Surviving The Recession
This article appeared in Issue 3#4 (May/June 2009) of Business Franchise Australia & New Zealand
Australian grown franchises Donut King, Forty Winks and Quest Serviced Apartments share their business experiences surrounding the recession of the 1990s.
The widely recognised definition of a ‘recession’ is a period of negative growth over two or more successive quarters in an economy. A recession is usually linked with gross domestic product, a depreciating stock market, low employment and business activity.
The Global Financial Crisis has had many people speculating on their working prospects and results from the May 2009 quarter could reveal Australia is indeed in a recession. Given the past is often a great teacher of the future, three franchisors contemplate history.
Doug McNamara is Chairman of the bedding franchise Forty Winks. With a background in retail since 1950, he has owned and managed various bedding and furniture stores.
Established in 1984, Forty Winks was started by a handful of store owners that broke away from Captain Snooze. Shortly afterwards, Guests Furniture opened a few outlets within their own stores, as part of the group. In those days, Forty Winks was a co-operative, whereas now all 90 store owners are franchisees.
McNamara explains, “I joined in January of 1985 when I became a store operator. They were taking on a number of new people because they were seeking to expand. At that stage we were a co-operative. We drew upon experienced people within the industry who would generally manage the stores.”
He agrees that franchises have many similarities with co-operatives: “The difference mainly is we didn’t have a shareholding in the company. Later, in 1993, when we decided to expand the company and move to other States, we decided we should also franchise the company.
“During the 1990 recession, we decided to become more aggressive, rather than pulling back and saving some dollars. We increased our advertising with the intent of picking up a bigger share of the market.”
In 1990, McNamara says Forty Winks was still only six years old: “There were a lot of young and enthusiastic people who were very keen to make sure that the group not only survived, but that it flourished. In order to do that, it was decided by the group that we would spend more of our dollars on advertising and promotions.
“We were around 30-odd strong, so we’d grown fairly rapidly and there was a feeling from within the group of success and great confidence that we would continue on. Everyone really jumped on board and supported the decisions that were made.
“At that particular stage in 1990, Captain Snooze had considerably more stores and a much larger share of the marketplace. We saw the biggest opportunity for us at that time was to grab more of their market share - and that’s what we did!
“We grew very quickly, so without that type of promotion and activity, and raising the dollars by being so aggressive, we simply wouldn’t have been able to do it.”
McNamara believes being part of a network greatly assisted their success, “And we were dominated by people who were out of the retail industry, particularly in the furniture and bedding side of it. We had very experienced, knowledgeable people and they all embraced the idea of expanding and supporting each other in those early stages.”
In 1992, after achieving their market share goal, Forty Winks decided they had reached saturation in relation to store numbers. McNamara says they decided to grow by branching out to other States: “Being virtually only stationed in Victoria, we decided to expand by going interstate and that’s when franchising came up.”
McNamara says having young, eager people in the group helped to expand in the ‘90s: “Nothing beats youth as far as having the greater energy and also greater stamina – so a younger person doesn’t have as much fear or reservations as older people do.
“Of course one difference today in business is that you need a lot more finance than you did back in the early days. I can recall one store opened on about $50,000 capital – today most of our stores would be $600,000-800,000; so you need an awful lot more capital today than you did previously.
“Things were very tight back in the 1990s. You had to be very careful in controlling the costs of your business and that’s the same as today. The last thing you want to do is stop the flow of the clients in the shop, so you’ve got to try and look after the costs of running the business, but at the same time do your very best to make sure you don’t pull back on promoting. Because if you stop promoting, then you stop your lifeblood, which are the customers coming through the door.
“We’re doing much the same thing now. We’re not decreasing our advertising at all; we’re not decreasing our promotions; but we’re finding ways of reducing our overheads. That’s exactly what we did back in the 1990s.”
Gavin Nixon was an area master franchisee with Donut King in the 1990s. Although he has since sold those rights, he is currently Head of Emerging Markets at Retail Food Group Limited. RFG currently manages and owns Donut King’s intellectual property.
Donut King was founded in 1981 by the Papoulious family, opening their first store in Sydney. Two years later, the concept of franchising was introduced by their new partner, Murray d’Almeida, who later bought out the family. Then, d’Almeida and two partners created RFG to manage and develop Donut King, along with other prominent food franchises.
Discussing his entry into the system, Nixon says: “In 1995 I bought the Donut King master rights for Queensland and Northern New South Wales. When I first started, I had 13 outlets and then when I amalgamated with RFG in 2002, I had 52.” Today Donut King has over 300 outlets.
Nixon points out that when he entered the Donut King system, franchising in general was a major challenge: “Franchising wasn’t as well known as it is today. In the ‘90s when companies such as RFG started to franchise, you were still at that stage of promoting franchising as an enterprise.
“There was a lot more education required about franchising in particular, through levels of government getting behind it and also the Franchise Council of Australia, to gain the momentum.”
He continues, “Because they were tough times, we had a lot of people that were being retrenched – exactly what you’re seeing at the moment. In the mid-90s you got a lot of people coming out of the workforce that had been retrenched and they typically wanted to get into business; and franchising was an option.”
Nixon says he is often asked if the current economic slowdown compares with his experiences in the mid-90s: “It wasn’t easy to get the franchise enquiries, to convert people interested in buying businesses, over the line. There were still a lot of hurdles there.
“When your brand’s very juvenile and you haven’t got a lot of store numbers, you really have to convince people that yours is the brand to be in. It was quite the ‘underdog mentality’ back when I started – and it was just proving to people that your franchise system worked and had legs, which it did.”
