While rising unemployment will create a deeper pool of potential franchisees, the experts agree it is a short term strategy that will only prolong the agony for the struggling business.
“Franchisors who go out and sell more franchises as a response to a slowdown in sales may as well hand their administration papers in now,” DC Strategy’s McFedries warns.
“It has a devastating effect when a franchisor fails,” says Zumbo. From his study of the past collapses of Barbara’s House and Garden, Cut Price Deli, Traveland and Kleins, he has observed that once the franchisor fails there is a strong likelihood that the franchisee will lose everything.
He says that while some will pick up and continue operating as an independent business, or band together with other franchisees to keep trading, most will fail. Typically, franchisors in retail chains hold the head lease and an administrator will terminate this as one of their first actions. This means the franchisee loses their site unless they can come to terms with the landlord independently.
Zumbo says the 15 Kleenmaid franchisees running retail stores now have virtually no stock, the brand is next to worthless, and he says they can’t provide warranty back up. Most will lose their stores because the administrator has stopped paying rent. Many are also creditors of Kleenmaid and will get no return.
Customers caught up in a franchise collapse may lose out as well, as they have in the Kleenmaid disaster where $27 million in customer deposits are gone and up to 6000 customers, some of whom have paid as much as $40,000 on kitchen appliance orders, are unable to get a refund.
But Steve Wright, executive director of the Franchising Council of Australia, who believes it would be “over-optimistic” to think there were not a possibility of more failures this year, says franchise failure is not always the end of the line for franchisees or for a franchise chain.
He points out that EzyDVD, which went into receivership in December 2008 with $18 million in debts, was sold to entertainment chain Franchise Entertainment Group (which operates the Blockbuster chain in Australia) in January and its 25 franchisees are now part of a more robust chain.
On the upside, in a recession some of the problems of the boom for franchise chains are problems no longer. More franchise recruits are emerging – for chains that can afford to expand – and good sites for retail operations are becoming available again.
McFedries identifies another new market for franchisors – baby boomers who can no longer afford to retire. The big falls on the sharemarket have eroded retirement savings and mean a totally passive retirement is no longer an option. McFedries is expecting many of those in the 40 to 55 age bracket with accessible capital to move into franchising over the next 18 months.
Dirk Spence, co-founder and managing director of the 63-store strong retail chain Howards Storage World, says he has seen a “glimmer” of increased interest in the chain from middle-management types.
But like many franchisors, Spence won’t need as many recruits this year because the downturn has hit his franchisee sales and his expansion plans. “Instead of reaching 75 to 80 stores, we’ll be happy with 70 stores in 2009-10,” he says. Turnover in 2008-09 will be $105 million, slightly up on $102 million in 2007-08.
In 2009-10 he will be happy to avoid going backwards. “It would be silly to be over-optimistic for the coming year, but we’d like to grow slightly from where we are.”
Spence says it is certainly possible for franchised chains under pressure to maintain profitability – he says his chain will, despite softening franchisee sales. He hasn’t laid off staff, but says he hasn’t hired the new staff he would have needed had growth continued at the same pace.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
