15th Dec 2012
GO to any established shopping centre and you can't miss it. Neon lights and signboards of different colours and designs light up the walkways, attracting shoppers and diners to establishments one will have seen in other similar centres.
One may think the franchise landscape is a hotchpotch of different shops but in reality, there is method behind the franchising industry in the country.
The industry is worth billions in excess of RM20bil a year and is growing. One of the factors behind this is recognition by the Government of the value franchising brings and the incentives and initiatives that were launched one-and-a-half years ago to elevate the industry.
These initiatives come in the form of promotion and assistance of micro-franchising, tax incentives and the establishment of the National Franchise Blueprint that is supposed to steer the industry to greater heights.
Over the last five years, even without substantial incentives, the franchising industry has been growing at a steady pace of 10% to 15% per annum despite the turbulence created by the global financial crisis since 2008.
But changes are taking place now, according to Malaysian Franchise Association chairman Abdul Malik Abdullah, for Malaysia to fully exploit the potential of this industry.
The micro-franchising scheme was introduced by the Domestic Trade, Consumerism and Cooperatives Ministry last July. It is supposed to open up more entrepreneurship opportunities for the lower income groups, youths and just about anyone who is interested.
“In the last 20 to 30 years, franchising was a business intended for people with a substantial amount of money as the minimum capital required is around RM300,000 and above.
“But, presently, under the scheme, a person can go into franchising in the form of kiosk-type business with an initial capital investment of RM50,000.
“And there is a micro-franchising fund where the person can apply for a loan to start off the business. Newcomers can get a 70%-80% loan of the start-up cost from the Government or specifically Perbadanan Nasional Bhd (PNS) that requires neither a guarantor nor collateral.
“The interest rate is also low at only 3%,” Malik tells StarBizWeek.
Since the launch of the micro-franchising scheme, there are 58 brands now involved in the micro-franchising business from just nine last year, he says.
“The Government is also encouraging big-scale franchisors to join the bandwagon of micro-franchising. For example, Bangi Kopitiam, Ani Sup Utara and Legend's Family Curry House now have stall-concept franchise,” he says.
D’silva: ‘We can have three types of OldTown White Coffee in the same mall.’
On tax incentives, Malik explains that to further support the development of the local franchise industry, the Government proposes that franchise fees borne by local franchisees be allowed tax deduction.
“All these initiatives are very helpful to the general public and they should make full use of this advantage,” he says.
Also for the first time in the history of franchising in this country since the 1930s, Malik says Malaysia has a National Franchise Blueprint. “This is actually a 10-year plan till 2020 for the industry to have a proper direction in line with the national and economic agenda.
“The blueprint will ensure the franchise industry grows at an optimal pace and also nurtures human capital experts for the sector,” he says.
Other agendas of the blueprint are to enhance competitiveness of Malaysian franchises, transform business through franchising and establish a dynamic franchise ecosystem.
Refreshed outlook
The franchise industry is expected to contribute RM22.5bil or about 2.6% to the Malaysian gross domestic product (GDP) this year. This reflects a rather small jump from last year's contribution of 2.5% or RM21.48bil to the GDP.
In the long term though, under the National Franchise Blueprint, the industry is forecast to account for 4.3% and 9.4% of GDP by 2016 and 2020 respectively.
At present there are 603 franchise brands in Malaysia and some 6,000 franchisees nationwide.
Malik anticipates the franchise industry will post stronger growth next year as a number of new brands enter the market.
“A lot of these new brands will revolve around products in the concept of snacks and dessert foods.
“These kinds of products have proven to garner huge demand currently in the market such as Tutti Frutti, a US-brandname brought by the Naza Group in Malaysia, which has opened 120 outlets in two years,” he says.
Due to low level of awareness and perhaps “big-risk” associated with getting into a business, Malik says only 70%-80% of the RM8mil fund granted by the Government for the microfinancing of local brands has been used since it was launched last July.
“We have problems getting people into the business because they are scared of the risk of running their own business.
“A lot of people do not see the potential of being a franchisee compared with a conventional business start-up,” he says.
