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FRANCHISING IN NEW ZEALAND

by Rory MacDonald
 

Franchising is a well established method of doing business in New Zealand. According to a survey conducted by the Franchise Association of NZ Inc. in 2003 and sponsored by the National Bank of New Zealand, there are some 350 active franchise systems in NZ with a turnover of NZ$6.9 billion. On average, new franchisees are paying NZ $132,000.00 in start-up costs. It is estimated that there are some 41,000 people employed in the franchise industry. The growth rate for franchised and company owned units is in the order of 25% per annum.

Franchising has been applied successfully in a wide range of retail and service sectors to a population of just over 4 million people. There is a strong culture in New Zealand of self employment and franchising has adapted well to such a culture.

The economy has shown exceptional GDP growth in the last three years at:

  • 2002   4.4%
  • 2003   3.5%
  • 2004   4.2%

However, some economists consider that the economy will slow down to about 2.4% in the year 2005. Unemployment is around 4% as at August 2004 and there is a marked skill shortage in New Zealand.

There is a relatively high degree of deregulation in New Zealand. From a legal perspective it is a straight forward procedure establishing a master franchise in New Zealand and there is no legislation which is specific to the franchise industry. There is legislation which impacts on the conduct of franchising such as consumer and employment law. Legal agreements used in New Zealand have a familiar pattern to offshore agreements. There is a strong emphasis in New Zealand on producing documents which are in plain English.

The Franchise Association, referred to above, does have a wide level of support and is an active organization which has a voluntary code of ethics as well as requiring its members to observe such procedures as alternative dispute resolution.

The country has three main cities comprising Auckland in the North Island, with a population of some 1.2 million; Wellington (the Capital), also in the North Island, with a population of 420,000; and Christchurch, in the South Island, with a population of 340,000. There are sizable smaller provincial cities.

Examples of overseas franchises which have come into New Zealand and have been successfully established here include of course the ubiquitous McDonalds and KFC, Burger King, Pizza Hut and Wendy's. More recent arrivals include Blockbuster, Starbucks, Esquires, Borders, Dunkin' Donuts, and a number of well established Australian franchises such as Muffin Break, Dymocks, Pizza Haven, Brumbies, Baker's Delight, etc. Some of the locally developed franchises have gone offshore and a good example is Fastway Couriers which is now found around the world.

In the past there has been a difficulty in raising venture capital for significant sized franchise operations but increasingly sources of such capital are becoming available. Because New Zealand has a small population, there is not the diversity of funding entities that tend to be found elsewhere. Four banks in New Zealand have specialist franchise divisions including the ANZ Bank, the National Bank, Westpac Bank and the ASB Bank. Packages for prospective franchisees are available for many franchise systems.

New Zealand has sophisticated communication systems, efficient banking and postal systems, and there is a high level of use of electronic communications. New Zealanders are perceived as having a willingness to adopt new technologies and new know how.

The New Zealand Dollar has gained in strength over other currencies in recent times and as at August 2004, the per capita income in New Zealand is about US$17,500.00.

New Zealand has a democratic government operating under the Westminster system. The country is regarded as virtually free of corruption and New Zealanders have a reputation for openness and willingness to work hard. With a mild climate, sport is a major feature in the lives of many New Zealanders as is witnessed by New Zealand winning and then retaining the America's Cup before losing it last year.

New Zealanders have a high level of home ownership (around 68%), are high up in the use of motor vehicles and have a high level of ownership of such things as personal computers, DVDs and cellphones. A more recent trend has seen New Zealanders eat out more frequently, particularly, because of longer working hours. There has been a steady growth in fast-food outlets and consumption of coffee at franchised outlets.

Many New Zealanders have travelled and lived abroad and are therefore familiar with products and brand-names that are not yet established in New Zealand. Younger New Zealanders have a familiarity with American products that are seen on U.S. television programmes. New Zealand traditionally operated on an agricultural-based economy and in a tightly regulated environment. However, a substantial de-regulation took place in the mid 1980s and the economy has steadily transformed since then. Specialised manufacturing, a small but vibrant information technology industry, tourism, timber, horticulture, wine-making, boat-building, and film-making (eg Xena and Lord of the Rings) are all examples of growth industries for New Zealand. The country operates a highly efficient and subsidy-free farming sector.

