Static NZ franchise sector needs regulation - expert

By Ben Chapman-Smith

Gehan Gunasekara, Auckland University associate professor in commercial law. Photo / Supplied
Gehan Gunasekara, Auckland University associate professor in commercial law. Photo / Supplied

The lack of growth in Kiwi franchisors expanding overseas is a result of weak regulation on home soil, says a university franchise expert.

A recent report on the New Zealand franchise sector showed there were currently 446 franchisors operating, up only slightly from 423 in 2010.

Massey University's Franchising New Zealand 2012 found about 23 per cent of those were currently franchising overseas - the same as in 2010.

Gehan Gunasekara, Auckland University associate professor in commercial law, believes the plateau has occurred because New Zealand has almost no regulation in the sector.

"The number of New Zealand franchise systems overseas has remained pretty static.

"I would argue the reason is that a franchisor has to reach a certain critical mass and develop a really good system at home before it can consider expanding overseas."

Gunasekara said that if it was made tougher to set up a franchise system, people would have to "really do their homework".

The resulting systems would ultimately be better grounded and have more potential for local and offshore success, he said.

"If you have more accountability, people will be more careful when they roll out franchise systems.

"We still have cowboys out there - there's no real accountability."

New Zealand does not regulate its franchise sector, unlike countries like Australia, but franchise owners can voluntarily join the Franchise Association of New Zealand (FANZ) and commit to its Code of Ethics.

According to its website, FANZ has around 200 members - including Burger Fuel, Cash Converters, Green Acres, Rodney Wayne, and Specsavers - which is less than half of the total franchisors operating in New Zealand.

"That's a major threat," Gunasekara said

"Everyone should be made to belong to FANZ or otherwise vetted in the same way."

New Zealand urgently needs to implement tight regulation like Australia, he said.

"New Zealand has been lagging behind Australia. Strict regulation has not held back franchisors in Australian, whereas here, we seem to have reached a plateau.

"We keep hearing that New Zealand is over-regulated and that it's held back businesses but Australia is highly regulated and they're growing well."

Gunasekara said Australian franchisors had to "do their homework" before they could roll out a system.

Massey University's study showed the average franchisor piloted their business for 12 months before making it available to franchisee owners.

"I'd say that's not long enough to see if the system works or not before you let other people take the risk," Gunasekara said.

"If it doesn't work you're going to take a dozen or more people down with you."

Ultimately, if franchise systems are not set up well their potential for future offshore expansion is limited, he said.

"The real crux of it is whether it's capable of worldwide expansion. You should be able to replicate it overseas.

"Otherwise, you're basically making a buck at the expense of a few franchisee owners."

The Franchising New Zealand 2012 survey found there are about 22,400 franchisee businesses operating in the country, employing 101,800 people.

Their combined turnover is estimated to be somewhere between $19.4 billion and $21 billion annually.

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