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Saturday / February 24.
HomemistoryFranchising is the Question. Is it the Answer?

Franchising is the Question. Is it the Answer?

When an optometrist decides to go into business they can either run their own independent practice or become a franchisee. There’s been a lot of noise this year from multi-national giants Luxottica and Specsavers about their franchising models, suggesting that one model is better than the other and pronouncing loudly the reasons why. We’ve been watching this battle from the sidelines and thought it was time to get some straight answers to big questions, beyond the spin.

Anyone who has tried to research phone plans, or health care funds knows how difficult it is to find a ‘like-for-like’ or ‘apples with apples’ comparison. Franchise options in the optical industry are no different – and there’s so much moreat stake.

While there are a number of companies offering franchising models, the multi-national corporations Luxottica and Specsavers are the dominant players in optical franchising in Australia and New Zealand.

There are a number of types of optical retail franchise models including the consulting room only franchise. For a like-for-like comparison, the focus of this article is on the full franchise which covers both the retail store and the consulting room.

While there are a number of companies offering franchising models, the multi-national corporations Luxottica and Specsavers are the dominant players in optical franchising in Australia and New Zealand

Experienced optometry business consultant Mark Overton of Ideology Consulting says “If you are considering franchise options and maximum revenue and profit is your priority, it stands to reason that the full franchise model is the best option. A really good independent practice will always be the most profitable model, but all options have positives and negatives that need to be weighed against each other.”

The choice of whether to opt for a franchise agreement, absolute independence, or even an independent co-operative approach, is one that must be made after careful consideration and discussion with experts in the field including your accountant and lawyer. While we at mivision don’t offer advice on what is right for you, we did take an in-depth look at the options available.

Control and Fees

One major query about running a franchise is how much control you have over your own business. For many people, it is one of the main reasons they reject the notion of a franchise.

Both Luxottica and Specsavers claim their franchisees control all the key elements of their business.

Luxottica require franchisees to seek their own finance however franchisees can access finance through Luxottica’s network of relationships with major financial institutions.

Specsavers say franchisees must secure finance from the Specsavers Pty. Ltd., rather than using their own bank or building society stating that “the advantage of this model is that these loans aren’t secured against private assets, such as property”.

Fees are a very important area. Luxottica and Specsavers use different terms to describe similar things, but essentially they’re both saying the same thing, so we’ve broken down fees into three sections:

  1. Royalty Fee – this covers a whole range of services around the brand, support network, IP and business development.

2. Marketing Fee – this is referred to as a contribution to a Marketing fund or Marketing levy, either way it covers contributions to the marketing of the brand to the end consumer.

3. Administration Fee – every business in Australia needs to pay for the administration of their business. This will include accounting, insurance, legal fees, staff training, software, support, etc.

On Luxottica’s Full Franchise model it charges Royalties of 7.5 per cent (OPSM), 6 per cent (Laubman and Pank) and 5 per cent (Budget Eyewear) and Marketing fees of 6 to 4 per cent. It leaves the cost of the Administration of the business to the franchisee, but covers staff training and support, a small charge for software and covers health fund relationship management.

Specsavers charges Royalties of 8 per cent, a Marketing fee of 6.5 per cent and 4.5 per cent for Administration of the business (including accounting and administration, staff training and development, software and IT support).

Take Home Profits

We asked both Luxottica and Specsavers about take home profit, specifically ‘What average weekly revenue is required in order to make a profit of AUD$250,000 per annum over and above market wages and expenses, before company tax?’

This is a highly variable area as it depends on items such as rent, staff costs, product costs, franchise fees, insurances among other things. We received figures ranging from AUD$20,000 to AUD$55,000 per week to achieve a net profit after salaries and before company tax of anywhere between AUD$125,000 to $360,000 per annum.

After weighing up the answers we received, the best advice is to take some time over the figures and crunch the numbers with your accountant as well as business experts who specialise in franchising. As one respondent said, when trying to compare apples with apples, “some apples may look like apples, but are not necessarily that comparable”.

Questions for the Franchisors

Business experts argue that there are pros and cons to both running an independent practice and taking up a franchise. Aversion to risk, business experience and funding are all considerations to be taken into account.

