Franchising - Howard Franchise Stores Australia - Case Study Example

Franchising Name: Tutor: Course: Date: Table of contents Table of contents 2 1.0 Introduction 3 1.1 The Franchise system 3 1.1.1 Definition 3 1.1.2 Franchising models 3 1.1.3 Evaluating a franchise opportunity 4 Buying a franchise has tax implications (Spinelli, et al. 2004). Part of the capital cost base of the business is any transfer or renewal fee, initial franchise fee when purchasing the franchise is not claimed as tax deductions. If one sells the business, they gain relevance in the calculations of any capital gains tax liability given that they form part of the of franchise acquisition costs. Just like any other franchise business operating costs, ongoing fees payable are generally tax deductible to the franchisor such as training fees administration fees, marketing levies and royalties. Few franchisors provide funds to prospective franchisees (FCA, 2014). Therefore, one needs to consider sources of capital to buy the franchise. Fortunately, most banks have online information on applying for finance and about franchising. 4 1.1.4 Success and challenges in franchising 5 2.0 Howard Franchise Stores Australia 6 2.1 Company overview 6 2.2 Location 7 2.3 Brand quality 7 2.5 Unique business proposition 8 2.8 Benefits of franchising with Howards Storage World 9 9.0 Recommendations 10 Reference list 11 1.0 Introduction The preferred franchise for the target client is Howard storage world, an Australian franchise. The client will first get an overview of the franchise system and how it works in Australia. The details for the preference of this franchisor are discussed later in the report. 1.1 The Franchise system 1.1.1 Definition Franchising is a system of using a successful business model of another firm (Spinelli, et al. 2004). In this case, independently owned outlets (a franchisee) are assigned by the business owner (a franchisor) to distribute and market their services or products for a fee. Under a trademarked name, the franchisor grants the right to operate a replicated business, using operational and marketing procedures and established management techniques. Besides the upfront capital fee, percentage of gross monthly sales or ongoing royalty fees are also paid by the franchisee after agreeing to comply with franchising procedures (FCA, 2014). 1.1.2 Franchising models The major types of franchise models are; business format, product and process or manufacturing franchise. Under the business format franchise, the franchisor offers rights to use his or her intellectual property by the franchisee such as fast food outlets (Spinelli, et al. 2004). In the product franchise, the products of the franchisor are sold at retail or wholesale outlet by the franchisee sells such as motor vehicle dealership. The franchisee is given exclusive rights within a specific area, to sell the product. Lastly, in manufacturing or processing franchise, the product is produced by the franchisee. In this case, provides the ‘know-how’ or an essential ingredient to the franchisee such as the model in the soft-drink industry (Sugars & Sugars, 2005). There are advantages and disadvantages to consider before deciding to buy a franchise. With an established brand, the advantages could include assistance with involvement and marketing (FCA, 2014). On the other hand, strict operational procedures and the loss of decision making autonomy could be disadvantages. Depending on which one selects, the cost of buying a franchise varies dramatically. On the contrary, most franchisees will pay a continuing royalty and an initial up-front franchise fee (Spinelli, et al. 2004). The royalties could be a fee based on turnover, or a flat weekly or monthly fee. 1.1.3 Evaluating a franchise opportunity When evaluating a franchise opportunity, there are many things to consider. First, the personal characteristics and situation of the buyer should be complemented by the business. Evaluating any business idea is also similar to handling the franchise issue (Malbon & Bishop, 2014). However, implications of the franchise agreement are not a factor to be considered by a franchise. Leases on commercial property are required for most franchisees. Knowing ones obligations and rights under the agreement are essential before signing any lease (Spinelli, et al. 2004). Before committing to leasing commercial premises it is important to get professional advice. This is because the cost of money and time in getting advice about acceptable lease negotiation outweigh a poorly negotiated lease. Franchising has a Code of Conduct espoused in the Competition and Consumer Act 2010 (Franchising Australia, 2014). Also, responsible for ensuring compliance with the Code, is the Australian Competition and Consumer Commission (ACCC). The Code provides protection for franchisees and regulates the conduct of participants in areas such as dispute resolution, marketing fund audits, cooling off periods, and disclosure documents. Buying a franchise has tax implications (Spinelli, et al. 2004). Part of the capital cost base of the business is any transfer or renewal fee, initial franchise fee when purchasing the franchise is not claimed as tax deductions. If one sells the business, they gain relevance in the calculations of any capital gains tax liability given that they form part of the of franchise acquisition costs. Just like any other franchise business operating costs, ongoing fees payable are generally tax deductible to the franchisor such as training fees administration fees, marketing levies and royalties. Few franchisors provide funds to prospective franchisees (FCA, 2014). Therefore, one needs to consider sources of capital to buy the franchise. Fortunately, most banks have online information on applying for finance and about franchising. According to Spinelli (2004) wealth creation is the prime motive for people to consider taking franchise business opportunities. Planning is required before starting a business and in this case it should be aligned to the franchise opportunity. Potential franchisees are able to gauge possibility of them being on the path to generating attractive investment returns (ibid). Companies often rely, in a number of retail sectors, on purchasing market share at the expense of gross profits or discounting as a strategy for driving sales growth (Spinelli, et al. 2004). Franchising is both a systematic risk-reduction tool and a entrepreneurial vehicle. This can be established using opportunity assessment of entrepreneurship as the core function where franchising must embodies this principle. Franchise relationship model (FRM) earlier mentioned is appropriate in examining and/or assembling a franchise (FCA, 2014). 