Australia can be a lucrative market for the right brand, but going in blind will result in unnecessary frustration.
Australia is the ‘global capital‘ of franchising with eight per cent, or $146bn, of annual economic contribution compared to just 2.7 per cent contribution franchising made to GDP in the U.S. – arguably the birthplace of franchising.
Australia has more franchise outlets per capita than any other country and three times more than the United States. From a maturity perspective, over 92 per cent of franchises in Australia were developed in-country, showing our love for franchising.
Australia is English speaking; it has a robust economy and is the second wealthiest nation in terms of wealth per adult (second to Switzerland). With all these positive attributes it may appear that Australia is the perfect place to expand your brand.
So why have international brands come to Australia and not been successful, and why are 92 per cent of Australian franchises born and bred right here in Australia?
Being successful in Australia really has nothing to do with luck. Famous golfer Lee Trevino was reported to say: “The harder I work, the luckier I get.” If you’re thinking about coming to Australia with your brand, you need to do the leg work before you get here. Here’s what you need to know.
Research the market
It’s hard to argue that Starbucks isn’t a global phenomenon, as its business model works in most countries around the world. So why hasn’t the brand enjoyed the same success in the Australian market?
Starbucks entered the Australian market without researching the market adequately starting in 2000 and grew quite quickly to nearly 90 locations. With operating losses of $105m, it was forced to close 61 stores – over 70 per cent of its stores – in 2008.
There were some fundamental mistakes that it made that could have been averted, should the brand have completed the requisite research. It underestimated the sophistication of the coffee market in Australia, and its flavor profile did not suit the Australian palette.
Starbucks also grew for the sake of growth and took locations that other retailers would not have considered – because it did not know the market value, the brand overpaid on the leases it entered into.
Most cafés in Australia have complementary food offerings to accompany the beverage offering. The food offering in Starbucks was limited to pastry items and these food items were brought in at a higher cost of goods than its Australian café competitors, which resulted in lower gross profit margins and lower average sales.
“Being successful in Australia really has nothing to do with luck”
The most significant difference between the Australian marketplace and other international markets is the labor costs. The national minimum wage in Australia is $19.84 per hour (plus 25 per cent for casual employees) compared to a rate as low as $7.25 with an average of around $10 per hour in the U.S. and £8.91 in the U.K. This represents an additional wage cost percentage of up to 50 per cent to these two major markets.
Understand the cost of business
Understanding the cost of operating a business in Australia is critical but just as important is the need to not overcapitalize on the building and fit out of a new franchise. Global brands like McDonald’s, Starbucks and Krispy Kreme got this wrong initially by building stores just like they did in the U.S. when they first entered the Australian market. Fast forward a few years, and all of these brands have reduced the establishment costs by over 50 per cent to 100 per cent, making the return on capital significantly greater.
Financial analysis is critical. It is true the Aussie dollar is lower than most other global currencies, so an international dollar may travel further but at the end of the day, we are all in business to make money and any new entrants need to understand the costs to enter and operate in the Australian marketplace.
Finally, you’ll need to understand the positioning of your product in Australia, market trends, your competitors and potential threats in your industry, so a comprehensive market evaluation and SWOT analysis is essential.
Select the right people
Local people and partners are essential. Getting good advice from quality people in-country is the best way to fill your knowledge gaps. Professionals and non-competitive business owners in Australia can provide valuable insights into market forces, cultural nuances, sales cycle differences, and more.
Considering a master franchisee may be a good option, but they need to have the financial capacity to grow your business and meet your development requirements, so your brand grows to meet its market potential.
Finding the right master franchise partner may be difficult so starting with company-run operations may be the fastest and most effective way to get started.
Either option will require a combination of local (Australian) and your own team members spending time in the market. There may be a desire to send your own employees to Australia rather than sourcing local talent as this may be cost-effective in the short-term due to lower labor costs, but there can be long-term drawbacks.
Lack of Australian market knowledge and inability to build the relationships you need for success in Australia can lead to costly mistakes.
An ethical business model
One of the biggest challenges facing Australian franchisors in recent years was brought about by the parliamentary enquiry into the sector because of some high-profile Australian franchisors advocating or perpetuating underpayment of staff as their business model was not as profitable as it should have been.
This put the franchise sector in the spotlight and has created more rigor and scrutiny on the sector and an additional impasse of the franchisors, ensuring that their franchisees are compliant with federal labor laws. This has created greater responsibility on the franchisors where both the franchisee and franchisor have “joint employer” liabilities for the workplace non-compliance of their franchisees. The lesson here is to have a business model that is fair and profitable and for new entrants a thorough understanding of Australian labor laws.
For new franchisors to the Australian market, partnering with the right consulting firms with expertise in franchising, legal, accounting standards, and labor laws is imperative.
THE AUTHOR
Doug Downer is The Franchise Guy and principal of Franchise Ready. Franchise Ready has launched and supported 60 franchise brands in Australia. Doug currently owns three franchises, three franchise systems and has run eight franchise systems in Australia at senior management level.