How do the Luxottica and Specsavers full franchise models compare? We posed the following questions:

mivision: What are the benefits delivered by entering into a franchise agreement with your company?

Luxottica:

After extensive industry research, we have designed our franchise offering to be both flexible and scalable. Our Franchise Partners have access to three models, characterised by different levels of risk/return, and can move between models over the life of their career depending on their needs and goals.

The models’ benefits include lower fees and increased profitability with earning potential increased by low start up costs, reduced product costs, highly competitive marketing and royalty fees.

Franchise Partners own 100 per cent of their business and manage the growth of their business; set their own wage and drawings in line with business performance; control the purchase, sale or lease of assets; have control over employment and management of employees; managing how they finance the purchase of their franchise; and have the ability to determine their own corporate structure, including whether they own the business with others or not.

Franchise Partners also receive regular store visits and structured support from our team of retail and optometry specialists, offering practical advice and guidance to help maximum business performance. They also have free access to a wide range of learning and development programs.

Specsavers:

Optical professionals who enter into a franchise arrangement with Specsavers ultimately take their stake in a marketing-led business model that for more than 27 years has been 100 per cent designed around supporting and generating success for owner-operators.

The Specsavers ‘partnership’ franchise model has flourished because roles are clearly defined – Specsavers exists to support each Specsavers partner, delivering world class product, supply chain, marketing, IT systems, training support and all the accounting, administrative and ‘back-office’ services that often create the headaches associated with being in business for yourself. This allows the store partners to focus solely on what they do best – providing the very best customer and eye care experience and developing their teams.

The result? Over the past four yearsalone, more than AUD$1 billion in profits has been distributed to Specsavers franchise partners.

mivision: Could you explain your full franchise model which covers both the optometry consulting room and retail/dispensing side of the business?

Luxottica:

Research showed that optical professionals want models that provide different levels of risk/return to match the diversity of business and lifestyle goals. Luxottica has three franchise models (Full Franchise, Optometry Room only franchise and the Alliance Franchise).

The Full Franchise Model means that the Franchise Partner owns the optometry and dispensing facets of the business,and receives all income generated from both the optometry and dispensing sides of the business.

Specsavers:

All our franchises are full franchises. We offer a ‘Joint Venture Partnership’ franchise model for brand new stores (the majority of stores) and a ‘convert to Specsavers’ franchise option for independents wanting to roll-out the Specsavers business model in their local community – all under a single retail brand, ‘Specsavers’. It’s clear, simple and allows the entire support team to focus on all stores in the same way.

All Specsavers stores are classified franchise ‘partner’ stores and they all receive the same level of support from the Melbourne-based and field support teams – as all operate under a full franchise agreement.

mivision: What person is best suited to your franchise agreement? (For example, start/end of career, city/rural, type of market etc.)

Luxottica:

Potential Franchise Partners who work with us should be passionate about caring for others; have a desire to own and build a business; show a willingness to adopt and work within the Luxottica system; be able to recruit, lead and develop a team; have industry qualifications and experience; and contribute actively to Luxottica’s Franchise community. With a range of different models, brands and locations available we try to match the right person with the right opportunity.

Specsavers:

The typical Specsavers partner is someone who relishes being their own boss and who instinctively believes that they should profit from their own hard work. We’re always talking to experienced optical professionals, be they optometrists, dispensers and / or optical retailers, who have energy, great people skills and a genuine passion for exceptional patient and customer service.

Age has never been a barrier. If you’re passionate enough, you’re old enough (or young enough!).

With the Specsavers franchise model having been built and continuously improved over 27 years, it ‘works’ exceptionally well. There is undoubtedly a recipe for success and those who take up the recipe, while looking for continuous improvement, will be extremely successful as has been proved in 10 countries.

mivision: What costs are involved in set-up and over the life of the agreement? How much, as a percentage of revenue, are franchisees required to pay each year?

Luxottica:

Franchise Partners are looking for transparency and clarity around cost and fee structures from the initial set-up, through to the selling of the business.

Franchise Partners are encouraged to take charge of their business, manage their own financials and use their own accountancy provider, making this essentially a fixed cost rather than a cost that increases as turnover goes up Luxottica also provides optometry and business development training, retail development and health fund management services at no charge.

