Many Australian retailers are feeling the pinch but those in the franchise sector have additional pressures.
“Issues within the franchise sector are systemic,” says Jirsch Sutherland Partner Amanda Young. “Franchisees face the same issues as other retailers – rising rents and staff costs – but there’s the added layer of franchise fees, which are often based on sales rather than profits and this really chews into their margins. The crackdown on ensuring the correct payment of wages by Fair Work Australia has also highlighted the struggles franchisees face when trying to turn a profit.”
Lack of support from the franchisor is another major issue. “We have been involved with a number of franchisees and this is a common complaint,” Amanda says. “The level of support doesn’t match expectations.”
One franchisee Jirsch Sutherland worked with owned a café that was part of a popular chain of franchised stores. Jirsch Sutherland Partner Andrew Spring says the owner was caught up in the recent underpayment of wages situation and also experienced steep rent increases.
“The franchisee went into liquidation after having to purchase much of its product from the franchisor,” Andrew says. “There was no flexibility around the cost of acquiring the consumables and this fed into the issue.”
Marketing support vital
Another Jirsch Sutherland client, who owned a fast-food franchise, found marketing support from its franchisor was almost non-existent. “The franchisor had promised radio, TV, and print marketing but this didn’t eventuate despite the franchisee flagging it as an undelivered promise,” Andrew says. “The high cost of acquiring the product from the franchisor was the straw that broke the camel’s back and this franchisee also entered into liquidation.”
Not all franchisees lack support from their franchisors, however. Swimart, one of Australia’s largest pool and spa specialists, for example, provides the assistance its franchisee network needs to be successful.
Brandon Hill owns the Swimart store at Sydney’s Frenchs Forest. He says having the level of support and backing of Swimart’s massive network provides peace of mind. “We found the Swimart franchise model to be very fair for franchisees, with no heavy burden around upfront costs,” he says. “It also has a supply base that is second to none, fantastic training, and experts that have proven invaluable as we’ve learnt the business.”
Greater pain awaits franchisees unless they evolve
However, like the rest of the retail industry, the franchise sector needs to evolve. This includes ensuring an e-commerce strategy is adopted in order to keep pace with competitors.
Amanda says the recent Franchise Accountants Conference highlighted five areas the franchising industry needs to address in order to evolve in 2018:
- Greater accounting support: Turning to an accountant for support can help free up both time and money that can be reinvested back into growing the business – whether it’s seeking help to reduce the burden of compliance, using technology to improve cash flow or getting things ready for Single Touch Payroll.
- Reviewing the franchise financial model: Franchisees are facing cost pressures from power bills, rent and wages – and this flags the need for careful modelling of financial profiles. “This is currently the responsibility of the franchisee, but if they don’t have accounting or business experience, they should engage bookkeepers and/or reliable accountants,” says Amanda.
- Staying across the numbers: Staying on top of their numbers, including profit and loss and cash flow, can be a weak spot in franchises. Franchisees need to establish relationships that foster the sharing of data in order to evolve and grow.
- Franchisors need to engage with payroll issues: Wages compliance programs should be part of a franchise system. Even one complaint by an underpaid worker can result in an expensive legal case. And a mistake with classifications doesn’t just affect wages, it also flows on to tax, super and leave payments.
- Asking for help: “Accepting you can’t run a store alone and calling on help is not a sign of weakness,” Amanda says. “Help might mean hiring good people to manage the necessary operations of your store, or investing in outside consultants, service providers or companies that can also assist in areas in which you’re having concerns.”