1.1.4 Success and challenges in franchising There are several issues such as resource constraints, risk management and administrative efficiency that exist in virtually all businesses of scale (Malbon & Bishop, 2014). Such common obstacles can be overcome by franchising thus, making it a significant and efficient model for wealth creation. A successful franchise has a franchise service delivery system (SDS) that is highly developed (Spinelli, et al. 2004). This is evidenced by significant growth and considerable capitalization. A further proposition for an overall successful franchise strategy is in obtaining public capital as a supplementary source of funding (Malbon & Bishop, 2014). Launching and growing small company-owned stores is the most effective way to expand the franchise concept. On the other hand, to concurrently obtain public capital, one can subsequently sell several franchises, to build an infrastructure and to increase the number of company-owned units (FCA, 2014). Some few quick facts about average franchisee are that they own owns 1 outlet, have been in business for 9 years and spends 8.5 percent of sales on promotions (Spinelli, et al. 2004). They also have made an average investment of $155,000 and about $58,000 in after-tax profit. The largest franchisee owns over 500 outlets while 5 percent of franchisees own 30 or more outlets. For the franchisors, they own 13 percent of their system outlets and have 75 percent of their franchisees owning only 1 outlet. They also franchise 87 percent of their system outlets (Spinelli, et al. 2004). 2.0 Howard Franchise Stores Australia 2.1 Company overview Howards Storage World formerly ‘Stack and Store’ was started as a single store in the early 1970’s in Sydney by Les and Edda Howard (HSW, 2013). Today, as living space has become a premium, the retail franchise operation specializes in organizational products for every home and office room space saving and provides a wide range of storage. The rationale of establishing this line of business was based on the fact that there is a necessity in day-to-day living to maximize space and organize household items. After establishing the potential to roll out of the franchising concept, a partnership was formed in 1997 with Dirk Spence (HSW, 2013). From then on, Howards has experienced commenced international expansion and rapid growth in Australia. Currently manufactured exclusively for the stores are a range of Howards branded products that focusing on organization in the office and home as well as on storage (HSW, 2013). By June 2014, Howard Storage world had more than 60 stores in Australia with the objective of expanding to over 100 stores nationally by actively seeking Franchisees to open additional stores. Howard’s Storage World, today, is operational in six countries. Its international Master Franchises include; Canada, Spain, Philippines, India, and Ireland (South and West). 2.2 Investor profile requirements The investment needed is dependent on the market sought and country. Howard Storage World is looking for high net worth individuals or Retail Corporations (HSW, 2014). They should have experience in Master Franchise business and/or within retail in order to add a complimentary brand to portfolio. However, a bigger capital requirement is needed and it is a preference to have a partner who intends to open all company stores. The Master Franchisee is also required to adopt the Master Franchise model in the opening and operation of the warehouse distribution centre (HSW, 2013). The goods are distributed to the stores and imported to the facility. Buying the rights to a particular territory or country is of course at an individual cost. 2.2 Location Howards Storage World is extending across internationally and Australia. In Australia new opportunities exist in ACT (Canberra and Woden), Victoria (Geelong and Preston), New South Wales (Bankstown and Mosman), Queensland (Carindale and Ipswich), Western Australia (Bunbury and Midland) and South Australia (Modbury and Westlakes). The locations mentioned are new but other existing stores are also available at the following website; http://www.hsw.com.au/?site&pg_name=franchise_opp_aus. Online inquiries can be made or telephone to the resource persons provided in the website. 2.3 Brand quality Daniel Jordon, the Operations Manager of Howards Storage World, explains that Howard’s franchisees when forecasting their GP margins are able to operate with a fair degree of certainty (HSW, 2014). This is due to the Howards home branded products’ exclusive mix. The common denominators featuring amongst Howard’s franchisees that are successful are product and service knowledge perspective, and strong focus from sales on customer engagement (HSW, 2013). The franchisees ensure that their store presentation and product mix is in accordance with company guidelines. They also integrate local area marketing activity with the group’s national marketing activity. To assist with the way consumer shops today, Howards Storage World has embraced the technological revolution. Howards Storage World recently launched in Australia the Howards At Home concept (HSW, 2013). The same concept will also be rolled out in the international markets. A popular fun way for customers to buy has always been a party plan. As witnessed from many retailers around the world, Howard’s range of products is well suited for party plan to create incremental sales. There is need for great customer service in store and offerings of various alternatives to customers in order to purchase. Howard’s excellent web presence and digital platform allows customers to be inspired by the many storage solutions and research products available. Important ingredients are excellent customer service, range quality, and any specialty retail of which Howards Storage World excel in them all (HSW, 2013). The reigning principle at Howard is that they ‘do not mind whether a customer buys at a Howards At Home party, on a mobile phone online, and/or in store but provided they buy from Howards’. 