Australia’s transparent financial system and ease of doing business make it one of the best and most profitable markets in the world. “Australia’s franchise sector has over 1,200 brands and is worth $154 billion” (statistics provided by Minister for Employment, Workforce, Skills, Small and Family Business, The Hon. Stuart Roberts MP, 01/06/2021. There is no doubt that the Covid-19 pandemic had a big impact on the franchise sector, not just in Australia but globally; however, as the Australian economy slowly returns to normality, there are many opportunities for those wanting to enter the Australian franchise sector; following the recent IMF upgrade of Australia’s economic growth outlook for 2022 (https://www.imf.org/en/Countries/AUS).
A new entrant to the Australian market should undertake a market entry analysis to avoid the regulation traps unique to Australia. The most successful franchise brands are prepared to invest in initial market research and personnel to support their master franchisees in getting their first store open. By overseeing the on-boarding processes, such as identification of locations, logistics, and all the operational, training and supply chain issues that are critical to success, the best outcomes are achieved by the committed franchisors.
The Franchising Code of Conduct (Code) is the mandatory code that regulates franchising in Australia. This Code was substantially amended from 1 July 2021 following the Australian Government’s commitment to the increased protection of franchisees. As part of the reforms a Franchise Disclosure Registry will be set up and administered by the Secretary of the Treasury, which will assist prospective franchisees to make an informed decision before entering a franchise agreement.
It is important for both franchisors and franchisees to understand that significant changes to the Code are now in force and many of which involve imposing very high civil penalties for breach. Franchisors should get the legal and financial advice on the nuances of the Australian regulatory market as part of their market evaluation.
Set out below are some practical considerations for franchisors:
1. Register your trade mark - Ensure your trade mark is registered in Australia before you start to talk to prospective franchisees, master franchisees or partners. Your trade mark is your identity. There are many stories globally of people who have gone into a market, discussed their brand and intention to enter the market, and then found out later that their trademark has been surreptitiously registered under another owner. This in turn results in additional expenses to buy back your own brand from these opportunistic registrants. Similarly, you should consider putting in place non-disclosure agreement/confidentiality agreement prior to entering into those discussions with potential partners.
2. Understand Australian franchising law – A franchise agreement is a legal contract that both the franchisor and franchisee must abide by. Franchisors must not give franchisees information that is misleading or deceptive and must follow then Code. The rights and obligations of the parties to a franchise agreement are governed by the Code. The Code applies to every franchise carried on in Australia regardless of where the parties are from. The Code is administered by the Australian Competition and Consumer Commission (ACCC).The ACCC is Australia's competition regulator and national consumer law regulator. The Code dictates what is considered to qualify as a franchise relationship. The Code is intended (following the recent regulatory changes) to instil fairness in the franchising process and ensure that franchisees are protected.
3. Understand your competitive differentiation - Do a competitive analysis to understand your competitors. There are many failed international franchise operations who underestimated the degree of competition and the degree of sophistication in the Australian market, especially in the foodservice business. It is imperative to understand your core customer profile – age, income, sex, family structure etc. We suggest you go a step further and consider the customer life stage or life events that are associated with their purchase decision. Many business sectors in Australia are very sophisticated, so you need to understand how your brand or business model will differentiate itself in the marketplace and compete with incumbents. Businesses that cannot differentiate their model have little chance of success. Covid-19 has certainly changed consumer decision making and how consumers buy and interact with business/s; it is essential that you understand and are aware of this change to adapt and to differentiate your business.
4. Understand labour costs - Determine how labour costs are going to impact your operation. Australia has a high cost of labour, with additional “hidden” costs such as payroll tax, superannuation and rates of pay. For instance not knowing when a penalty rate applies can have a major impact on operating expenses in comparison to many other countries. Operationally, if you are coming from a market with relatively modest labour costs, you might find that your business won’t be as efficient in Australia. Alternatively, it will be much more expensive to have the same labour hours as you might have on a roster that you operate with in your home country.
5. Understand occupancy costs and conditions - Australia has very high occupancy costs. A considerable amount of retail and foodservice revenue is generated through shopping malls which offer retail, foodservice, and entertainment precincts anchored by major supermarkets and/or department stores. High traffic street-side strip precincts often associated with tourism and entertainment are in high demand in many cities. Good retail and foodservice locations in these higher-traffic destination precincts and shopping malls are expensive and will impact on your total operations. It is important that you understand the customer demographic needed to fit/adapt your business model, to ensure your location targets the right consumers and occupancy arrangements. This in turn will assist you to meet your requirements of fit-out costs, revenue and annual occupancy costs. You may need to consider the footprint of your retail space, as occupancy costs are higher in Australia, this may change the concept and design of the retail space of the premises.
6. Determine your market entry strategy - Determining your market entry strategy is going to be critical to your success. Consider the following factors applicable to your circumstances:
Granting a master franchise; this will allow sub-franchising.
Grant an area development agreement/arrangement; requiring multiple locations to be opened by the one organization.
Grant a single unit franchise; this will allow for you to prove your concept in the locality.
Direct entry by establishing a business in Australia to provide proof of concept.
Buy your way into the market. That is, by buying a currently operating similar competitor in the market with a view to converting the business to your brand either as a full acquisition or partnering with the current owner.
With good due diligence, this alternative provides a fast start and low risk option and access to local knowledge.
7. Determine your city of entry - Australia has only 5 large capital cities and each of our capital cities are quite different. Each one differs geographically, economically, climate wise and in terms of taste, sophistication and lifestyle and consumer sentiment and expectations. If you are coming to Australia you need to consider in which city to establish your brand, and how to establish a proof of concept and critical mass in one of those cities as quickly as possible. There are no economies of scale between capital cities, and as a result don’t try to open in multiple markets or cities; think about creating and developing the brand in one market and invest in achieving that goal.
8. Be prepared to invest - Be prepared to invest time and capital to establish a footprint in Australia. Building the brand and network in this market, even by granting a master franchise, is not easy, you will need to invest most of any upfront fees you might receive and more back into the market to support your local master franchisee or joint-venture to get your business model established and ready to scale. If you are under-capitalised and you are looking to sell a master franchise as a simple way of getting into Australia, you will quickly come to the realisation that this simplified approach of leaving it all to the master franchisee are often not successful. In the long run it will damage the perception of the brand.
9. Engage from the outset with legal advisors and franchise consultants - It is important to invest in legal and consulting expertise. Hire a franchise lawyer and a good franchise consultant. This might sound self-serving but it’s going to be cheaper in the long run, and you will get direct in-market expertise. The reality is you will need to hire the best advisors you can in the marketplace to take you through the complexities of how to establish yourself and build a substantial brand in Australia. Manookian Solicitors has the expertise to assist with your market entry plans and provide guidance and assistance to ensure that all your legal compliance requirements are satisfied to achieve success in Australia. Contact Rostom Manookian, 0416 716 960, or email: rostom@manookiansolicitors.com.