For the Full Franchise model, the total marketing levy and royalties charged by Luxottica range from 10 per cent (for Laubman & Pank) to 13.5 per cent (for OPSM). Optometry and Alliance Franchises are charged a four per cent marketing fee, and no royalties.

(Ed’s note: Asked to clarify initial setup costs, Mr. Peter Baily, Luxottica’s Franchising Manager, said it varied greatly, ranging from AUD$30,000 for an Optometry Franchise to approximately AUD $400,000 for a new practice.)

Specsavers:

Set up costs for a brand new Specsavers practice range from AUD$200,000 to AUD$500,000 depending on the size of the floor plan and geographic location. These costs are specifically used for the store fit-out and are fully funded by Specsavers.

As far as franchisor fees are concerned, Specsavers charges 8 per cent of monthly turnover to deliver a whole range of support services covering everything from business development, supply chain and product development, IP, a locum support network, a full graduate recruitment and induction program and, perhaps most important of all, the value and power of the Specsavers brand. The eight per cent fee also covers quarterly Retail Advancement Meetings for all franchise partners in each state and a field team of dedicated retail development and performance consultants to help all partners grow their businesses.

In addition, Franchise Partners pay an additional 4.5 per cent of turnover to benefit from economies of scale across a range of costs that any business will incur including accounting and administration, training and development for all team members, software and IT support.

Finally, all Franchise Partners contribute 6.5 per cent of turnover into the Specsavers marketing fund. The administration of the marketing fund is probably the most public example of the competence shown by the franchisor in the expenditure of franchisees’ fees. Research house Roy Morgan states that public recognition of the Specsavers brand now stands at more than 90 per cent in both Australia and New Zealand.

mivision: Can a franchisee increase earnings, without having to open another store or business?

Luxottica:

Yes. We encourage Franchise Partners to build their business and maximise their profits and fully support and facilitate this growth. If a Franchise Partner outgrows their current site and wants to relocate to larger premises, Luxottica will provide full support in finding an alternative location.

Specsavers: Absolutely. Since 2008 in Australia and New Zealand quite a number of stores have already relocated to larger premises in order to unlock their next levels of growth. Year-on-year growth is forecast to continue to grow by 10 per cent or more on average, as has been the case for more than 20 years in the UK.

An example in a mature Specsavers market is Specsavers Norwich in England, a regional city similar in size to, say, Newcastle in NSW. Open for 20 years, the practice has relocated three times and now has 10 eye examination rooms running, turning over more than UK£115,000 per week. It commenced trading originally as a two-room practice.

mivision: How much time can a franchisee expect to spend each week working in and managing their business?

Luxottica:

Luxottica expects Franchise Partners to diligently run their business, however we do not specify the hours that a Franchise Partner has to work in or on their business. The more a Franchise Partner puts into their business, the more they can expect to get out of it.

Specsavers:

Each Franchise Partner is contracted to work 40 hours in or on their practice. Of course, as entrepreneurs, many choose to spend additional time in the practice as they look to maximise their growth and profitability.

mivision: What is the number one reason that you believe franchisees fail?

Luxottica:

Usually a non-successful franchise is based on the business owner not recognising they are the key to the success of the business. It’s important that Franchise Partners are actively involved in managing their business, including having a business plan, as well as understanding the key drivers of their business. From there, continually monitoring business results and making changes if required is fundamental to the success of any business.

Specsavers: Specsavers is proud of the fact that, aside from relocations, the company has never closed a store it has been responsible for setting up and opening.

That said, franchisees will only ever be as successful as the franchise model that supports them. If the model a franchisee buys into is not tried and tested then failure is of course a possibility.

mivision: If a franchisee wanted to terminate their agreement with the franchisor are they able to do this, and what are the consequences?

Luxottica:

Buying a franchise is a valuable asset that can be transferred to another Franchise Partner when the time comes to sell. It’s not recommended that Franchise Partners end their agreement early or they will be giving away what is potentially a valuable asset. In the event of an early end to an agreement such as sickness or disability, Luxottica would assist the Franchise Partner in finding a buyer or may purchase the asset as a corporate store.

