FIRST MALAYSIAN FRANCHISE PROFILING SURVEY

Transcription

1 FIRST MALAYSIAN FRANCHISE PROFILING SURVEY By Chee Hee Hoe 1, Abdul Rahim bin Othman 2, Filzah binti Md Isa 3, Zolkafli bin Hussin 4, Amy Azhar bin Mohamad Harif 5, Hijattulah bin Abdul Jabbar 6, Siti Norezam binti Othman 7, Norkhazzaina binti Salahuddin 8 EXECUTIVE SUMMARY The Franchise Profiling Survey on Franchisors and Franchisee in Malaysia 2010 was conducted from 9 th February to 13 th April This survey was conducted on all franchisors that are still in operation and registered with the Registrar of Franchise (ROF). Data on the franchisees were captured through the franchisors that were surveyed. The main aim of this survey is to collect data in order to have an in-depth understanding about the current status of franchising in Malaysia, the current practices, performance, needs, expectations, key challenges and any other issues related to franchising. The information gathered from this study will provide the inputs and form the basis in the formulation of the Malaysian Franchise Blueprint With this blueprint, the Malaysian government would be able to design better policies, strategic recommendations and development programs in order to re-energise and further enhance the growth and development of the franchise business sector in Malaysia. The data sought in this survey included the following, 1) detailed business and operational data which include basic company information and profile, franchise network and high-level franchise information; and 2) qualitative data relating to needs, expectations, issues and challenges faced by franchisors and master franchisees, and the critical success factors to facilitate the development of their franchise business and the franchise industry as a whole. In conclusion, the researchers in this study were able to gain an insight into the current status of franchising in Malaysia. The researchers were not only successful in collecting the important quantitative data, but from the sidelines, they were also able to gather some pertinent and equally important qualitative data in the form of sentiments and personal viewpoints about what they thought is the state of affairs of the Malaysian franchising sector, the issues and challenges. Thus, the results of this survey are important inputs to the policy makers of the Malaysian franchising sector who are keen to design more proactive and effective policies, strategic recommendations and development programmes in order to bring the franchising sector to a higher level of growth and development. Keywords: Franchising, profile of franchises, franchisor, performance INTRODUCTION Franchising in Malaysia first started in the 1930s with the introduction of the product distribution franchises such the Singer Sewing Machines, petrol kiosk such as Shell and 1 Chee Hee Hoe, College of Business, Universiti Utara Malaysia (corresponding author) chhoe@uum.edu.my 2 College of Business, Universiti Utara Malaysia 3 College of Business, Universiti Utara Malaysia 4 College of Business, Universiti Utara Malaysia 5 College of Business, Universiti Utara Malaysia 6 College of Business, Universiti Utara Malaysia 7 College of Business, Universiti Utara Malaysia 8 College of Business, Universiti Utara Malaysia

2 Esso and automobiles via the Wearne Brothers. A & W was the first fast food franchise that came to Malaysia in the 1960s, KFC in 1973 and McDonalds in There was not much attention given to franchise business sector and its growth and development was relatively slow compared to the other countries which saw the potential and business opportunities of this sector. The franchising sector was then given a boost when in 1992, the then Prime Ministers of Malaysia, the Right Honourable Dr. Mahathir Mohamad decided that franchise was to be given special encouragement to develop and flourish in Malaysia. His argument was that franchising could be used as the vehicle for entrepreneurial development for the Bumiputera community who were still relatively lagging behind in terms of entrepreneurial development (Hoe, 2001). The Franchise Development Unit was the set-up under the auspices of the Prime Minister Department. In 1994, the Malaysia Franchise Association was established to further boost the franchising sector. The Malaysia Franchise Act was gazetted in 1998 with the aim of streamlining and coordinating the franchise business sector. However, despite the various incentives, schemes and franchise development programmes put forward by the Malaysian government, the franchising sector in Malaysia has still not grown to its full potential. While the franchising sector in other countries has grown rapidly and contributed much to the retail sector in terms of distribution of goods and services, this has not been seen in the Malaysia scenario. To date, a franchise survey has never been conducted before in Malaysia and as such, the facts and figures in terms of the number of franchises, franchisors and franchisees are not known. Questions such as its total value, the total number of employees employed by the franchise sector, the types of business sectors, current issues and the problems faced by the franchisors and franchisees and other aspects related to franchising could not be ascertain. Thus, it is timely that some indicators and measurements of the franchise sector be made available. This Malaysian Franchise Survey provides the platform to investigate among others, who are the main players, the various franchise business sectors, the profile and distributions of franchises in Malaysia and what are the current issues and problems which are deemed important to the franchisors. The Franchise Profiling Survey on Franchisors and Franchisee in Malaysia 2010 was conducted from 9 th February to 13 th April This survey was conducted on all franchisors that are still in operation and registered with the Registrar of Franchise (ROF). Data on the franchisees were captured through the franchisors that were surveyed. The main aim of this survey is to collect data in order to have an in-depth understanding about the current status of franchising in Malaysia, the current practices, performance, needs, expectations, key challenges and any other issues related to franchising. The information gathered from this study will provide the inputs and form the basis in the formulation of the Malaysian Franchise Blueprint With this blueprint, the Malaysian government would be able to design better policies, strategic recommendations and development programs in order to re-energise and further enhance the growth and development of the franchise business sector in Malaysia. 1. RESEARCH METHODOLOGY 1.1 Research Design For the purpose of collecting the primary data, the survey questionnaire is the instrument used in this study. The design of the questionnaire was in the first instance, based on the 2

