Thinking of franchising into New Zealand? With relatively low barriers to entry for foreign franchise systems looking to enter the New Zealand market, it is becoming an attractive proposition.
Well, New Zealand is an exciting and fast developing market for franchising. The population of New Zealand is about 4.6 million and there are over 630 franchise systems—one for every 7,400 people—which is very high in comparison with other countries. Why? As a whole, New Zealanders love brands and businesses that succeed, and franchising offers people a chance to leave the security of employment and purchase a franchised business which should succeed provided the system is followed.
In 2017, a survey of New Zealand franchising was conducted by Massey University (Auckland) and Griffith University (Queensland, Australia). Highlights from that survey are as follows:
- The number of business-format franchise systems operating in New Zealand has increased, with 631 business-format franchise systems operating in 2017, compared with 446 in 2012.
- It is estimated that franchised businesses contribute around NZ $27.6 billion to the New Zealand economy.
- The number of units operating with business-format franchise systems has also increased, with an estimated 37,000 units, compared with 23,600 in 2012.
- There are an estimated 124,200 employees of New Zealand business-format franchise systems, up from 80,400 in 2012, with approximately 60 percent of the employees estimated to be in permanent full-time employment.
- Franchising covers a wide range of industry categories and sub-sectors. Predominant sectors included “retail trade” (23 percent), “other services” (20 percent), “accommodation and food retail” (18 percent), and “administration and support services” (8 percent).
- The median total start-up cost for a franchise was NZ $308,500 for retail and NZ $87,550 for non-retail.
- The median initial franchise fee was NZ $35,000.
- Fifty percent of franchise systems have been operating since before 2000.
- The overall level of disputes per franchised unit was low (1.9 percent). Only 22 percent of franchisors experienced a substantial dispute with a franchisee within the last 12 months.
There are no franchise-specific laws in New Zealand; however, there are existing laws which protect franchisees. The primary laws are Fair Trading Act 1986, Commerce Act 1986, and Contract and Commercial Law Act 2017. These statutes focus on misrepresentations and restrictive trade practices, including anti-competitive behavior.
Franchise Association of New Zealand
Unlike Australia where mandatory disclosure requirements are a fundamental part of the Franchise Code of Conduct, there is no mandatory disclosure regime in New Zealand. Having said this, the Franchise Association of New Zealand (FANZ) compels its members to a Code of Practice and Code of Ethics. While foreign franchise systems are not required to become a member of FANZ in order to operate within New Zealand, it is an attractive marketing tool for prospective franchisees who would be looking for FANZ membership as an important factor in deciding whether to purchase a particular franchise.
The FANZ define a franchise as:
“Franchise” means the method of conducting business under which the right to engage in the offering, selling or distributing of goods or services within New Zealand includes or is subject to at least the following features:
- the grant by a Franchisor to a Franchisee of the right to the use of a mark, in such a manner that the business carried on by the Franchisee is or is capable of being identified by the public as being substantially associated with a mark identifying, commonly connected with or controlled by the Franchisor; and
- the requirement that the Franchisee conducts the business or that part of the business subject to the Franchise Agreement, in accordance with the marketing, business or technical plan or system specified by the Franchisor; and
- the provision by the Franchisor of ongoing marketing, business or technical assistance during the term of the Franchise Agreement.”
The FANZ also defines a Franchise Agreement as:
“a contract, agreement or arrangement, whether express or implied, whether written or oral, between two or more persons by which one party to the agreement (‘the Franchisor’) grants, authorises or permits the other party to the agreement (‘the Franchisee’) the right to operate a Franchise. Any contract, agreement or arrangement which purports to be a Franchise Agreement shall be deemed to be a Franchise Agreement for the purposes of this definition, notwithstanding that it may lack any or all of the requirements or attributes referred to in the definition of ‘Franchise’.”
FANZ Code of Practice and Code of Ethics
The FANZ publishes the Code of Practice and the Code of Ethics and all members of it must comply with both Codes. The Code of Practice has four main aims which are as follows:
- To encourage best practice throughout franchising.
- To provide reassurance to those entering franchising that any member displaying the logo of the FANZ is serious and has undertaken to practice in a fair and reasonable manner.
- To provide the basis of self-regulation for franchising.
- To demonstrate to everyone the positive will within franchising to regulate itself.
The Code applies to all members including franchisors, franchisees or affiliates such as accountants, lawyers, and consultants, and all prospective new members of the FANZ must agree to be bound by the Code before they can be considered for membership.
What Does the Code Cover?
- Compliance – All members must certify that they will comply with the Code and members must renew their certificate of compliance on an annual basis.
- Disclosure – A disclosure document must be provided to all prospective franchisees at least 14 days prior to signing a franchise agreement. This disclosure document must be updated at least annually and it must provide information including a company profile, details of the officers of the company, an outline of the franchise, full disclosure of any payment or commission made by a franchisor to any adviser or consultant in connection with a sale, listing of all components making up the franchise purchase, references and projections of turnover, and possible profitability of the business.
- Certification – The Code requires franchisors to give franchisees a copy of the Code and the franchisee must then certify that he or she has had legal advice before signing the franchise agreement.
- Cooling-off Period – All franchise agreements must contain a minimum seven-day period from the date of the agreement during which a franchisee may change his or her mind and terminate the purchase. This is very important and the cooling off period does not apply to renewals of term or resales by franchisees.
- Dispute Resolution – The Code sets out a dispute resolution procedure which can be used by both the franchisor and the franchisee to seek a more amicable and cost-effective solution. The Code requires all members to try to settle disputes by mutual negotiation in the first instance and this process does not affect the legal rights of both parties to resort to litigation.
- Advisers – All advisers must provide clients with written details of their relevant qualifications and experience, and they must respect confidentiality of all information received.
FANZ Code of Ethics – All members must subscribe to the Code of Ethics which sets out the spirit in which the Code of Practice will be interpreted.
All franchisor members of the FANZ must have a franchise agreement, which contains a dispute resolution clause and a cooling-off provision. In order to resolve disputes, mediation is the favored method and has a high success rate in relation to franchising disputes.
New Zealand is a sophisticated market with relatively low barriers to entry for foreign franchise systems looking to establish themselves. At Aventus we have assisted a number of franchise systems to expand internationally into New Zealand and have found that it is the perfect ‘first’ country for franchisor clients looking to test the waters before expanding further into international markets. Whether via appointment of a country master franchise, or via direct appointment of franchisees, New Zealand offers a perfect opportunity for franchise systems to expand their international footprint.