Australia’s transparent financial system and ease of doing business make it one of the most profitable and rewarding markets in the world. According to The Hon. Stuart Roberts MP, minister for employment, workforce, skills, small and family business, “Australia’s franchise sector has over 1,200 brands and is worth $154bn,” and while there’s no doubt that the COVID-19 pandemic had a big impact on the franchise sector globally, the Australian economy is on the road to recovery, making it a good time for prospective franchisors to look into the many opportunities available. This is especially relevant now, as the IMF recently upgraded Australia’s economic growth outlook for 2022.
However, it’s not a decision to be taken lightly. 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, as well as all the operational, training, and supply chain issues that are critical to success), the best outcomes are achieved by the most committed franchisors.
Deciphering the Code
The Franchising Code of Conduct (Code) regulates franchising in Australia and is mandatory for all. 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 to assist prospective franchisees in making an informed decision before entering a franchise agreement.
It’s important for both franchisors and franchisees to understand that significant changes to the Code are now in force, many of which involve very high civil penalties for breach. Therefore, franchisors should get legal and financial advice on the nuances of the Australian regulatory market as part of their market evaluation.
Any new entrant to the Australian market should undertake a market entry analysis to avoid the regulation traps which are unique to this territory. If you’re considering extending your brand into this lucrative market, read on for some practical considerations for franchisors.
1. Register your trademark
Ensure your trademark is registered in Australia before you start to talk to prospective franchisees, master franchisees or partners. Your trademark is your identity and there are many stories of people who have gone as far as discussing their brand and intention to enter a new market, and then found out later that their trademark has been surreptitiously registered under another owner, resulting in additional expenses in buying back their brand from these opportunistic registrants.
Similarly, you should consider putting in place non-disclosure agreements or confidentiality agreements prior to entering into discussions with potential partners.
2. Get to grips with Australian franchising law
A franchise agreement is a legal contract that both the franchisor and franchisee must abide by. Franchisors must not give franchisees misleading or deceptive information and must follow the Code, which governs the rights and obligations of all parties. The Code is administered by the Australian Competition and Consumer Commission (ACCC), Australia’s competition regulator and national consumer law regulator, and applies to every franchise in Australia, regardless of where the parties are from. It’s intended (following the recent regulatory changes) to instill fairness in the franchising process and ensure that franchisees are protected.
3. Understand your competitive differentiation
Many failed international franchise operations have under-estimated the degree of competition and sophistication in the Australian market, especially in the food-service trade.
Do a competitive analysis to understand your competitors as well as your core customer profile – age, income, sex, or family structure. We suggest you go a step further and consider your target customer’s life stages, or life events, associated with their purchasing decisions. 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 can’t differentiate their model have little chance of success.
COVID-19 has certainly changed consumer decision-making and how people interact with businesses. It’s essential that you understand this impact in order to adapt and differentiate your business model from the rest.
4. Understand labor costs
Determine how labor costs are going to impact your operation. Australia has a high cost of labor, with additional ‘hidden’ costs, such as payroll tax, superannuation and higher 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 labor costs, you might find that your business won’t be as efficient in Australia. Alternatively, it may be much more expensive to have the same labor hours compared to a successful roster that you operate 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. Hightraffic, street-side strip precincts, often associated with tourism and entertainment, are in high demand in many cities, but good retail and food service locations in these higher-traffic destination precincts and shopping malls are expensive and will impact your total operating costs.
It’s important that you understand the customer demographic needed to fit your business model, to ensure your location targets the right consumers and occupancy arrangements. In turn, this will assist you in meeting your requirements regarding fit-out costs, revenue targets and annual occupancy costs.
You may need to consider the footprint of your retail space, as occupancy costs are higher in Australia. This may influence your concept and design of the retail space of your Australian premises.
6. Determine your market entry strategy
This is going to be critical to your success, so consider the following factors and choose which is most applicable to your circumstances:
- Grant a master franchise, allowing sub-franchising
- Grant an area development agreement/arrangement, requiring multiple locations to be opened by one organization
- Grant a single unit franchise; this will allow 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 – as in buying out a 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 starting and lowrisk option, and access to valuable local knowledge.
7. Determine your city of entry
Australia has only five large capital cities, and each one is quite different. Not only do they vary in terms of geography, economics, and climate, but also in lifestyle, taste and sophistication, with varying consumer sentiments and expectations.
If you’re new to Australia, you need to consider which city in which to establish your brand, and how you’re going to establish proof of concept and critical mass in your chosen city as quickly as possible.
There are no economies of scale between capital cities, so as a result, don’t try to open in multiple markets or cities. Instead, think about creating and developing your brand in one market and focus on investing in achieving that goal.
8. Be prepared to invest
Building your brand and network in Australia, even by granting a master franchise, is not easy – you will need to invest any upfront fees you might receive and more back into the market to get your business model established and ready to scale. If you’re under-capitalized and looking to sell a master franchise as a simple way of getting into Australia, you’ll quickly realize that this simplified approach of leaving it all to the master franchisee is often unsuccessful. In the long run, it will damage the perception of the brand.
9. Engage from the outset with legal advisors and franchise consultants
It’s important to invest in legal and consulting expertise, so hire a franchise lawyer and a good franchise consultant. This might sound self-serving, but it’s going to be cheaper for you in the long run, and you’ll get direct in-market expertise.
You’ll need to hire the best advisors you can in the marketplace, to take you through the complexities of how to establish 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.
Rostom Manookian is the principal of Manookian Solicitors, a Sydney-based law firm. He is an experienced lawyer providing specialist legal services to franchising clients (including acting for franchisors and franchisees); hospitality/ restaurant clients and commercial property clients