The state’s franchising sector is finding new areas of growth, but it is subject to the same labour market pressures as other industries in WA.
“Why would you want to put your neck on the line when you’ve got a surefire $120,000 on a mine site?”
It’s a question many franchisors around Western Australia must be asking themselves, faced with an ever-dwindling pool of potential franchisees as the state’s mining boom-generated skills shortage continues to affect the rest of the economy.
The issue has prompted a number of WA franchisors to take a hands-on approach, and venture out to the source of their labour crisis in a bid to promote the positive side of being a franchisee to regional residents.
A self-funded group of franchises – comprising Quick Colourprint.com.au, PoolWerx, Oven Clean, Jim’s Pool Care and Cash Loans – is taking a mini-expo to Kalgoorlie and Karratha in the next few months to try and win back potential franchisees from the mining industry.
Quick Colourprint.com.au WA franchisor Richard Huggins said he hoped to sell the benefits of franchising to fly-in fly-out workers.
“What they miss out on, which is lifestyle, franchising can give them,” he said.
The perceived loss of potential franchisees to the mining industry is quantifiable, according to Australian Franchising Systems director Alan Franks, who is aware of at least five occasions where mining employees were offered a salary increase when they expressed interest in purchasing a franchise.
“Whereas before they might have bought a franchise in Perth, right now they’re attracted by better money up there,” Mr Franks said.
Franchising is worth $128 billion to the Australian economy, contributing more than both the mining and farming sectors.
But growth within the industry in WA is being constrained by a shortage of available talent.
For Mike Stringer, franchisor of cleaning business Housework Heroes, a lack of franchisees is a major limitation on the company’s growth.
“We’re probably turning 20 jobs a week away and I know our competitors are doing the same,” he said.
The business has 30 franchises within WA and an additional 30 contractors, with a total of 70 franchises nationally.
“We could add 100 to each of those franchises across the country and probably, within three months, we’d be full again – it’s that busy,” he said.
However, not all businesses are affected equally in the current labour market.
Howard’s Storage World franchisor Rune Johannesson said inquiries had been strong since he bought the business in February 2006.
“The WA market is just such a hot market at the moment,” he said. “There is definitely a lot of money out there. Anyone I’m talking to in retail is doing fantastically.”
The former IKEA WA general manager has grown the business from two to six stores during the past year, and plans to have eight franchises in operation by about July.
He estimates it takes between 30 and 50 phone calls to find one franchise owner, with seven franchisees coming on board since July last year.
Although franchisee interest remains high for other franchises, finding a quality applicant is often proving more difficult.
Brumby’s WA master franchisee, David Bothworth, said while there had been no change in the number of inquiries he received each week, the quality of applicants had declined recently.
“It’s changing slightly – we’re still getting the inquiries, but we’re needing to vet carefully, in terms of finance levels,” he said.
The other major challenge for franchises in WA is rent.
Party Plus franchisor Andrew Foote said while landlords previously maintained annual rent increases at the consumer price index, rents were now increasing by up to 20 per cent, particularly when a stores were due for a five-year rent review.
“It’s also increasingly popular for landlords to charge bonds of roughly six months’ rent,” he said.
One way to overcome the limitations of labour and occupancy costs is to expand, either interstate or internationally.
Franchise Alliance owner John Brown said research from Griffith University suggested that about one quarter of all Australian franchises exported their business models internationally.
“Is that out of WA? Not in large numbers, because we have a small base to work from, but it’s a significant list,” he said.
The Merchant Tea and Coffee Company, which has four franchises in WA, recently confirmed it will establish three outlets in the UK, outside London.
According to marketing manager Sarah Thomson, the business is expanding despite remaining growth opportunities within Australia.
“Our main reason for wanting to go international is the opportunity places like the UK offer in terms of footfall,” Ms Thomson said.
Worldwide Online Printing chief executive Mark Manderson, whose printing franchise turned over $53.9 million last financial year, said while there were many opportunities for Australian franchises overseas, timing was important.
“Looking at the overseas market, the opportunities are always there,” he said.
“You’ve got to assess what your capabilities are and whether you have the management time to enter a new marketplace.”
While many franchises are creating economies of scale by expanding, consolidation within the sector is becoming more common.
Fast food chain Jesters Jaffle Pies is a local example, having merged with Sydney-based company Shakespeares Pies in 2004 and now trading under the name Jesters Pies.
The business has also expanded into the UK and New Zealand markets.
WA-based franchise JAG Poolcare is another example, having been acquired by national pool cleaning giant PoolWerx in September 2003.
The Queensland-based franchise has bought a number of its smaller competitors in WA, including Mandurah-based Pool and Spa Mart and Bluewater Pool Cleaning, and is set to acquire Wizard Pool Cleaning.
Meanwhile, established bakery chain Brumby’s, last month recommended a $28.5 million bid by its management team to the company’s shareholders, following an initial offer by fast food giant Retail Food Group, which owns Donut King in Australia.
Consolidation at the big end of franchising is being accompanied by growing interest from private equity in the sector, with WA fast food chain Red Rooster leading the way.
The $180 million buy-out of Australian Fast Foods Pty Ltd major shareholder Nick Tana earlier this month, by managing director Frank Romano and Sydney fund Quadrant Private Equity, may be the beginning of what some in the industry believe will be further consolidation in the sector.
WA-based fast food company Bucking Beef managing director, Stuart Beechen, said further merger and acquisition activity within the franchising sector could be expected over the next five years, with private equity likely to play a major role, due to the sheer volume of funds available.
“The relatively lower risk profile of a franchised business, which has a number of independent operators over a number of sites, means that the risk profile of the industry is very good, from an investment point of view,” he said.
Mr Beechen said there would be a trend towards more diversified groups with a focus on particular markets, such as the food or service industries.
