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Tuesday 7th December, 2021

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Franchising in Australia: the ultimate guide

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Franchising in Australia: the ultimate guide

Australia’s franchising sector is thriving, with around 1,200 franchise systems operating in the country

The franchise sector in Australia was largely kick-started when McDonald’s, KFC, Hungry Jacks (AKA, Burger King) and other large, quick-service, franchised business restaurants brought over their systems from America in the late 1960s to early 1970s. Fast-forward to the present day, and Australia’s franchising sector is thriving, with around 1,200 franchise systems operating in the country. In fact, according to a study by Queensland-based Griffith University, there are over 1,100 franchisors, 65,000 franchise units and 8,000 corporately-owned units in the country.

So, incoming brands will find a marketplace that’s firmly embraced the franchise model, as well as no language barrier for brands hailing from English-speaking countries. Australian brands dominate the market, but U.S. brands have the most number of units due to the early success of the larger global brands. Unsurprisingly, Domino’s Pizza is Australia’s largest pizza franchise, both in terms of network units and network sales. KFC, which first appeared in Australia in 1968 in Sydney, today employs over 34,000 Australians and typically serves more than two million customers a week across 640-plus restaurants.

Geographically-speaking, Australia covers an area of 7.69 million square kilometres, but the majority of its 24m population is concentrated along the eastern coastline, especially the Gold Coast, Australia. While the small Australia population size may deter some franchisors, the allure of a unique opportunity to trade in Asia due to its close proximity will tick the boxes for many. The country’s main trade partners are China, Japan and the U.S., and according to the International Franchise Association’s Guide To Australia report, its GDP is $800.5bn, and it’s ranked ninth in the World Bank Group’s Ease of Doing Business ranking.

Franchising Australia: what prospective franchisees should know

“Australians are very resilient and determined to do business – they’ve got a very can-do attitude,” says Harry Stoubos, founder of Atlas Global Development, and former global chief development officer for Adelaide-founded, Australian brand Cartridge World, which has over 600 franchisees in over 30 countries. “Recently, the country endured its worst bushfire in memory, with extreme floods and droughts, but it found a way to overcome such adversity. The Australian government is very strong and has a strong rule of law supported by strong financial institutions – this all promotes confidence for business and aids the economy to rapidly recover from any adversity.”

Harry believes that this strong outlook helps international brands to thrive in Australia, and more and more companies are looking to enter the market. “For instance, Mail Boxes Etc., a brand from Italy with over 2,500 units globally, now has 38 units across Australia. The franchise’s successful entry was due to its ability to identify Australia as a service-based economy that would be suited to its business model, therefore, attracting suitable potential franchisees fitting its target profile. Jani King is another example. In Australia, the U.S. business has over 600 units, which are all independent business owners, showing that the Australian franchise market has welcomed cleaning franchise concepts from overseas.”

An overview of the Australian franchising sector

When you take a deeper look into the world of franchising in Australia, you will recognize a number of brands dominating the industry. Home to almost 25 million people, Australia is no stranger to the scalable and profitable business system that franchising provides.

There are around 1,314 franchised businesses currently operating Down Under, with new franchise brands and networks expected to disrupt the sector and contribute to its annual growth. Many international franchise brands, such as McDonald’s, KFC, and Subway, have all chosen Australia as part of their expansion strategy.

Australian franchising has also been the catalyst for global growth for many of the ‘Australian-made’ franchise brands such as F45 Training, The Coffee Club, and Poolwerx. Franchise systems are found across a range of sectors and the industry has evolved enormously since its inception in the early 1970s when U.S. fast-food giants ventured across the Pacific to set up operations and influence the Aussie locals. Most of those brands can still be seen today, while new players in the market have created a rivalry and competition like no other. The franchising industry is said to provide job opportunities to more than 500,000 people and generates an average of $181.8bn in revenue – a continued, welcome injection for the Australian economy.

What the foreign franchisor needs to know

So what does the opportunity of franchising in Australia present? While the Australian franchising industry has experienced both positive and negative media attention in the past year, there’s also no sign of the industry slowing down. According to the Franchise Council of Australia (FCA), “franchising in Australia may have initially provided a means for Australian people to benefit from foreign products and systems, but it is now the chosen format for many Australian entrepreneurs to expand and develop their business. The great majority of franchise systems operating in Australia are homegrown, and an increasing number of Australian franchise systems are successfully taking their concepts overseas.”

With Australia’s growing international franchise presence, it gives other international brands the key to success and opens the door for new brands to take on the current competition. There are a number of different points to consider when thinking about entering into the Australian franchise market.

Is your brand ready to expand in Australia? Consider the following legal pointers, critical to your international expansion understanding and success.

1. The legal elements of franchising in Australia
Direct franchising from an overseas franchisor to an Australian single-unit franchise hasn’t been a common method of expansion in the past, as the distance and inability to support an individual franchise becomes very costly, primarily because of taxation issues. In most cases, master franchising and area development are the most common vehicles used for the international expansion of a franchise system into Australia.

2. Master franchise agreement
Under a master franchise agreement, a franchisor grants a master franchisee a territory within which to sub-franchise to third parties. This structure might result in a certain loss of control for a franchisor and an additional party with whom profits and royalties must be shared. However, it is beneficial to a franchisor because the master franchisee can act as a local, self-sufficient party who organizes franchise recruitment, site selection, construction, dealings with procedural matters, and conducting operational support.

3. Area development agreement
Under an area development agreement, a franchisor grants a franchisee the right to roll out multiple corporate stores but not sub-franchise without the franchisor’s express approval. Many franchisors adopt this model in Australia, as it reduces the management and training time for the franchisor, but allows a rapid rollout of the concept in Australia.

