FROM TODAY'S SYDNEY MORNING HERALD
With economic conditions continuing to deteriorate the spotlight is now well and truly on the vulnerability of franchise systems.Placed into administration late last week, the Queensland-based kitchen and laundry franchise Kleenmaid joins three franchisors - Kleins, EzyDVD and Midas - which have failed in the past 10 months.
BASKIN ROBBINS AUSTRALIA HAS BEEN CLOSE TO COLLAPSE TWICE IN THE LAST FIVE YEARS. THE FIRST TIME THEY USED THEIR SHAREMARKET FLOAT TO ACCESS CHEAP MONEY TO BAIL THEM OUT. THE SECOND TIME, LIQUIDATION EMPLOYEE LACHLAN MACINTOSH FROM KORDA MENTHA PULLED MORE CHEAP MONEY OUT OF HIS HAT.
The tough economic conditions serve as a valuable reminder that franchising is not immune to economic downtowns, nor is it a guarantee of business success. Both franchisors and franchisees can and do fail at the best of times, but are especially vulnerable during the current financial crisis.
ALLIED BRANDS LAST HALF-YEARLY REPORT SHOWED THEM AGAIN BURNING CASH AT A MASSIVE RATE. THIS MANAGEMENT FAILURE COUPLED WITH THE CONSUMER SPENDING DOWNTURN? DON'T HOLD YOUR BREATH.
Such failures are particularly traumatic as a failed franchisor inevitably means that franchisees lose everything.
These are not isolated cases. Franchisors have collapsed at regular intervals during the past 20 years. Barbara's House and Garden, Cut Price Deli and Traveland just a few prominent examples of where large numbers of franchisees have lost everything following the franchisor's collapse.
As economic conditions tighten, more franchise systems will come under pressure or fail altogether. This should put franchisors, franchisees and even potential franchisees on notice.
Franchisors need to do an urgent audit of their financial viability. Undercapitalised franchisors needing finance to survive or grow will come under considerable pressure, as will those franchisors that have previously relied on cheap credit to expand.
CHEAP CREDIT? ALARM BELLS ARE RINGING!
Franchisors thinking of expanding need to review those plans given the difficult economic conditions. Aggressive expansion plans maybe a recipe for disaster if the franchisor and franchisees are left exposed to declining consumer spending or the franchisor cuts corners on franchisee selection or training.
POORLY TRAINED FRANCHISEES? AGGRESSIVE EXPANSION PLANS? SMELLS LIKE ALLIED BRANDS, TOO. IN FACT THEY'VE BEEN SO AGGRESSIVE THEY'VE BEEN ADVERTISING FRANCHISES FOR SALE IN SOUTH KOREA, AND ARRANGING MIGRATION FOR THESE POOR SOULS.
Expansion plans should be carefully tailored to ensure that there is sufficient consumer demand to sustain the expansion and that only appropriate franchisees are recruited and given adequate training.
GO INTO A NEW BASKIN ROBBINS SHOP AND TRY TO CONVERSE IN ENGLISH!
Franchisees also should review their operations. Those in retailing will come under pressure as rents remain high while sales weaken. Franchisees need to keep a watchful eye on the franchisor's behaviour and look for danger signs of a franchisor in financial distress.
Trouble getting stock from the franchisor or long delays in being paid money owed by the franchisor should ring alarm bells.
BOTH CURRENTLY BEING EXPERIENCED BY BASKIN ROBBINS FRANCHISEES. A HUGE NUMBER OF ICE CREAM FLAVOURS ARE CURRENTLY OUT OF STOCK, INCLUDING FLAVOURS REQUIRED TO BE CARRIED BY FRANCHISEES. CURRENT FRANCHISEES ALSO REPORT CONTINUAL ICE CREAM SHORTAGES THE LAST FEW MONTHS, DURING WHAT SHOULD HAVE BEEN THE BUSY MONTHS. ALONG WITH OTHER DRY GOODS INCLUDING SHORTAGES OF LOCALLY PURCHASED ITEMS (MAYBE DUE TO UNPAID BILLS??)
Franchisees in these situations should seek legal advice as to possible breaches of the franchise agreement by the franchisor.
Potential franchisees must take more care and look very carefully at the franchisor's financial viability. Potential franchisees should be asking to see the franchisor's financial statements before signing the franchise agreement.
A franchisor's refusal to show a potential franchisee the most recent financial statements should sound very loud alarm bells. 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.
REPRINTED FROM THE SYDNEY MORNING HERALD, APRIL 14.
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