I write a regular column for Unlimited magazine, one of New Zealand’s most respected publications for the creative business sector. In an attempt to alienate a good proportion of the population my article last month took a well aimed broadside at the franchising industry. For more information about Unlimited magazine click here, the article follows underneath.

The recent high profile debacle where a Green Acres master franchisee sold bogus franchises to unsuspecting people has highlighted once again the perils of franchising in New Zealand. While that story had a sort of happy ending (well, happy for the misled investors, but both sad and expensive for the owners of Green Acres who had to help make good investor losses), the saga raises some interesting questions for Kiwis going into business.

In the absence of good ideas, it seems New Zealanders wishing to chase the holy grail of self-employment are increasingly looking to franchising as an option. While I risk alienating the entire franchising industry in this country, I’d like to stand up in resistance to this trend.

New Zealand has historically been a number-8 wire type of country — the sort of place where a reasonable idea, a fair measure of elbow grease and a dash of determination can get spectacular business results. The late Sir Angus Tait, founder of the Tait group of companies, is often held up as the paragon of this self-created and self-executed model. Where else but in New Zealand would the saying about business being ‘one part inspiration and nine parts perspiration’ be coined?

Yet in the past decade or so, franchising has become huge business in this country as it has in others. The statistics bear this out; according to Westpac’s franchising unit, New Zealand has 350 franchise chains covering 64 areas of business. That makes 14,000 enterprises employing 41,000 people and turning over $10 billion a year. And franchising would seem to be running hot, especially in the services and business-to-business sectors. For next to no capital or experience, people can buy their way into ownership of an operation with a brand name, readymade back office systems, and central office training and support. Or so the spin goes.

Call me a sceptic but Kiwis buying into franchises is analogous to Ed Hillary being dropped to the top of Everest by helicopter: sure it achieves an outcome, but it misses the point. It seems everything these days is franchised; we’re all used to McDonald’s, Subway and Mr Green franchises but our local hardware store, supermarket and even our accountant might also be a franchised operation. So
much for ‘knocking the bastard off’; we seem to prefer the bastard to be brought to us already pre-packaged.

It seems many people pushing franchises do so with the rationale that while potential franchisees may have some professional skills, or a desire to be ‘self-employed’, they often lack the core business skills — the strategy, the accounting, the marketing and so on. Call me simplistic but this would seem to be a real red herring. The average franchise has a hefty initial fee, continuing royalty fees, along with strict requirements on the franchisees. With these onerous (and expensive) requirements, it’s not hard to see that someone could just as readily buy some professional help (accountants, after all, aren’t that expensive) or, even better, learn some skills themselves (through the likes of excellent, and free, New Zealand Trade and Enterprise training courses).

I accept it’s easier to obtain funding for a franchise than for a self-contained startup business. Banks, being the risk-averse (and not overly SME-savvy) beasts they are, usually prefer a known quantity. A well established franchise brand provides this . But just because something is easier to fund doesn’t necessarily make it better.

There is one group, however, for whom franchises are a no-brainer. That group is, of course, the head franchise owner. Imagine being able to scale your business, achieve geographical spread and guarantee an ongoing income and growth without any real investment yourself. Most franchises have a requirement for franchisees to purchase centrally, and often this will result in yet more revenue for the franchise owner. Not only do they win through the upfront and ongoing royalty fee, they’re often making a cut on the raw product the franchises use.

It seems franchising works best for those wanting to ‘buy themselves a job’. It has to be asked, however, why they’d bother. I argue that a franchise gives all the negative parts of self-employment but fails to produce the positive ones.

So my advice is if you’ve an inkling to be self-employed, either come up with a novel idea yourself or seek a partner who already has one. Don’t rely on someone else’s secondhand idea to make you rich. That other person has a good reason for wanting you to buy into their dream.

Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

7 Comments
  • we’ll thats one opinion….

  • Ben,

    casting my mind back to my days as a post grad student at the Auckland Uni School of business I remember doing a paper in innovation and entrepreneurship. The statistics for business failure should be required reading for anyone contemplating starting an independent commercial enterprise. I haven’t got time to sniff out the current figures, but they are, shall we say, statistically significant. Interestingly franchises are less likely to fail.

    Your Everest analogy doesn’t gel for me. The summit of Everest is littered with corpses of those who didn’t make it back (the top is the halfway point). And, like the drive to be self employed, there are still people who trudge to the himalayas even though they know they might spend eternity on ice.

    Franchises are excellent for hard working, organised people who want cash flow and a business that can grow based on their efforts, rather than their genius – and let’s face it there aren’t that many exceptional businesses out there (the bell curve).

    I have worked with a master franchiser (Columbus Coffee) the chain has grown dramatically. The business is every bit as good as any multinational chain – some might think better than. I don’t believe any of the franchisees would have been capable of developing a world class cafe on their own. Consumers benefit from the investment, the franchisee benefits and the owner benefits. It is a virtuous circle.

    Why reinvent the wheel when you can get on with building cash flow? It seems like a waste of resources to me.

    As any independent franchise consultant or bank will tell you it’s not the answer for everyone…but there are self employed people out there who would be better off flipping burgers at a well known chain – bearing in mind that failed businesses often leave a wake of chaos and destruction for suppliers and other small businesses.

  • David

    It’s great to have you back – I must be slipping – haven’t had you comment in vehement disagreement for months now! The article was an attempt to get some strong comment – my role as devil’s advocate coming to the fore!

    I guess we’ll have to agree to disagree (as in many occasions in the past) – I appreciate your feedback anyway

    Ben

  • Dunno about ‘vehement’, but one of my mantra is: agreeing isn’t thinking.

    Always enjoy visiting…thanks for sharing your ideas (no matter how nutty some of them might be 😉

  • I guess it’s all about Risk vs Reward. Usually, franchising offers a middle path between regular employment and an independent business. I can see how it’s very appealing to some people. I agree it’s a bit sad that there aren’t more Number-8 wire types in NZ these days. I would guess that many of them think the opportunities are better for them overseas.

  • The MED is sufficiently concerned with the franchise industry that is has just released a Review titled, “Review of Franchising Regulation in New Zealand”, see http://www.med.govt.nz/templates/MultipageDocumentTOC____37853.aspx. Franchisees that have been burnt by franchise deals that have gone wrong should write a submission to the Review documenting their experiences. If the MED does not know the true extent of problems in the franchise industry nothing will be done about it. (I know not all franchises are not bad, but there are bad ones out there that are giving franchising a bad name.) Franchisors can also make submissions on whether the status quo should continue and/or evaluate the merits of possible changes to the system.

  • Sorry included and extra not in the sentence with brackets, should be “(I know not all franchises are bad, but there are bad ones out there that are giving franchising a bad name.)”

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