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Wednesday 10th August, 2022

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3 keys to successful Kiwi franchising

Insight

3 keys to successful Kiwi franchising

How do franchise brands achieve profit and growth in New Zealand? By developing rocksolid systems and respecting its unique market, says Nathan Bonney

Success is subjective. My view has been molded by two decades within the New Zealand franchise sector, working across both domestic and imported brands and covering a variety of categories, from food and beverage to construction.

These franchises – along with other success stories – have three universal characteristics. They’re able to maintain demand for the brand and have good single unit and system economics. And the glue that keeps it all together – well-developed and evolving franchise systems.

From observation, the success or failure of imported franchise brands in New Zealand lies in their ability to balance the following three fundamentals, and to really appreciate the size and dynamics of the market.

1) Create a need for lasting demand

There needs to be a market demand for a product, service, or offering which is enduring. That’s to say the consumer demand, or business requirement (for a business-to-business franchise product), remains persistent over time and isn’t a trend that waxes and wanes.

In New Zealand, locally-grown brands account for 71 per cent of the 590 franchise brands reported in the Franchising New Zealand 2021 survey. Many of these brands grew through the success of an existing business, and therefore an established consumer demand, or love, for their product or service.

Kiwis love new ideas and products, but not all imported systems prosper. Those that have do recognize two important factors in regard to demand.

They localize their product offering

If you’re of my generation and familiar with popular culture, you know the Royale with Cheese dialogue in Pulp Fiction. It communicates an important lesson – localize your product offering.

When McDonald’s entered the New Zealand market in 1976, it listened to the suggestion of its Kiwi franchisee and localized the offer – adding the Kiwiburger to the menu, which included an egg and beetroot.

My experience within a successful Mexican brand saw us offering protein options that New Zealander’s expected to see, like mince tacos. Coffee franchises are built on the back of the flat white, a coffee option you would not have found anywhere else in the world until recently.

Products change, brands remain

Successful franchise brands create consumer demand that transcends the product offering. The great quote from Ray Croc, when asked what McDonald’s would be selling in the future, encapsulates it very well: “I didn’t know what we would be selling in the year 2000, but whatever it was we would be selling the most of it.”

I can’t remember the last time I saw a franchised waterbed outlet – yes, there were some back in the day – but New Zealand has a home decorating franchise brand, which has been around for 125 years, and successful café franchises that were early proponents of franchising, all of which have a different product offering to what they had in 1995. Importantly, these brands have kept their products and services relevant to the modern market.

Everyone needs to eat

Most franchisors make their income from the top line of franchise fees or sales, but franchisees make their living from the bottom line, the profit at a single franchise unit level.

2) Understand the economics of the local business model

A high number of franchises doesn’t always reflect a successful franchise model. If the franchise system has multi-unit franchisees, is this due to good single-unit economics, or because having just one outlet or franchise doesn’t make enough money?

It’s also not enough that the franchise system has a single unit or franchise units with sustainable economics – the system needs to be able to produce sufficient returns for the franchisor as well.

A great number of systems that fail to survive are due to faulty economics. New Zealand-grown brands are not immune to this. Perhaps the greatest story of market success resulting in system failure is Georgie Pie. The brand grew to over 30 outlets in the early 1990s – which at the time amounted to a substantially-sized system. But its popularity was based largely on a $1 pie offering. The product pricing did not provide adequate returns, ultimately resulting in the brand’s collapse.

Foreign brands that look at the New Zealand market and believe the economics for their systems will be similar do so at their own peril.

Even brands originating from New Zealand’s closest neighbor – Australia – will find very different economics on both a franchisee and system basis. Wage and labor costs are very different, and input costs will vary, as well as construction and property costs. Physical limitations affecting the reach within a particular franchisee’s territory could also place considerable limitations on revenue, especially when compared to overseas markets.

Additionally, foreign franchisors need to be conscious of the market for franchisees, including human capital requirements and their ability to fund.

3) Develop a great franchise system

Finally, for a franchise system to be truly successful, it’s not enough that there’s an enduring demand for the brand, or even enough that the individual franchises, or the franchisor, are profitable.

To be successful over time, the system and the franchise organization need to be well developed in every sense. A sustainably successful franchise will have a well-resourced head office, a focus on and culture of franchisee support, along with a system that franchisees can easily implement and follow. They will also resource, reinvest, and constantly look forwards, continually developing the system.

This is often the greatest hurdle for New Zealand-grown franchise systems to overcome. Many have developed from single-unit businesses and look at franchising as a less capital-intensive way to grow. Failure to adequately fund or resource themselves has hindered their potential. Conversely, you won’t find a successful franchisor in New Zealand that isn’t focused on their resourcing and continued development of their systems.

Grasp the nuances

At just over five million people, the New Zealand population is relatively small. You only have to compare the foot traffic past a railway station entrance in London to Auckland or Wellington to receive a wake-up call that New Zealand is a small market. And, other than Auckland, this population density is spread out.

However, there’s a good reason why New Zealand is the most franchised country per capita in the world. The opportunities lie in the fact that it’s often easy to stand out in a small market, and that New Zealanders are inquisitive as consumers, as well as being innovative and entrepreneurial.

The author

Nathan Bonney is the founder and director of Iridium Partners, a multidisciplined consulting group focused on supporting sustainable franchise growth, and deputy chair of the Franchise Association of New Zealand (FANZ)

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