3 terms of reference of the research project. From the terms of reference, the parameters to be measured in this study are then developed. The validation process of the questionnaire involved a series of construction, consultation and verification with franchise scholars, industry players as well as policy makers. Finally, the questionnaire is endorsed by the client before it was administered to the respondents. 1.2 Population for the Study The focus of this study is on the franchise business sector in Malaysia. The population frame for this study is based on all the franchise businesses registered with the Registrar of Franchise (ROF) and the Malaysian Franchise Association (MFA) Directory Based on this population frame, primary data are collected from all franchisors and master franchisees. Franchising is a business opportunity by which the owner (producer or distributor) of a service or product grants exclusive rights to an individual for local distribution and/or sale of a service or product, and in return receives a payment or royalty and conformance to quality standards. Franchisor can be defined as the individual of business granting the business right to a franchisee while franchises are the individuals of business granted the right by the franchisor to operate in accordance with the chosen method to produce or sales the product or service. 1.3 The Questionnaire The survey was conducted by means of a mailed questionnaire. A total of 40 questions were included. Not all of the questions in the questionnaire were relevant to every respondent and some answers required additional information and hence, the amount of information required varies between respondents. The Questionnaire was structured into 5 sections Section A (Introduction), Section B (Basic Information System), Section C (Franchisor Profile), Section D (Franchise Network), and Section E (Issues, Needs, and Expectations). The questionnaire was mailed to franchisors through electronic mail and postal service. In order to obtain a higher rate of response and co-operation from the respondents, a covering letter from the Ministry of Domestic Trade Cooperative and Consumerism together with the explanation contain in section A that emphasized its importance to them and the confidentially of the survey was included. 1.4 Response Rate 3

4 A total of 68 usable responses were obtained, which represents an overall response rate of 37 percent of the net population frame of 184 franchisors. Detailed information of responses, taking into consideration the gross population, out of frame, useable and unusable responses, is presented in Table 1. Table 1: Population Frame and Response Rate Item Number of Franchisors Percentage Gross Population Frame 388 (-) Dropped list a 88 Potential Population 300 (-) Inactive franchisors b 116 Net Population Frame (-) Refused to participate Available Responses (-) Unusable responses c Useable Responses d Notes: a The dropped list includes franchisors with invalid contact details (32), several franchisors with same trademark (22), and franchisor with several trademarks (18). See Appendix 1 for details. b Initial telephone calls, s and/or postal correspondence were made to all 300 Franchisors. A total of 116 businesses were considered as inactive due to various reasons, mainly due to unanswered phone calls/ s, and incomplete/wrong mail addresses (97). See Appendix 2 for other details. c These responses were discarded due to incomplete data. Follow-up calls were made, but failed or unable to get full cooperation from the respondents. d Inclusive of data obtained and/or rectified via follow-up calls for a number of missing values/incomplete data. 1.5 Data Collection Procedure Data collecting involved the use of electronic mail, telephone interviews and face to face or personal interviews. Figure 1 showed the process conducted in this survey. The process started with acquiring the complete list of franchisors and master franchisees from the population frame. The next step involved screening the list obtained from the ROF and MFA. Introductory calls were then made on all the potential respondents. Upon getting the respondents agreement to participate in the survey, questionnaires were then distributed through and/or postal service. The next important step is the effort employed in ensuring getting feedback from the respondents. Finally, after getting the feedback, data were validated by comparing the data from the Companies Commission of Malaysia (CCM). The detailed process is explained as below. 4

5 Step 1 The list of potential respondents was taken from directories of the Register of Franchise (ROF) and the Malaysian Franchise Association (MFA). Screening process was carried out by comparing the two lists of directories. From this comparison, the research team was able to determine the list of active and bona fide franchisor which will form the sample base for the survey. The screening process is important because of the high occurrences of information duplication for instance, repetitive franchisors list, one trademark with numerous franchisors, and a franchisor owning numerous trademarks. In addition, incomplete information included factors such as no contact number, no contact person and wrong address given. The screening process took 8 days to complete. Step 2 The next step is to get the survey started. To initiate the survey proper, introductory calls was firstly made to all prospective respondents, in order to inform the respondents of the purpose of this survey and the responses will be kept confidential. Another purpose of the introductory call was to verify the franchisors status, whether they are still active or otherwise and also whether the information provided by ROF and MFA is still valid or not. In addition, information of the person in-charge, correspondence address, address and contact numbers were also obtained. However, information of certain respondents cannot be obtained due to wrong telephone numbers and/or the telephone service has been terminated. Step 3 The communication channel of questionnaires distribution was dependent on respondents preferences. Most of them preferred to be sent the questionnaire through due to length of the questionnaire and the time given was very limited to fill-up the questionnaire. Apart from that, a few respondents preferred to be sent the questionnaire through postal service due to non-availability of internet services and/or broke down in their internet system. Distribution of questionnaires was carried out for 16 days started from 23 rd February 2010 until 16 th March From 23 rd February until 2 nd March, the questionnaires were distributed after the first introductory calls have been made. Follow-up actions included the distribution of questions for the second time because of respondents claiming non receipt of questionnaires and or changes in the persons responsible for answering the questionnaires. These follow-up actions commenced from 3 rd March until 16 th March,