The difficulty of this arrangement is selecting the right area developer with the capital and infrastructure to achieve the development schedule without resorting to sub-franchising. A further difficulty for the franchisor is ensuring consistency of standards where multiple area developers are appointed within a State or region of Australia, given that Australia has a very large geographical area. You need to ensure that brand standards remain consistent whether you have a regional developer based in South Australia, Western Australia, and across all Australian states.

4. The franchise relationship: the franchising code of conduct
In Australia, the franchise relationship is a contractual one (known as “the Code”) where the agreement between the parties determines their rights and obligations. The Code applies to all franchise agreements operating in Australia, regardless of whether the agreement refers back to the law of the franchisor territory. The legislation dictates what is considered to qualify as a franchise relationship.

Based on the expansive definition of a franchise under the Code, there are likely to be many existing relationships that fall within the definition of a franchise. While dealers, distributors, and various licensees may not consider themselves franchises, under the Code, they may very well be.

Unlike some other countries, the Code does not require registration of the franchisor or the franchise disclosure document. There are, however, significant financial penalties for breaches of the Code, if the disclosure requirements are not met. This should hopefully avoid the need for dispute resolution processes or legal action.

5. Disclosure documents and the franchise agreement
Clause 7 of the Code states that master franchisees do not need to provide separate disclosures to a potential franchise owner who has enquired about the franchise opportunity, and Clause 12 of the Code states that master franchisees do not need to comply with the requirement for disclosure to a sub-franchisee of various information such as financial statements.

This means that there is no need for an overseas master franchisee who appoints a sub-franchisor to provide a separate disclosure document in addition to the disclosure document provided by their sub-franchisor to sub-franchisees. The master franchisee is still required to fully comply with the Code and provide a disclosure document to its sub-franchisor in the prescribed form.

Master franchisees must now attach the following financial information to their disclosure documents:

  • A statement signed by the director as to the solvency of the company at the end of the last financial year, attaching the last two years’ financial statements and franchise turnover
  • An auditor’s report, supporting the director’s solvency statement

There are additional obligations of disclosure on master franchisees in relation to:

  • End of franchise term arrangements
  • Disclosing information relating to rebates and incentives from suppliers
  • Disclosing the impact of online sales on franchise partners

The Code lists several items that must be addressed in a disclosure document. Some of these include:

  • Who owns the intellectual property in the franchise business
  • Who your business associates are (individuals or other companies related to the franchisor entity)
  • What your business experience is
  • Whether there is any litigation relating to the franchise (including directors of related companies)
  • The financial information of the franchisor
  • Whether franchisees can sell or promote your goods and services online
  • The estimated upfront and ongoing expenses for franchisees

Australian code: what’s the review period?

An international franchisor must also comply with procedural aspects under the Code, including providing a 14-day review period for the sub-franchisor or franchisee to review and consider the franchise documents, and a seven-day cooling-off period after signing.

There are also laws that are specific to Australia, which international franchisors should be aware of. For example: taxation; consumer laws; employment, particularly in light of fair work laws; occupational health and safety; data collection; and privacy.

Additionally, there may be other specific regulations that apply to certain industries, which you should research and review before finalizing your marketing entry strategy. While these issues and standards of conduct may not necessarily have to be incorporated into your legal documents, having a general understanding of your responsibilities under these different laws will help guide your operation of the franchise network and avoid incurring any civil penalties or allegations of breach.

IBISWorld also highlighted, in a 2019 report, how consumer trends have directly impacted the franchising industry. The study shows that Australia’s disposable income has supported consumer demand for franchised goods and services, and this increase has enabled consumers to spend more on goods and services provided by franchised operators, such as food, footwear and clothing.

Furthermore, solid growth in online shopping and retail shifts has fuelled demand for courier and delivery services that are supplied by franchise businesses and brands. Now is the perfect time to start planning and researching your market entry into Australia, and you could quite possibly find your international franchise influencing Australia sooner than you think!

International franchisors need to understand the Australian market – in particular customer behaviors and habits, and the legal and commercial landscape.
A market entry analysis is invaluable for any international franchisor to understand the unique Australian market, as what works in one location may not necessarily work in another. Australia is a geographically vast and diverse destination for international franchisors with broad categories, so international franchisors need to gen up on these varying areas to ensure they successfully expand to the country and achieve a steady sale of franchises.

Three trending Australian franchise systems

1. Notwithstanding the current crises, service franchisees are continuing to grow in the home services, education and health and wellness area, as increasing wealth increases the spending of time-poor customers.

2. One example of a health service franchise is Nurse Next Door, which recently established itself in Australia and will continue to expand, especially in light of the current health crises.

3. Healthy food and vegan franchise businesses offering lifestyle choices will encounter strong competition and new entrants and incumbents will demand differentiation and innovation to succeed.

Franchising Australia: pros and cons

  • Australia is very franchise orientated and used to major franchise brands in most shopping malls. Consumers trust them for good service, quality products and good prices.
  • The country boasts a very good Franchising Code of Conduct, which, unlike in many countries, is law. It covers the franchisor and franchisee, their responsibilities, mediation requirements and more. This should negate the possibility of franchised business owners signing up to own a business with unfair terms.
  • Tradesmen are on very high wages, which affects the cost of store fit-outs. As of 2021, the minimum wage in Australia stands at about $20.33 per hour.
  • Health regulations are very strict and vary from state to state, mainly due to climate. The health department pays regular visits to all food outlets and hand out very hefty fines for major breaches and can even close establishments down.

Need to know: Australia in numbers

Franchise systems: 1,200

Franchise outlets: 75,000

Franchise employees: 475,000

Revenue: AUD $177bn

Annual growth: 2013 – 2019 1.7%

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