2.4 Weighing up the costs Howard has new and existing franchises on offer going at $500,000 - $800,000 (HSW, 2014). International license fee is upon application and royalties can be negotiated. Howards Storage World believes that in a franchising venture, it is not only the monetary investment that drives the investment but also the time spent by the franchisee in the business. Moreover, financial gain is highly dependent on the management skills of the individual, type of industry, a personality fit between a brand and a franchisee, and the business model. The costs to the franchisee are essentially derived from those raised from own capital. 2.5 Unique business proposition 1. Specialty organizational products and retail operation for storage 2. Well merchandised stores with insitu products such as Wardrobe, Laundry, Kitchen, and Bathroom displays 3. Quality (better best) not discount and a good range of product 4. To help with storage needs is excellent customer service 5. Howards Storage World own branded product. 6. With online purchasing available is excellent web presence 7. Wholesale distribution business 8. Distributing to the network and importing goods of Howards Storage World stores 9. Howards At Home Party Plan availability within the territory/country 2.6 Marketing Throughout Australia, the Howards retail concept is the most successful (FCA, 2014). In many other countries around the world, the need for a similar concept has been identified. The Group Office marketing team manages the Howard’s marketing activity. The marketing team objectives are to; position Howards as the organization experts and storage, maintain national brand awareness, and to encourage consumers to visit Howards website and into its stores. To fulfill the objectives, a variety of tactics are engaged such as a variety of digital strategies, public relations activities, national rewards program, regular campaign events and an advertising catalogue program. 2.7 Franchisee training and support For Sub-Franchisees and International Master Franchisees, Howard’s Storage World has a very comprehensive training program (HSW, 2014). It mandatory for International Masters to complete a 1 week Orientation Training following the Master signing and is conducted at Group Office based in Sydney. All aspects of running a Howards Storage World store are covered in 5 week training. Brand Manager and Range Manager accompany the Master Franchisee from their countries. Again, local Howards Storage World stores and Group Office in Sydney conduct the exercise. A 2 weeks Master training conducted at Group Office in Sydney covers all aspects of running a Howards Storage World Master Franchise operation (HSW, 2014). This training takes place 10 weeks after the first store in the territory is opened. It can be a rewarding and exciting experience to buy a franchise. However, under the Franchising Code of Conduct, the franchisee needs to know some issues such as their obligations and rights. 2.8 Benefits of franchising with Howards Storage World A business is franchised for two main reasons; brand recognition and building in size much quicker (CILS, 2008). To open new stores, the franchised business can use franchisee capital. Ownership engenders a personal and financial commitment that exceeds the expectations of the store manager. A franchisee builds the brand for themselves because of their commitment to Howards Storage World objectives and constant presence in the store (HSW, 2014). There is also benefit of best practice from the franchisor and fellow franchisees. The Howards Storage World provides franchisees with support of a high level and a franchise operation that is tightly structured. This includes an ongoing support from merchandisers and field support managers as well as an initial 5 week training program (HSW, 2014). There are also regular strategic marketing campaigns, group buying power, and appropriate site selection and franchisee meetings for a winning formula. 9.0 Recommendations In-depth research above has shown that buying a Howard storage franchise is worthwhile. From the analysis and the literature above, Howards Storage World is the best franchisor to consider. The franchisor is offering a range of fees and flexible royalties in the range of $500,000-$800,000 which is pretty affordable. The brand is well known and easier to break-even. The company is also providing support in marketing and site selection. Nothing wins like getting it right in the storage and household business through training. The franchisor is offering several training sessions and best practice. There is also a unique business proposition right from storage, organizational support of home and office products and wholesale distribution business. One aspect of competitive advantage one will gain in buying the franchise is the excellent web presence and digital platform that will allow customers to be inspired by the many storage solutions and research products available. The franchisee will be able to maximize profits by buying into a winning brand in the market. Reference list Centre for International Legal Studies (CILS) 2008, International Franchising, 2nd Edition. Juris Publishing, Inc. Franchise Council Australia (FCA) 2014, BRW Fast Franchises lists, Canberra. Franchising Australia 2014 https://www.franchise.edu.au/__data/assets/pdf_file/0009/657063/FranchisingAustralia2014_webversion.pdf?bustCache=93366477 Howard Storage World (HSW), 2013, About Howards. www.hswgroup.com/ Howard Storage World (HSW), 2014, Storage products and storage solutions. www.hsw.co.in/ http://www.seekcommercial.com.au/business/howards-storage-world/1000 http://www.worldfranchisecentre.com/p-detail.php?bid=203 Malbon, J & Bishop, B 2014, Australian Export, Cambridge University Press. Spinelli, S Rosenberg, RM & Birley, S 2004, Franchising: Pathway to Wealth Creation, Prentice Hall, Upper Saddle River, NJ (ISBN: 9780768682069)  Sugars, B & Sugars B 2005, Successful Franchising, McGraw Hill Professional. Read More