Malik says that as a franchisee, one will buy into an already tested brandname in the market, complete with its own operation manual as well as consistent guidance and training from the franchisor.
“So obviously, the risk is much less than starting a business on your own,” he says.
In retrospect, Malik says because of the lack of awareness, the industry has yet to reach its optimal level. In other words, there is a lot more room for growth.
“If we compare Malaysia with Singapore, the latter with a much smaller population has about 30,000 franchisees. Malaysia has about 6,000,” he says.
Increasing awareness
Nevertheless, Malik says the focus on increasing awareness on the potential of franchising has already being aggressively implemented since last year.
“The Government has a few programmes that were implemented last year to attract people, especially from the lower income group and rural areas, to get into franchising.
“There is a community franchise programme where some of the franchise brands set up booths to promote their brandname alongside PNS for inquiries and financial assistance,” he says.
The community franchise programme, launched in October 2011, has the potential to attract RM132.3mil in investment for 1,213 future franchisees.
Currently, Malik says food and beverages (F&B) is still the top of the franchising industry, commanding about 35% market share. But emerging trends indicate that franchising traction is being seen in childcare, children's education as well as healthcare.
“Apart from kiosk-type franchising, another up-and-coming trend in the industry is mobile-franchising such as Pro Cleaners where they provide mobile cleaning services,” he says.
Trailing behind the F&B segment are the apparel and accessory segment with a market share of 12%, service and education both at 11% each and beauty and health at 10%.
In the F&B segment, one of the booming sub-segments of this sector is the kopitiam segment. Here. OldTown White Coffee is leading the pack.
Executive director Clarence D'Silva says OldTown is diversifying its restaurant style to kiosk-type as well as more premium style outlets.
“We can have three types of OldTown White Coffee in the same mall catering to different markets and lifestyles,” he says.
Apart from that, D'Silva reveals that OldTown has switched to Jakim halal certification for all its outlets from certification by a private body.
“We want to expand our Muslim customer base as in the past, 80% of our customers were non-Muslims. Ultimately, we want to capture the dominant Malay market in Malaysia.
“In order to be in compliance with Jakim, we need more Muslim employees and we plan to recruit more locals,” he says.
D'Silva says OldTown also plans to attract more bumiputra franchisees.
“In fact, we are targeting 50% of our new franchisees to be bumiputras,” he says.
In terms of growth in the number of outlets, D'Silva is confident the franchise chain will add 20 more outlets this year.
“We will end up having a total of 200 outlets in Malaysia, 10 in Singapore, 11 in Indonesia and four in China,” he says.
Another F&B franchise company Chaswood Resources Holdings Ltd, listed in the Singapore stock exchange, carries in its portfolio brandnames such as T.G.I. Friday's, Watami Japanese Casual Restaurant, Italiannies, The Apartment Restaurant & Bar, Teh Tarik Place, Laundry, Republic and Malones Irish Bar & Restaurant.
It plans to expand its footprint regionally with its specialty restaurants.
“We were listed in March, hence we're still young. Our next goal is to get into the main board.
“We have already established ourselves in Malaysia. Now I am looking at Singapore, Thailand and Indonesia,” managing director Andrew Reddy says.
EVEN though Asia was hit by the global financial crisis and its after-effects, businesses in the region have fared better as economic growth in this part of the world has been resilient.
Franchise businesses such as those under the Chaswood Resources umbrella expanded despite the economic downturn.
Managing director Andrew Reddy, who manages more than 10 food and beverage (F&B) brands, debunks the myth that the F&B industry is recession-proof. Reddy says people will cut spending budgets when the economy is not in the pink of health.
“There's nothing that is recession-proof. You must realise that when there's a crisis, people spend less,” he says.
However, his goal is to answer questions such as: How do we get people to come and indulge in our place? What is it that we have to give?
With successful franchise brands to boot, Reddy states one of the reasons the brands have managed to flourish in tough times is the fact that people are familiar with what the brands offer.
From the onset of a crisis, many businesses get “burnt out”. Many that have booked rental space opted out. New shopping malls added to the glut of space.
Reddy says it is important to build on the strength of the business and then make expansion plans.