6 Step 4 Collection of answered questionnaires from respondents began 1 st March until 12 th March 2010, lasting a total of 31 days. The questionnaires obtained were then screened and categorized into three categories which are complete, minor incomplete and major incomplete. Minor incomplete questionnaires are defined as those with missing data below 25%, and major incomplete questionnaires are those with missing data more than 25%. The purpose of this category is to ensure that the questionnaires are usable and to reduce the missing data due to the length of the questionnaire being too long. Actions were taken for the minor incomplete data by follow-up resending of the questionnaire and in assisting the respondents to fill-up the missing data through telephone calls and face-to-face interviews were carried out to fill-up the major incomplete sections of the questionnaire. Step 5 After receiving all the feedback, validation of the data was performed between the information obtained from the respondents and the information from the list such as company names and their trademarks. The data of sales turnover and profit after tax obtained from the respondents were also validated by comparing the data with the data obtained from CCM. Acquisition of population frame Screening MFA and Ministry List Introductory call Result: A completed profile of franchisor Getting Validation Getting feedback Distribution questionnaires Figure 1: Steps in Conducting Profiling Survey 1.6 Limitations of Study This survey was conducted through three phases. The data were collected through s, posted questionnaires and face-to-face interviews. However, not all the feedback could be 6

7 acquired completely from the respondents. This was due to difficulties encountered during the various stages of pre-data collection, data collection and post-data collection. Among some of the constraints faced by the researchers during the pre-collecting data was whereby the franchisors list provided by ROF was incomplete, out of date and/or not integrated with other sources such as the list provided by the MFA. During the data collection stage itself, there were constraints that prevented the researchers from getting the full support of the respondents. Firstly, the person in-charge that have been communicated by the research assistants and as such have been appointed (or identified) as the person responsible for answering the questionnaires was later found not to be the right or suitable person to fill-up the questionnaires. Thus, they could not furnish the exact data required of the questionnaires. In addition, there were instances whereby the person in-charge that could not fill-up the questionnaires because they were new in the company. Furthermore, there were cases where respondents that have been contacted earlier on for survey and interview purposes, could not be contacted for the second time (or follow-up calls) because of they did not answer their mobile telephones. This survey can be considered as an extensive survey because from the onset it included all of the franchisors and master franchisees registered in Malaysia who are located across the country. But the time period of 2 months that was given to complete the study is in itself a limitation and is insufficient for a study of this magnitude. Due to this limited time given to the respondents to answer the questionnaires, many of the respondents refused to participate and did not want to give feedback as required of them. In addition, many respondents claimed they were busy due to a lot of activities for instance; companies were too busy and concerned with the rather important activity of closing their annual accounts during the months of February and March. Despite initially agreeing to answer the questionnaires, respondents after having reviewed the questionnaires, refused to participate due to the questionnaire design that were deemed by them to be rather confusing, too lengthy and/or redundant information required. Besides that, they also refused to participate due to their business being at the liquidation stage. Perception by respondents that this sort of survey should not be carried every year also contributed to lack of participation by respondents. At the post-data collection stage, response rate for the question related to the sales turnover of outlets and profits after tax of outlets was very low. Therefore, the data had to be interpreted 7

8 cautiously. Discrepancies in the total number reported, for example the total number of franchisees in Figure 2, Table 2, and Figure 3, were due to missing responses. 2. SURVEY RESULTS The following survey results have been presented in the order that they appeared in the questionnaires. Responses have not been manipulated in any way, apart from the correction of obvious errors made by franchisors participating. In some cases respondents were telephoned and ed in order to clarify their responses where the data were out of range. To assist comprehension, additional tables summarizing common responses have been included. Hence, the data presented have not been estimated to infer results for the sample of franchisors. In this section, the data relate only to respondents of the survey. 2.1 Franchisee Franchisor Network Number of Franchisee The numbers of franchisees from the year 2005 till 2009 is on the increasing trend. The average growth for the whole sectors (Bumiputera, non-bumiputera and foreign) is about 31.5 percent for the past five years. Meanwhile the average growth rate for Bumiputera sector is about 22 percent, for non-bumiputera sector is about 34 percent and for foreign franchisees is about 34 percent. The growth rate for the latest year (2009) for non-bumiputera is about 60 percent compared to Bumiputera 22 percent and foreign 39 percent. Thus, from this development it shows that the number of non-bumiputera franchisees is growing much higher when compared to the Bumiputera franchisees. The growth rate for foreign franchisees is also much higher when compared to the Bumiputera franchisees. 8

