Franchises face a shaky 2009

Aggressive expansion plans were a "recipe for disaster" if consumer spending continued to fall, and if franchisors cut corners on franchisee selection and training, Mr Zumbo said. However, some franchises are pressing ahead. Bakers Delight, the world's largest bakery franchise, recently outlined plans to recruit 150 new franchisees

http://watoday.com.au
January 5, 2009

Franchises face a shaky 2009
Chalpat Sonti

It was a shaky 2008 for franchise businesses but this year could be even worse, a leading academic warns.

As administrators and franchisees pore over the wrecks of last year, such as Midas, EzyDVD and Kleins, those considering entering the $128 billion-a-year industry should be more careful than ever, according to Frank Zumbo, an associate professor at the University of NSW's school of business and taxation.

Car care company Midas is the latest franchisor to go into administration. The franchise, which has 11 stores in WA and is part-owned by former Coles boss John Fletcher, will be the subject of a creditors meeting in Melbourne this week.

Mr Zumbo said as economic conditions worsened, more franchise systems would be under pressure, or fail altogether.

"Undercapitalised franchisors needing finance to survive or grow will be the hardest hit, as will those franchisors that relied on cheap credit to expand," he said.

Aggressive expansion plans were a "recipe for disaster" if consumer spending continued to fall, and if franchisors cut corners on franchisee selection and training, Mr Zumbo said.

However, some franchises are pressing ahead. Bakers Delight, the world's largest bakery franchise, recently outlined plans to recruit 150 new franchisees.

The company, which last year was cleared by the Australian Competition and Consumer Commission following complaints by franchisees, says it is growing despite the sluggish economy.

Mr Zumbo said franchises involved in retailing would be under pressure as they had to pay high rents while faced with dropping sales.

The Kleins collapse showed that franchisors who failed to respond to new competitors (in Kleins' case, the jewellery industry) or changing tastes would find it tough to survive.

Franchisees needed more than ever to look carefully at franchisor viability before signing up. This included asking to see financial statements. If a franchisor refused to show these, it should sound "very loud alarm bells", Mr Zumbo said.

"After all, a franchisor would not go into business with a financially shaky potential franchisee, so obviously a potential franchisee should not be going into business with a financially shaky franchisor," he said.


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