So what do Kiwis like to do in their spare time? With so much coast line, water-based activities mean that boating (particularly, yachting), fishing, diving, surfing and kayaking are popular. Many kiwi families have a garage full of boats and their cars are parked outside! Every town of any size has a golf course and a rugby ground. Although rugby is a passion for most New Zealanders, there are many other sports and leisure pursuits including cricket, softball, hunting, trout-fishing, horse-racing, skiing, etc. New Zealanders love being outdoors, generally, and with a mild climate, gardening and general house maintenance is popular.

Surprisingly, for a country of people who live outdoors, book-reading is very popular. The country produces many artists and craftspeople; as well as world-class orchestras and choirs. In other words, there is a cultural side to Kiwis which is sometimes overlooked because of the apparent obsession with sport and outdoor activities.

The further south one goes, the more conservative people become, particularly in the lower part of the South Island. The indigenous Maori people comprise 15% of the population. In the 19th century much of their land was taken from them by the government and there has been a long and painful reconciliation process with ensuing land ownership restoration and compensation. Maori culture has undergone a strong revival in recent times. There is also a significant number of people who have migrated to New Zealand from the Pacific Islands and from South East Asia. Overall, there is now a diverse social and racial mix, with little racial intolerance.

Kiwis view their Australian neighbours in much the same way as Americans view Canadians. There is much in common between the two countries with close economic, sporting and cultural ties. (It is a source of much national distress that New Zealand has been consistently beaten by Australia in Rugby for the past few years.) Kiwis see Australians as somewhat brash and uncouth and the Australians see Kiwis as their poor cousins! There is a higher standard of living in Australia (although not significantly) and, in fact, the two countries are very close (apart from Rugby!)

Because the lifestyles in both Australia and New Zealand are so similar, offshore companies often come to New Zealand first to set up business and become acquainted with the local market before crossing over to the Australian market, with a population some five times larger. It is considered by many franchisors who operate in Australia and New Zealand that competition in New Zealand is a little less intense.

New Zealand is a country undergoing change. Mediocre economic management has seen the standard of living slip from third highest in the 1950s to about 20th in the OECD ratings. A contributing factor has been the laid-back Kiwi lifestyle but changes are taking place which are manifesting themselves in longer working hours, more innovation and greater emphasis on developing industries which are focussed on world markets. That trend has been encouraged by smart young Kiwis who have worked abroad and are coming back here with a desire to mix lifestyle with successful businesses. In short, Kiwis are receptive to new ideas and products from overseas. The economy has performed significantly better in the last three years and there has been a steady influx of migrants, many of whom are keen to take on franchises.

 
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MacDonald Pilcher Partnership:
MacDonald Pilcher Partnership is a New Zealand law firm based in New Zealand’s largest city Auckland, providing specialist legal services to prospective and existing franchisors and franchisees. Rory is the principal of the firm, and Sarah is an employed consultant. Both have many years experience in franchising legal work.

Rory MacDonald has considerable Australasian expertise and experience, having practiced law in New Zealand and Australia over a number of years. Rory regularly attends franchise conferences in New Zealand as well as in Australia, USA, and Singapore. He is active in the Franchise Association of New Zealand and has written a number of franchising articles.

Sarah Pilcher has extensive experience both as a lawyer and working in businesses outside the law. She has a Master of Commercial Law with a focus on intellectual property and has a practical approach which is always appreciated by clients.


Contact:
Rory MacDonald
MacDonald Pilcher Partnership
P.O Box 37851, Parnell
Auckland 1151

Phone: +64 9 307 3324
Fax: +64 9 307 3325

Web: www.macdonaldpilcher.co.nz
Email: rory@macdonaldpilcher.co.nz

 
 
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