9 Bumiputera Franchisees Non-Bumiputera Franchisees Foreign Franchisees Total Figure 2: Number of Franchisees Profile of the Franchisee (Age) In Table 2, the group of franchisees in the age group of under scored the highest number of franchisees in Malaysia which is 146. From these 146 franchisees, the number of non-bumiputera franchisees is much greater than the number of Bumiputera franchisees which is 99 and 43 respectively; with the balance 4 franchisees are of foreign origins. Table 2 also showed that the least number of franchisees are those who are in age group of which scored only one franchisee and also happens to be a Bumiputera franchisee. The highest and the lowest number of franchisees scored for different age groups varied between the Bumiputera, non-bumiputera, and foreign categories of franchisees. For the Bumiputera category, the highest number of franchisees is 43 who were in the age groups while the lowest is one franchisee in the age groups. In the non-bumiputera category, the highest score of 99 franchisees was from the age groups while the lowest number of franchisees is 6 who were in the age-group. As for the foreign franchisee category, the highest number of franchisees is 7 from the age groups, while the lowest number of franchisees was 3, from the age groups. 9

10 Table 2: Age of Franchisee Age Bumiputera Franchisees Non-Bumiputera Franchisees Foreign Franchisees Total > Total Profile of the Franchisee (Gender) Figure 3 showed that the number of male Bumiputera franchisees is much higher than the female Bumiputera franchisees. 10

11 Bumiputera Non-Bumiputera Franchisees Franchisees Foreign Franchisees Total Male Female Total Figure 3: Gender of Franchisee In terms of percentage, the male Bumiputera franchisees are approximately 62 percent compared to only 38 percent female Bumiputera franchisees. As for the non-bumiputera franchisees the data is of the reverse order, with 71 percent being female franchisees compared to 29 percent male non-bumiputera franchisees. For foreign franchisees the percentage for male and female is about the same Current Number of In general there is an increasing trend in the number of outlets in the franchise sector. The average growth of outlets for the past five years is about 58 percent. For the Bumiputera category, the average growth franchise outlet is about 49 percent, whereas for the non- Bumiputera category, the average growth franchise outlet is about 31 percent and companyowned outlets is about 62 percent, foreign franchise outlets is about 139% and foreign company-own outlet is about 20%. Thus based on Figure 4, it showed that there is a very significant increase in the number of outlets in foreign franchise. 11

12 Bumiputera Franchise Non-Bumiputera Franchise Company-owned Foreign Franchise Foreign Company-owned Total ,107 1,265 1,959 Figure 4: Number of Projected Growth of Figure 5 shows that by the year 2010, there will be 1,565 more outlets that is planned to be set-up by franchisors. From this projected total, 667 will be the local franchise outlet, 345 will be the local company-owned outlets, 345 will be the foreign franchise outlets and 208 will be the foreign company-owned outlets. For the year 2011, a total of 1,785 outlets is planned to be opened; comprising of 858 local franchise outlets, 446 local company-owned outlets, 68 foreign franchise outlets and, 413 foreign company-owned outlets. For the year 2012, a total of 2,178 outlets is planned to be opened and they comprise of 1,026 local franchise outlets, 440 local company-owned outlets, 95 foreign franchise outlets and, 617 foreign company-owned outlets. For the year 2013, total of 2,805 outlets is planned to be opened and they comprise of 1,332 local outlets, 521 local company-owned outlets, 130 foreign franchise outlets and, 822 foreign company-owned outlets. For the year 2015, a total of 4,976 outlets is planned to be opened and they comprise of 2,917 local outlets, 707 local company-owned outlets, 322 foreign franchise outlets and, 1,030 foreign company-owned 12

13 outlets. In summary, there is an increasing trend of total planned number of outlets for the next five years Local Franchise ,026 1,332 2,917 Local Company-owned Foreign Franchise Foreign Company-owned ,030 Total 1,565 1,785 2,178 2,805 4,976 Figure 5: Projected Growth of Distribution of Local Table 3 shows that central region scored the highest number of 855 outlets which covered the states of Selangor, Kuala Lumpur, Negeri Sembilan, and Malacca. The Northern region scored the second highest of 229 outlets which covered the states of Penang, Kedah, Perak, and Perlis. While in the south all of the 212 outlets are only located in the state of Johore. The lowest number of distribution among the regions in Peninsular Malaysia is in the East coast 13

14 region which has only 62 outlets. As for the states of Sabah and Sarawak taken together, the total number of outlets is only about 77 outlets. Table 3: Distribution of Local Rank State Bumiputera Franchise Non-Bumiputera Franchise 14 Companyowned Total Local 1 Selangor Kuala Lumpur Johor Pulau Pinang Kedah Perak Negeri Sembilan Sabah Melaka Sarawak Pahang Terengganu Kelantan Perlis Labuan Total , Distribution of Foreign Table 4 showed that there were only a total of 27 franchise outlets operating outside of Malaysia. Twenty (20) of them are franchise outlets that are located in the Asia Pacific and ASEAN regions. There were also 7 company-owned outlets that are located in the Middle East and ASEAN regions. Table 4: Distribution of Foreign Region Franchise Companyowned Total Foreign North America South America Europe Country Middle East Saudi Arabia, Syria Africa Oceania Asia Pacific Hong Kong, China, India ASEAN Singapore, Philippines, Thailand, Indonesia, Brunei Total