One thing that hasn’t changed admits Nixon, is the challenge of finding the right franchisees: “We’re only as good as the people looking to buy businesses and be involved in franchising. Otherwise your systems don’t grow and they become stagnate.
“We’re seeing a lot more people now that are well read and rehearsed; they’ve done more research. The materials are out there now, so it’s easy for people to get the knowledge of what franchising is about.”
Nixon says high interest rates were another challenge of the 1990s: “Banks were really looking at a fair bit of equity - franchisees had to have 30 or 40% in cash! Not a lot of people had that type of money sitting in their bank account. Now, we’re getting a lot of people that can buy because the interest rates are down and they can get into business with a full borrow."
However, says Nixon, Donut King didn’t witness big growth until the mid-90s, when RFG introduced master franchising: “That’s when a lot of growth happened in franchising because they granted area territory rights and called them ‘master franchisees’, which is what I was.
“Donut King in those days was really about the growth factor; they were investing a lot of money back into initiatives to grow the business. And part of those initiatives was to put master franchisees in place and work with them to grow the business in their territories.
“It was very popular because it negated risk to the franchisor; they had these other people that virtually grew the territories on behalf of them. And the basis of income was a divisional split: a proportion came back to the franchisor and a proportion stayed with the territory/state master.”
Nixon believes the current financial crisis is completely different to the 1990s: “We’re a much bigger business. RFG has 1,000 shops now and we’ve got the credibility. Donut King’s a great brand, but it was tough back then - I remember it vividly.”
Paul Constantinou is Chairman and founder of Quest Serviced Apartments, with around 130 franchises across Australia and New Zealand.
Established in 1988, Quest presented an alternative product for business people whose requirements demanded more space than a basic hotel room.
“My background has been in catering and hotel management”, explains Constantinou. “I always had a fascination towards the accommodation part of the business, as opposed to the food and beverage. I decided to look at starting up a new type of accommodation for the ‘extended stay corporates’ that travelled longer than the typical one or two days.”
Rather than employing managers, Constantinou decided franchising would enable Quest to properly deliver that experience: “What I wanted to develop was more of a business format franchise - so a true franchise. We could take people who had always wanted to get into the industry but didn’t necessarily have the skills set or qualifications.”
By eliminating the food and beverage component, ideal franchisees were not necessarily those with previous experience in running restaurants or bars. Constantinou says potential Quest franchisees had to be able to connect well with people: “We looked at individuals who had some type of business understanding, a good character and relationship-building skills; and a desire to go and build some wealth for themselves.”
Constantinou recalls the effects of the 1987 stock market crash: “There was a lot of worried people because many had used personal wealth to get in the market. It was probably a big hit in those days in the sense that people took a big hit at the beginning; there wasn’t as much marginal lending as what we’ve seen this time where people tried to delay the impact but eventually got hit with it.
“But then we saw this massive influx of money into the market; property started booming and interest rates were going through the roof. We had to refinance in about 1989 in a business sense, and we were paying 22.5% on leasing and normal property rates. If you were a qualified customer buying property in those times, you were paying about 17% interest.
“Throughout the 1990s, we had very high interest components to our business and the property market went completely upside down due to the fact that there were so many vacant buildings. What they did in the ‘90s or post-crash was they just kept on building; there were offices with no tenants and hotels in areas that had no real need for a hotel. We went through an oversupply of everything; the expense of interest was growing and there was very high unemployment.”
He believes today’s economic climate is completely different to the 1990s: “There’s a lot of talk about recession and slowdown, and there should be, especially after the last three or four years that we’ve had - eventually things do slow down. Retail for example will slow down any time, but it’ll pick up – it always has.
“This is a slowdown in a climate where there are people who have more discretionary income to spend, but they just don’t want to spend it. You’ve got interest rates that are extremely low, in fact I’ve never seen them this low and I’m 54 years old!
“A lot of people really haven’t seen a tough time – especially the new people in business. This is a challenging time for them and if they’re not part of a strong franchisor or a good network of businesses, standing there trying to sail the boat by yourself, not knowing who to talk to – that becomes more stressful than the actual storm itself.”
Constantinou says the very nature of business means owners must always prepare for a slowdown. Apart from the 1990 recession, he cites other challenges in Quest’s history, such as the Victorian pilots’ strike, the SARS outbreak, the Asian monetary crises, 9-11 and even the IT boom.
“We picked up some very good franchisees around 2000 when anything that smelt like a ‘dot com’ made a fortune. Within a year IT came tumbling down and a lot of people lost their jobs. We picked up some very good franchisees from IT that had a bit of money put aside; very smart individuals who had a good persona with people - now they are our top franchisees.
“What we’ve found through all of these cycles is it’s not so much surviving a recession; it’s trying to survive the boom. We become very complacent through a boom because you can’t put a foot wrong. Everything’s going well and what we do is we overspend. People say ‘we have to look after our expenses’ – well it’s hard when you haven’t got too much income! The time to look after your expenses is during the boom, to protect yourself.”
Constantinou shares his wisdom, from 20 years in business: “The best opportunity to grow is through a recession; and the best opportunity to develop some wealth is through a boom. It’s how you maintain that wealth and not squander it that will get you ready for the next recession.
“Even from a personal perspective, as people we have a good day and we have a bad day. It doesn’t mean we’re going to die - it’s just that we’re having a bad day. You’ll still have a good day tomorrow – and business is like that. Invest in your people – invest in your brand – and keep riding it through.”