“We did that with T.G.I. Friday's. From 2003 to 2005, we had a lot of cash reserves, and opted not to pay any dividends to ourselves,” he explains.
It was in 2007, when the crisis was bubbling, many businesses cancelled bookings for rental space. This left landlords in a lurch as they were left with unoccupied shoplots or rental spaces.
When landlords approached him with the possibility of him taking their spaces, Reddy jumped at the opportunity.
“When 2009 came, we had to deliver 13 restaurants because I had committed to be in all these new malls and spaces,” he says.
It was because Chaswood Resources had kept a lot of cash reserves that it was able to commit to opening its restaurants in those new spaces.
It's not as easy as it looks
Contrary to popular belief, operating a franchise is not as easy as it looks. Owning and running a franchise business does come with its own set of challenges, which may be too hard for some to overcome.
In the early days of OldTown's operations, prior to its listing on the Main Market of Bursa Malaysia, it was operating on a licensee basis. It was only in 2009, four years down the road that the then total 117 OldTown White Coffee licensees were converted into franchise operators.
“It was tough to convince the licensees to convert into franchise operators because it would mean more restriction and control for them,” executive director Clarence D'Silva says.
Among the stringent requirements needed to achieve franchise operator status is the development of the trademark systems. D'Silva says the trademark systems include innovations that enables the business to be recognised as a franchise operator.
There are numerous things, he says, and briefly mentions training systems, and franchise and operation manuals.
“One of the key concerns of franchise operators is the ability to control and maintain a certain level of standard and compliance. This is something that can't be done using the licensing system,” he says.
Using the franchise system, the franchisor controls various matters related to the marketing and development of the brand. In the case of OldTown, this includes new menu launches and promotions.
From another perspective, Gourmet Corner Sdn Bhd director Wilson Beh, who is one of the earliest licensee-turned-franchisees of OldTown White Coffee shares his experience. He operates one of OldTown White Coffee's largest franchisee groups with 15 outlets.
Having found an attraction in the concept of the franchise, he decided to start his own in August 2005. He first took over the Ipoh Padang outlet. Beh says his initial capital back then was between RM200,000 and RM300,000.
Starting with a two-page menu, Beh, a chef by training, had given the franchisor ideas that proved to be a win-win situation for both parties.
He says the fees he pays to the franchisor only amounts to 5% of the outlets' gross sales.
“I think the 5% is worth paying as there is a lot of difference in the power of the franchise versus that of independent outlets. This way, it saves us a lot of work such as branding. If not for relying on OldTown's systems, we would not have been able to manage 10 to 15 outlets,” he says.
D'Silva says OldTown does not short-change its franchisees. “Whatever we collect from them, in terms of advertising and promotional fees, is 100% reinvested into all our activities.”
OldTown's ratio between direct shops and franchise operators was previously hovering in the 40:60 ratio. “Last year, we went through our corporate exercise and some of these shops were actually bought back,” he says.
D'Silva explains that he would like to maintain the current 50:50 ratio moving forward as it gives the company some form of control. “If you have a certain amount of control and also run the franchise operations, we would be aware of the shortcomings of the business. You would share the pain of the franchisees,” he says.
From the corporate aspect, the branding of the business is a priority.
“We would go to locations that may not make money but we establish ourselves there to maintain a brand presence,” he says.
D'Silva mentions that 10% of the company's shops are not profitable, exemplifying the Pavilion outlet and the “new generation” kiosk at KL Convention Centre, due to high rental cost.
“As the owner of the brand itself, we would be more willing to do it to benefit both us and the franchise operators,” he says.
Over the past seven years of operations, only two franchisees have dropped out.
“What we provide to our franchise operators is a set of systems, a guide of products, corporate identity, and training to help them manage the business. In the long run, we continually meet up with them to exchange ideas. As they are on the ground', listening to them can guide us towards the right direction,” he says.
Finding a franchisee that is willing to walk the extra mile and put in the extra effort in making the business work is important, he adds.
“On the sidelines, location is important but the effort to manage the business well is also paramount,” he says.
[Source]
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