15 2.1.8 Number of Staff In year 2005, there were 1118 people employed by the local franchise sector. There is an increasing trend on the number of staff being hired between the years 2005 to As shown in Figure 6, the total number of staff hired for year 2009 was At Bumiputera Franchise (Local) ,891 At Non-Bumiputera Franchise (Local) At Company-owned (Local) ,045 1,256 At Franchise (Foreign) At Company-owned (Foreign) Total 1,118 1,239 1,470 1,983 4,592 Figure 6: Number of Staff at Financial Performance by Franchisors were asked to provide two types of financial data of their outlets, i.e. sales turnover and profit after tax (questions 10 and 11, Section D). A detailed breakdown of sales 15

16 and profit performances by specific categories of outlets, covering from year 2005 to 2009, is shown in Table 5 and 6 respectively (see also Figure 7 and 8). Table 5: Sales Turnover from Franchise Business - All, (n = 45)* Year Bumiputera Franchise (RM) Local Non-Bumiputera Franchise (RM) Companyowned (RM) Franchise (RM) Foreign Companyowned (RM) Total (RM) ,237,462 2,723,379 85,928, ,889, ,044,345 17,417,701 97,714,464-8,893, ,070, ,472,001 30,532, ,291, ,560 11,597, ,143, ,798,545 40,070, ,921,603-14,455, ,246, ,125,365 54,518, ,295,695-13,861, ,801,009 *Note: Number of responses for each year varies slightly or less than 45 due to missing items. Figure 7 Total sales turnover of all outlets,

17 Table 6: Profit after Tax from Franchise Business - All, (n = 44)* Year Bumiputera Franchise (RM) Local Non-Bumiputera Franchise (RM) Companyowned (RM) Franchise (RM) Foreign Companyowned (RM) Total Average (RM) , ,214 2,237, ,269, , ,722 3,081, ,531, ,476 1,123,690 1,055, ,492 8,000 3,292, ,122, ,984 1,792,163-10,000 3,282, ,257, ,968 1,314,356-15,000 3,422,800 *Note: Number of responses for each year varies slightly or less than 44 due to missing items. Figure 8 Total profits after tax of all outlets, Table 5 and 6 indicated the increasing trend of sales and profits performances, with one notable exception in terms of profit performance for non-bumiputera franchise outlets in

18 Despite this increasing trend in sales profits and performance by athletes, the average sales trend per outlet showed slightly decreasing trend, with an exception to 2006, as shown in Table 7 (see also Figure 9). On the other hand, cyclical trend is observed in terms of average profit per outlet, as shown in Table 8 (see also Figure 10). Table 7: Average Sales Turnover per Outlet, (n = 45)* Year Bumiputera Franchise (RM) 1,794,195 (28) 1,590,881 (39) 859,236 (89) 834,532 (110) 739,381 (153) Local Non-Bumiputera Franchise (RM) 73,605 (37) 341,524 (51) 328,311 (93) 426,287 (94) 358,672 (152) Companyowned (RM) 1,161,197 (74) 1,149,582 (85) 952,818 (121) 827,295 (151) 648,397 (221) Franchise (RM) Foreign Companyowned (RM) Total Average (RM)*** - - 3,028, ,280 (2) ,916 (137) 69,864 (166) 76,082 (190) 53,728 (258) 3,146,902 2,335,509 2,164,196 1,800,178 Note: * Number of responses for each year varies slightly or less than 45 due to missing items. ** Average per outlet is computed by dividing sales turnover (see Table 5) by number of outlets. Number of outlets for this purpose (given in parenthesis) is slightly varied from total number of outlets as presented earlier in Figure 4, due to differences in the response number. ***The amount is a summation of average turnover per-outlet for each category in the relevant year. 18

19 Figure 9: Average Sales Turnover per Outlet, Table 8: Average Profit after Tax per Outlet, (n = 44)* Year Bumiputera Franchise (RM) 46,892 (7) 50,110 (18) 37,979 (25) 24,402 (46) 22,455 (56) Local Non-Bumiputera Franchise (RM) 78,246 (9) 34,233 (16) 35,115 (32) 18,841 (19) 26,124 (32) Companyowned (RM) 34,420 (65) 39,506 (78) 27,770 (38) 24,550 (73) 25,276 (52) Franchise (RM) Foreign Companyowned (RM) Total Average (RM)*** , ,848 78,246 (2) - - 8,000 (1) 10,000 (1) 15,000 (1) 187,111 77,793 88,855 Note: * Number of responses for 2008 and 2009 is less than 44 due to the missing items. ** Average per outlet is computed by dividing average profit (see Table 8) by number of outlets. Number of outlets for this purpose (given in parenthesis) is slightly varied from total number of outlets as presented earlier in Figure 4, due to differences in the response number. ***The amount is a summation of average profit after tax per-outlet for each category in the relevant year. Figure 10: Average Profit after Tax per Outlet,

