What you don’t know about Food and Franchising

This article appears in the May/June 2014 issue of Business Franchise Australia & New Zealand

 

Food and Franchising are almost as complementary a duo as Food and Beverage!

And food and beverage businesses certainly dominate the franchising story as being some of the oldest, largest and most profitable in the world.

Food franchising traces its recent roots back to German ale houses in the 1850s where brewers licenced access of their beer brands exclusively to certain merchants in exchange for fees we would now call royalties. The concept migrated to the US with Coca Cola granting its first franchise in Georgia in 1901. Fast food followed with Kentucky Fried Chicken in 1930, Dairy Queen in 1940 and Dunkin Donuts in 1950, trailed closely by burger giants Carl’s Jnr, Burger King and McDonald’s all franchising by the mid-50s.

Today food is the largest single sector of the franchise industry globally. Entrepreneur magazine ranks franchises in the US annually based on factors such the size and growth rate of the system, financial strength and stability, start-up costs and the  number of years a company has been franchising. Every year fast food franchises including Subway, Pizza Hut, Denny’s and Dunkin Donuts are over 50 per cent of the top 10 and about a quarter of the top 500. Those figures are fairly consistent for  Australia where BRW’s 25 fastest growing franchises in 2013 had eight food businesses among them. Although perhaps it says something about our concerns for just what this is doing to our health and waistlines that we also had six healthrelated businesses on the list – four of which were gyms!

However food franchises constitute almost half of all the franchise offers on the market. Additionally around half of all food outlets in Australia are franchised and I’d challenge anyone to name a successful food brand with multiple units that ISN’T  franchised!

SO WHY FRANCHISE?

Businesses look to franchising as a growth strategy for two simple and compelling reasons:

Capital – The capital a franchisee invests in one or more outlets is derived interest free to the network and does not involve providing collateral, giving equity or in any reduction of control. The unencumbered access to capital through franchising  allows these networks to expand more quickly resulting in greater market share and brand penetration than corporate networks where organic growth is constrained by access to capital.

The Human Resource – Franchisees are owner operators whose motivation is driven by their personal investment. Dealing directly with their customers ensures not only better management of costs and employees, but higher sales and profit margins. Well recruited franchisees outperform company operated businesses on average by 15 per cent even after paying royalties.

SO WHAT IS THIS CURIOUS CHEMISTRY – FOOD AND FRANCHISING?

There are a number of reasons but key to it all is this simple maxim ‘Process is Profit’. A good product is not enough. What really determines success is the process of turning that product into profit!

Scalability

Successful franchises are big business and all big businesses must have scale to exploit the economic advantages of their buying power externally in terms of supply, advertising and marketing, leasing, legal and other professional services and recruitment. Internally scale also benefits administration, management, training and support and accounting and reporting systems and processes.

Franchising exploits the external benefits of scale as well as corporate networks. The real advantage of scalability in franchising however is internal because the franchisor’s administrative infrastructure is heavily reduced with much of the function and its cost pushed down the value chain to the franchisee. This is true of multipleunit franchisee networks where they too experience the economies of scale in consolidating their local area marketing, recruitment, administration, accounting, training and support.

And successful food franchises protect their investment through well integrated supply chain relationships which is fundamental to building a valuable, saleable business for the franchisee and long term enterprise value for the franchisor.

Maximising Revenue Streams

In food franchises this scalability is further enhanced by the franchisor’s potential to be both a providore and distributor of raw materials, fresh foods and dry goods, as well as the manufacturer and supplier of pre-prepared foods such as sauces, bakery goods, desserts, virtually the entire menu if required, from centralised commissaries and commercial kitchens. Not only does this ensure consistency in the quality and standard of the food, it reduces the need for franchisees and their employees to have high level food preparation expertise and training.

Franchisors may also supplement this with branded goods for re-sale such as gourmet condiments, confectionary, bottled sauces and marinades in both their restaurants and other retail food outlets such as delis and supermarkets. This builds substantial enterprise value as the revenue from the franchisees, such as royalties is augmented by multiple revenue streams from the supply side of the value chain. These products are in turn an effective marketing strategy building the value of the brand through increased visibility and brand authority.

Brand

Really successful food franchises understand better than their competitors the value of their brand which is consolidated and protected by the highly prescriptive nature of their well-developed systems and processes and a high degree of compliance  by their franchisees.

Franchisees are directly invested in the genuine transmission of the brand values and culture. On the customer end this translates to consistently superior service and a personalised experience which creates long term, even life-time brand loyalty.  Franchising allows these networks to build critical mass more quickly resulting in greater market share, more consistent brand penetration and building enterprise value much more quickly by removing the opportunity from their competitors.

Innovation

Innovation keeps the best franchises ahead of their competitors because know their imitators are always hot on their heels. Market leaders understand that differentiation is vital in every aspect of their business. Successful food franchisors actively  encourage and extract ideas from their franchisees and are more likely to utilise technology to drive infrastructure, cost efficiencies and scalability. The Fillet of Fish Burger, the McCafe and Ronald McDonald were all concepts from McDonald franchisees.

