitated a colloquium in the USA of some of the brightest and most experienced lawyers and franchise consultants, representing both franchisor and franchisee interests, on how USA legislation might be improved. The clear consensus was the overlay of State based and Federal legislation in the USA had led to an inefficient and ineffective franchising sector which created unnecessary cost and red tape with little benefit to the franchisees it was intended to protect.

There is possibly another important lesson here for Australia, as debates continue over the merits of introducing State based franchise legislation.

It would appear that better education for franchisees and franchisors on how to run good quality businesses and effectively manage their franchise relationships would be a better focus for everyone’s energies.

Greg Nathan is Founder of the Franchise Relationships Institute (FRI), leading global providers of learning programs to help franchisors and franchisees create profitable partnerships. He is also author of several popular franchising books including Profitable Partnerships. For more information about FRI’s work contact:

Phone: 07 3510 9000
Email: info@franchiserelationships.com
Web: www.franchiserelationships.com