20 2.2 FRANCHISOR PROFILE Franchise Sector Table 9 showed the number of franchisors by sectors. The number of franchisors in the food sector is 12 (17.65 percent), convenience shops and supermarkets is 2 (2.94 percent), health and beauty care is 4 (5.88 percent), clothing and accessories is 8 (11.76 percent), retailing is 9 (13.24 percent), services and maintenance is 13 (19.12 percent), learning centre and nursery is 13 (19.12 percent), IT, telecommunication and electrical is 4 (5.88 percent), landscaping and furniture is 2 (2.94 percent) and others is 1 (1.47 percent). The highest number of franchisors falls under two sectors; the services and maintenance sector, and also learning centre and nursery. Table 9: Franchise Sector No Franchise Sector Count Percent 1 Food Convenience Shop & Supermarket Health & Beauty Care Clothing & Accessories Retailing Services & Maintenance Learning Centre & Nursery IT, Telecommunication & Electrical Landscaping & Furniture Others Total

21 Figure 11: Franchisor by Sector Franchise Brand Figure 12 showed that the number of homegrown/local franchise brands was higher compared to foreign franchise brands. In terms of percentage and the number, homegrown/local was higher (56 brands, percent) than foreign franchise brand (12 brands, percent). Table 10: Franchise Brand No Franchise Brand Count Percent 1 Home-grown / local Foreign Total Figure 12: Franchisor by Brand Origin Franchisor Business Structure Table 11 showed the franchisor business structure, which was divided into four categories, namely enterprise (sole proprietorship), partnership, private limited company (Sdn. Bhd.), and public limited company (Bhd.). The percentage of private limited company (Sdn. Bhd.) was about percent, followed by partnership (2.94 percent), enterprise (sole proprietorship) and public limited company (Bhd.) (both 1.47 percent) respectively. 21

22 Table 11: Business Structure No Business Structure Count Percent 1 Enterprise (Sole proprietorship) Partnership Private limited company (Sdn. Bhd.) Public limited company (Bhd.) Total Figure13: Business Structure Franchisor Ownership Table 12 depicted that 47 percent of franchise was owned by non-bumiputera followed by Bumiputera 34 percent. The chart also showed that partnership with foreign franchises was slightly greater than partnership with local franchises, the difference being 4 percent. The lowest percentage was 3 percent, representing foreign ownership. 22

23 Table 12: Franchisor Ownership No Franchisor Ownership Count Percent 1 Bumiputera Non-Bumiputera Foreign Partnership (Local) Partnership (Foreign) Total Figure 14: Franchisor Ownership The Length of Franchising Operation Table 13 showed the length of franchising business in operation. The largest number of franchisors (36) were in the category of 6-15 years of business operation, followed by years category, less than or equal to 5 years category, and above 30 years category. Meanwhile the remaining 7 franchises did not indicate their length of franchising business operation. 23

24 Table 13: The Length of Franchising Operation No Length of Franchising Operation Number of companies Percent 1 Less than or equal to 5 years years years Above 30 years Not specified Total Figure 15: Length of Franchising Business 2.3 FINANCIAL INFORMATION Source of Funding Table 14 indicated that sources of funding both at start-up and current business operation were almost similar. Specifically, equity funding was slightly higher during start-up stage (86 percent) compared to current operation stage (78 percent). 24

25 Table 14: Source of Funding Type of Funding Source of Funding % Share During Start-up % Share During Current Operation Savings / investments Equity Family / friends Investors / venture capital Debt Bank borrowing Government loan Grants Grants Total Franchisors Authorized and Paid-up Capital Data on both authorized and paid up capitals were obtained through the questionnaire (Question 5, Section C). A considerable number of respondents failed to indicate responses to this question completely. As an alternative approach, all capital information was obtained via CCM database for the responding franchisors. It must be noted that the data was not available for nine (9) companies only. Table 15 showed that the highest number of franchising companies had authorized capital of RM500,000, followed by RM1 million, RM100,000 and RM5 million. Taken together, these four categories contributed around 83 percent of the observed companies. It is interesting to note that one company had an authorized capital of RM200 million. Table 15: Authorized Capital Franchisors Authorized Capital (RM) Number of companies 100, , , ,000, ,000, ,000, ,000, ,500, ,000, ,000,000 1 Total 59 25

26 In terms of paid up capital, Figure 16 depicted that 42 percent of the responding companies have a paid up capital of up to RM100,001, followed by 24 percent having paid up capital between RM100,001 and RM500,000 and 15 percent in the RM500,001 to RM1 million category. Figure 16: Paid-up Capital of Franchisors Source: Data obtained from the Companies Commission of Malaysia (CCM) Financial Performance of Franchisors using CCM data This section presented data obtained from the CCM database. It was fully acknowledged earlier that this study had difficulties in obtaining sufficient financial data, which in turn contributed towards a considerable number of missing values or non-responses in this regard. It was also observed that the CCM data too had a considerable number of missing data, undoubtedly due to non-submission of financial statement to CCM and also due to noncompletion of recent financial data set. For example financial statement for the year ended 31 December 2009 could be lodged to CCM by 30 June The aim of this section is to provide an overall insight of the franchisors financial performances, which is inclusive of revenue and expenses from non-franchising business and other activities. As a result this section should be treated with caution. 26

