Specialists tell the upside of being down under
Australia has both modern cities and room for kangaroos to roam. It’s an egalitarian society, where workplaces are friendly and there’s little class distinctions. The majority live in cities and along the coasts.
Q: How would you characterize the franchising sector in Australia? What is its composition in terms of business sectors?
Kanawati: It is very mature. Australia has nearly 3x more franchise outlets per capita than the U.S. There are close to 900 brands here versus 3,000 in the U.S., but Australia’s population only slightly exceeds that of New York or the greater Los Angeles area. To put this comparison in further perspective, Australia has about one-third the franchise concepts as the United States, but its population comprises only about 7 percent of the total U.S. population.
Significantly, nearly 92 percent of all franchise systems in Australia are Australian developed.
In Australia 80 percent of the population lives on a narrow band along the east coast, and franchisors take advantage of this densely populated area by often establishing franchises in major cities like Sydney, Melbourne and Brisbane.
Q: What is the outlook for the sector?
Kanawati: The outlook for franchising in Australia is relatively good. In a new report released on May 24th, the International Trade Administration projected Australia to be the second best top market for franchising. Australia’s franchise sector may be well-developed, but trends continue to forecast growth and opportunity. There has been consolidation among franchise brands, thus the number of concepts has declined over the past few years, but in contrast the number of units has increased. This year the number of units is estimated to grow at about 2 percent.
Q: Is the market receptive to U.S. franchising concepts? What sectors are the most promising?
Kanawati: The Australian market is receptive to new concepts that speak to current and emerging trends. For example, Australia has an aging population, and in 2020, the median age will increase to 38.2 as opposed to 35.4 in 2000.
In 2020 there will be more 65-year-olds than 1-year-olds. Demand for senior-care services will continue to increase.
Additionally, Australians eat 3 times more junk food than the recommended intake. Two out of 3 adults, and 1 in 4 children, are overweight. This points to a rise in participation rates in non-competitive activities. With fewer organized sports and less time for leisure activities, the 24-hour gym concept and personal trainers are increasingly popular. Anytime Fitness and Snap Fitness successfully entered the market in recent years. Contours Gym and Gold’s Gym are also doing well in this market.
According to some commentators, the fast-casual restaurant sector is over-catered, especially given the size of the market in proportion to services offered. It has been difficult for a number of overseas fast-casual brands to break into this sector.
Q: What traits do successful foreign concepts have in Australia? Are some market entry models better than others for franchise concepts?
Kanawati: Australian partners are looking for scalable franchise concepts that do not require a huge footprint. A small number of U.S. franchises, such as Ben and Jerry’s and Carl’s Jr., are setting up flagship outlets to establish proof of concept. The restaurant space is very competitive so this is a critical strategy. Even though a brand might be internationally recognized, it may not get traction in Australia.
Both U.S. and Australian franchisors prefer the same market-entry model—finding an area developer or master franchisee.
Q: What issues do franchisors, especially foreign franchisors, face in your market?
Kanawati: The biggest challenge is finding a master franchisee. This stems from the relatively small population base, and there is also difficulty in finding financing. The four commonly used banks all have a small touch on the franchise sector. The main issue is their ability to assess franchise risk. Private equity investors have shown interest in successful franchises, but have not been suitable partners for concepts looking for master franchisees.
There are also significant challenges regarding a lack of suitable sites and the affordability of sites, especially retail sites. Australia’s retail costs are higher than in the U.S. and our labor rates are almost double. The national minimum wage in Australia is currently AU$17.29c per hour (US$12.95), and casual employees covered by the national minimum wage also get an additional 25 percent on the hourly rate. Collectively these factors can limit U.S. franchise systems’ translation in Australia.
Q: What do U.S. franchisors need to know about doing business in your country? Are there special regulations or costs?
Kanawati: There is a Franchise Code of Conduct that regulates the sector. It governs how franchisors and franchisees deal with each other. Franchisors are expected to follow the code, and U.S. companies need to engage consultants or franchise lawyers with experience with the franchise code to ensure they are compliant.
Q: What is the best way for U.S. companies to identify and pursue business leads?
Kanawati: Roughly 20 years ago it was a relatively straightforward process to generate leads. For example, a U.S. company could place an ad in the Tuesday edition of the Enterprise Section of the Australian Financial Review, a major newspaper, as a means of making important business connections. Today, a U.S. firm must adopt a more complex strategy. It could involve one or both of the top lead generation online platforms – Seek Commercial and Cirrus Media.
These platforms are used extensively by local franchisors to find franchisees.
In terms of finding master franchisees, one option for U.S. franchisors is to approach existing large Australian franchisors that may have maxed out their own brands in the market.
Typically, these Australian franchisors would then look to expand internationally (about 30 percent of these franchises do), but some are open to taking on a U.S. franchise. There is a national franchise convention organized by the FCA, usually held in October each year, that provides a potential forum for U.S. franchises to meet prospective Australian partners.
Q: Are there any recent success stories of American companies in the sector?
Kanawati: In the last few years, Anytime Fitness and Snap Fitness have been successful. In the aged-care franchise sector, Right at Home, Home Care Assistance, Comfort Keepers and Home Instead have successfully entered the market to provide in-home care. Carl’s Jr and Ben and Jerry’s have also entered the market successfully in the food industry.