Ongoing innovation may be seen by customers and competitors in new products, services or advertising and design but it’s the invisible innovation that really broadens market share. This is often related to staff training, more cost effective systems  and direct customer communication via a range of on and off-line media that allow the franchisor to respond to changing markets, to anticipate customer trends and track performance.

Successful innovation comes from being flexible and adaptive, edging better franchisors even further ahead of competitors whilst continually re-engaging with customers who may otherwise waiver in their loyalty.

CHALLENGES FOR THE FRANCHISED FOOD SECTOR

Food Franchises and Labour

Australia’s challenges in the food sector are driven primarily by human resourcing issues. High labour costs with growing scrutiny and enforcement and increasingly complex workplace relations compliance are compounded by low retention rates for  food service personnel who find the long hours and late and weekend shifts undesirable. Couple this with the constant cost of training and often poor or inconsistent service levels because of high staff turnover and many independent food service  operations simply lose viability. This is as true of fast food operations as high end restaurants with celebrity chefs.

The advantage for food franchises is that franchisees typically spend seven years working in their businesses compared to less than two years for employees. As owner operators they work full time often taking the Sundays, public holidays and late shifts that carry high wage costs. Because their franchise is a proven business model that comes with documented financial, operational and administrative systems, training and support and in most cases a guaranteed supply of all the food products and other service requisites, franchisees can be highly profitable.

Market Factors

Because of the largely discretionary nature of the spend, the food service industry (franchised and independent) is highly subject to fluctuations in the economy and consumer confidence. Increased competition from foreign food service franchises is also driving changes in the market.

The choice of food franchises has dropped as a franchisee preference by 7 per cent in the last two years. However this is good for the industry as only the best devised and managed franchise systems will survive and flourish. Of about 1200 franchise systems in Australia, less than 200 have enterprise value of $10million and an exit of poor and unprofitable operators will ultimately deliver sound national growth.

There will most likely be an increase in merger and acquisition activity to consolidate product and service offerings and enhance well differentiated brands. This will drive international interest in great Australian brands such Boost and Pie Face who  have migrated across the globe, in Boost’s case to 18 countries. Ironically Jenny Craig is also a famous Australian export now headquartered in the US and franchising globally for 3 decades.

TRENDS IN FOOD FRANCHISING

Specialty Products

Specialty beverages such as the increasingly exotic coffee offerings and experiences and specialist teas and herbal blends will have a widening audience. Juices, smoothies, health and energy drinks and frozen yoghurt will retain market share although  there will be some consolidation in the number of froyo players. Wine, craft beers and water delivery franchises will also prosper. Upmarket burgers such as Grill’d will build market share although again, there may be consolidation among some of the less differentiated small brands.

Healthy Fast Food (an oxymoron ??)

Greater consumer awareness about the nutritional content of fast and other convenience foods and a need to eat a balanced diet has led a shift towards healthier options within the industry over the past decade. An added feature has been a growing  number of people with specific dietary requirements. Gluten, dairy, nut, food colouring, preservatives and crustacean intolerances coupled with dietary preferences such as vegan, vegetarian, low carbohydrate and low GI diets now constitute an increasing section of the market.

Traditionally, the QSR sector has not made any concessions to these requirements and although there is some movement in meeting the demand, it has been more of a gesture than a genuine shift. An opening for healthy convenience food options has emerged in the last 10 years and been consolidated by a small but growing number of operators in the last five years. Additionally this growing constituency seeking an authentic food offering has a range of other concerns such as nutritional value, environmental sustainability, quality, provenance and ethical trade practices.

Conclusion

These trends in the QSR sector have been shored up by consistent revenue growth of 2.1 per cent from 2008-2013, even during the global economic downturn. Industry revenue posted an increase of 2.8 per cent in 2012-13, to reach $12.6 billion.*

Consumer demand for value, convenience and nutritious food coupled with increases in real household disposable income and changes in the age distribution of the population are also expected to drive industry performance over the next five years  with revenue expected to post annualised growth of 2.5 per cent to reach $14.2 billion in 2017-18.*

Additionally the rise in disposable income will increase purchases of more expensive, specialist products such as organic, artisan and fair trade produce as well as demand away from home such as in restaurants, fast food outlets and convenience stores.
*Ibis World 2013

Suzanne Jarzabkowska, CEO of DC Strategy is a dedicated foodie who specialises in organisational behaviour, change management and business growth and transformation in the franchise sector. A dynamic speaker who presents widely in the media,  commercial and educational communities she writes extensively about franchising in regular columns and specialist opinions in print and online business publications.

For 30 years DC Strategy has been the region’s leading end-to-end franchise consulting, legal, recruitment and branding firm. Franchise programs developed by their highly experienced specialist teams have built over $1 billion in enterprise value for their clients in the last decade alone growing the networks and brands of the many of the most successful national franchises, many of which they’ve taken to the world.

For more information contact:

Phone: 02 8220 8700
Email growth@dcstrategy.com
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