27 In terms of revenue level, as shown in Table 16, the highest number of companies reported revenue between RM1 million and RM5 million, followed by companies with revenue from RM0.5 million to RM1 million. A similar trend is observed in each year from 2005 to Table 16: Revenue Level - Franchisor Companies ( ) Revenue Level Number of Companies Up to RM 500, RM 500,001 - RM 1,000, RM 1,000,001 - RM 5,000, RM 5,000,001 - RM 10,000, RM 10,000,001 - RM 20,000, More than RM 20,000, Number of Companies Source: Data obtained from the Companies Commission of Malaysia (CCM) In terms of net profit, as shown in Table 17, with the exception of 2009, at least 80 percent of the companies are in the first three levels of turnover; with at least 22 percent of all companies were in a loss situation for each year respectively. Table 17: Profit after Tax Level - Franchisor Companies ( ) Profit after Tax Level Number of Companies Loss Up to RM 100, RM 100,001 - RM 500, RM 500,001 - RM 1,000, RM 1,000,001 - RM 5,000, More than RM 5,000, Number of Companies Source: Data obtained from the Companies Commission of Malaysia (CCM) Franchisee Selection Criteria Table 18 indicated that most of franchisors considered attitude towards business as one of the important criteria after financial strength. However, only few franchisors used psychometric test to select franchisees. Table 18: Franchisee Selection Criteria Rank Franchisee Selection Criteria Total Score 27

28 1 Financial strengths Attitude towards business (e.g. perceived innovative, commitment to business) Business proposal (e.g. feasibility of location, conducted market survey, etc.) Business experience and acumen People skills (e.g. sales and customer service) Management skills Psychometric test Others Franchisor Support Services Provided to Franchisee Table 19 indicated the types of franchisor support to franchisees. The results showed there were still a large number of franchisors who provided various kinds of support services to their franchisees. On the other hand, only a few types of support services that were not provided by any franchisor which are pre-opening, opening and post opening training and support, provision of employee training materials, on-going training and development programmes, provision of operation manuals, continuous product research and development, site evaluation assistance, purchasing, technical and equipment assistance. This was due to the inability of the franchisors to provide such efforts in maintaining their franchisees performance. Table 19: Franchisor support services provided to franchisee Rank Franchisor support services provided Yes No N/A 1 Pre-opening, opening and post-opening training and support Advertising and promotion Provision of employee training materials Regular communication with franchisees Ongoing training and development programmes Provision of operation manuals Continuous product research and development Site evaluation assistance Purchasing assistance Technical assistance Equipment assistance Others

29 2.4 DISPUTES, TERMINATION AND CLOSURE Number of Disputes, Termination, and Closure From Figure 17, it showed that there were a number of disputes, termination, closure of franchise outlets and closure of company owned outlets occurred from year 2005 until Figure 17: Number of Disputes, Termination, and Closure Reasons for Dispute Table 20 indicated the reasons for dispute between franchisor and franchisees. The most frequent reason given for the dispute is location of the franchise outlet which franchisees found to be unsuitable for their business survival due to low customer volume, higher rental cost and also the distance from the headquarters. 29

30 Table 20: Reasons for Dispute Rank Reasons for dispute Total Score 1 Unsuitable location (low customer traffic, high rental cost, etc.) 57 2 Territorial disputes 46 3 Mismatch of profitability expectations 45 4 Inadequate pre-start-up training and support 34 5 Inadequate advertising & promotion support 33 6 Inadequate on-going training and support 33 7 Changes in franchise fee and/or royalties 29 8 Inadequate and/or oversupplies 25 9 Others Reasons for Termination and Closure With reference to Table 21, the reasons for termination of franchisee business were attributed to poor sales performance, lack of involvement of franchisee in his/her business, nonpayment of monies due and non-compliance of operations manual and standards. However, the least chosen reasons for termination or closure of franchisees business was conviction of a criminal offence, fraud or bankruptcy of a franchisee. Table 21: Reasons for Termination and Closure Rank Reasons for termination/closure Total Score 1 Poor sales performance Lack of involvement of franchisee in his/her business 89 3 Non-payment of monies due 82 4 Non-compliance of operations manual and standards 81 5 Inadequate funding commitment from franchisee 70 6 Repeated failure to comply with or breach of the franchise agreement 67 7 Sales of unauthorized products 53 8 Non-reconciliation of disputes 36 9 Conviction of a criminal offence, fraud or bankruptcy of a franchisee Others ISSUES, NEEDS AND EXPECTATION The issues, needs and expectations of franchisors were classified into two phases; during (1) business start-up and (2) business operations and expansion. There were 11 similar issues, 30

31 needs and expectations that both stages were normally encountered with during their operation in both stages. The attributes were identified as (1) clear and transparent policy guideline; (2) availability and adequacy of funding from financial institutions; (3) availability and adequacy of government financial assistance; (4) clarity in criteria for government financial assistance; (5) access to tax stimulus/incentive and relief; (6) availability and effectiveness of centralized training support and knowledge sharing; (7) availability and effectiveness of the branding support and programmes; (8) legal framework for facilitating business and investment; (9) availability and quality of consultants to cater business needs; (10) availability and quality of legal advisors to cater business needs; and (11) availability of entrepreneurs as prospective franchisees. The specific attributes that were needed during the start-up stage are product/system development support and simplified and efficient franchise registration and approval process. On the other hand, access to pre-initial Public Offer (IPO) investment and assistance; labour market that can meet their business needs, and the availability and effectiveness of international market promotion programmes were much needed in business operation and expansion stage Issues, Needs, and Expectations During Start-up Stage During business start-up stage, franchisors indicated that most of the attributes were very important and essential to their venture success. These ten (10) attributes mean scores were ranged from 4.07 to Out of thirteen (13) main attributes, the first three attributes with high scores in importance were clear and transparent policy and guidelines (4.59), product/system development support (4.56), availability and adequacy of funding from financial institutions (4.47); availability and adequacy of government financial assistance (i.e. loans, grant, etc) (4.44); availability and effectiveness of the branding support and programmes (4.40); clarity in criteria for government financial assistance (4.40); availability of entrepreneurs as prospective franchisees (4.25); legal framework for facilitating business and investment (4.23); availability and quality of legal advisors to cater business needs (4.08); and availability and effectiveness of centralized training support and knowledge sharing (4.07). The other three attributes that were considered as just fairly important were ranged between 3.31 and The attributes were known as simplified and efficient franchise registration 31

32 and approval process and access to tax stimulus/incentive and relief (both with mean of 3.93), and finally the availability and quality of consultants to cater business needs (3.67). Also during the business start-up, franchisors seemed to be satisfied on only two attributes which were product/system development support (4.31) and centralized training support and knowledge sharing (4.14). They were moderately satisfied on legal framework for facilitating business and investment (3.92); legal framework for facilitating business and investment (3.88); availability and quality of legal advisors to cater business needs (3.85); availability and effectiveness of the branding support and programmes, and the availability and quality of consultants to cater business needs (both with mean of 3.80); availability of qualified entrepreneurs as prospective franchisees (3.75); simplified and efficient franchise registration and approval process (3.53); access to tax stimulus/incentive and relief (3.31); and clarity in criteria for government financial assistance (3.07). Figure 18: Issues, Needs, and Expectations during Start-up Stage However, there were two main issues that franchisors felt unsatisfied about. These are the availability and adequacy of government financial assistance (i.e. loans, grant, etc) with a 32

33 mean of 2.81 and availability and adequacy of funding from financial institutions with a mean The unsatisfactory level of new franchisors could have been influenced by a number of issues related to funding support either from the government agencies or financial institutions. These issues range from inadequate funding to start-up business, long funding processing time, funding criteria bias by financial institutions, high interest period of payment, inability to seek for government financial assistance, and delayed procedure for loan approval Needs and Expectation during Operation and Expansion Stage In relation to the business operation and expansion stage, franchisors responded that there were thirteen (13) attributes that were being considered as very important and essential to their business operation and expansion strategy, and these attributes were ranked between the mean of 4.00 to These attributes are; (1) clarity in criteria for government financial assistance (4.65); (2) access and adequacy of government financial assistance (4.65); (3) availability and adequacy of funding from financial institutions (4.65); (4) availability and effectiveness of centralized training support and knowledge sharing (4.44); (5) clear and transparent policy guideline (4.44); (6) availability of entrepreneurs as prospective franchisees (4.31); (7) access to pre-ipo investment (4.31); (8) access to tax stimulus/incentive and relief (4.29); (9) availability and effectiveness of the branding support and programmes (4.25); (10) availability and quality of legal advisors to cater business needs (4.17); (11) availability and quality of consultants to cater business needs (4.07); labour market that meets business needs (4.00); the legal framework for facilitating business and investment (4.00); and the availability and effectiveness of international market promotion programmes (3.87), respectively. The franchisors satisfaction level on all the attributes that affected their current performance seems to be slightly lower than their responses on the attributes importance which rank between the mean of 3.12 to The highest mean belongs to clear and transparent policy guideline (3.88); followed by the availability and effectiveness of international market promotion programmes (3.87), which happens to have similar mean in start-up stage; the availability and quality of consultants to cater business needs (3.86); availability and effectiveness of centralized training support and knowledge sharing (3.81); availability and quality of legal advisors to cater business needs and the legal framework for facilitating business and investment ( both with the mean of 3.77); labour market that meets business 33

34 needs (3.67); availability and effectiveness of the branding support and programmes (3.63); availability and adequacy of funding from financial institutions (3.47); access to pre-ipo investment (3.46); availability and effectiveness of international market promotion programmes (3.40); availability and effectiveness of international market promotion programmes (3.29); access to tax stimulus/incentive and relief (3.14); and access and adequacy of government financial assistance (3.12). Figure 19: Needs and Expectation during Operation and Expansion Stage Qualitative Answers for Issues Encountered During Business Start-up and Business Operation and Expansion 34