Specsavers: As with any business, owners cannot simply ‘walk-away’ from the business they own and are bound by law on their obligations as well as by the franchise agreement they have entered into. All franchise agreements under the Franchising Code of Practice must have reasonable break clauses, and that of Specsavers is no different. However, the typical way that a Specsavers franchisee will depart their business is to sell their shares in the practice to an incoming partner.


mivision: What do you do for your franchisees that your competitors don’t?

Luxottica:

Low franchising fees and operating costs and 100 per cent ownership of your business. Luxottica has no additional charges for services such as health fund relationship management, training and retail development. The lower fee structure also means that there are a more equitable profits received by the Franchise Partner from lower levels of turnover. We also have a multi-site policy that encourages our Franchise Partners to grow their business beyond one store.

Franchise Partners have the ability to set their own wage or dividends subject to business performance; decide whether or who they partner with in the running of their Luxottica branded store and have a choice in the financial set-up of the business.

Specsavers:

Specsavers is a marketing-led business model, founded on professionalism and customer service excellence. This year the Specsavers network will spend more than AUD$30 million on advertising the Specsavers offer, all focused on the singular ‘Specsavers’ brand.

This marketing-led approach has enabled Specsavers to build a business that will turn over AUD$400 million in Australia alone in 2011.


mivision: Are all your stores available for franchise?

Luxottica:

No. Some stores will remain corporate to facilitate our training and graduate programs. We are a mixed corporate and franchise business which is of great benefit to our Franchise Partners as we are always incentivised to optimise our business performance. If a potential Franchise Partners is interested in an established store then we are open discuss that opportunity.

Specsavers:

Every Specsavers practice is available for franchise. The Specsavers model has been built from the ground up to help optical professionals get into business ownership for themselves, not for Specsavers to own stores in its own right.

mivision: For a new store, how can franchisees be certain they will earn enough money to fund their current lifestyle while they build their business?

Luxottica:

If you are going to buy a business, you have got to have good advisers and take the time to really understand the business. Preparing good financial models is essential in determining how much money a Franchise Partner will make from their business and what are the key variables that affect business performance.

If you’re buying into an existing business, with an appointment book, you can better estimate the potential business and revenue, but it is always subject to risk.

If it is a green field business, it takes time to build a patient base and it doesn’t make money from day one, but there is a point of time when it falls into place. We have a marketing launch plan and implement a wide range of national and local store marketing resources to build the business form day one.

Specsavers:

Specsavers guarantees each partner a ‘salary package which includes super’ as part of their franchise agreement that is commensurate with the going-rate for their services in the open market. This ensures they arenot disadvantaged while they build
their business.

The Combatants

Luxottica

Luxottica Group S.p.A is the largest eyewear group in the world. Based in Milan Italy, Luxottica was founded by Leonardo Del Vecchio in 1961 and is home to some of the most popular eyewear brands including Ray-Ban, Oakley and Persol. It makes sunglasses and optical frames for many of the leading designer brands such as Chanel and Prada.

Del Vecchio was a spectacle maker who successfully started selling complete spectacles under his Luxottica brand in 1967… By 1974, he saw the need for a vertically integrated business and started a period of rapid global expansion, quickly acquiring the Vogue brand, Persol, LensCrafters, Ray-Ban, Sunglass Hut stores, the Sydney-based OPSM optical chain, Pearle Vision chains and Oakley.
Aside from OPSM and Sunglasses Hut, Luxottica owns Laubman & Pank, Budget Eyewear and Bright Eyes in Australia.

Luxottica turns over revenue of €5.8 billion (2010) each year and employs 62,000 employees around the world. It operates about 6,500 retail outlets in United States, Canada, China, Australia, New Zealand, South Africa and the United Kingdom, with 980 of those stores in Australiasia.
Throughout Australasia Luxottica has signed up 23 Full Franchise Partners, 43 Optometry Franchise Partners (plus 2 Alliance Franchise Partners) as well as 76 Bright Eyes Franchisees.

Today, founder Leonardo Del Vecchio chairs Luxottica. The eyewear tycoon sits at number 71 on the Forbes list of the wealthiest people on the planet with a net fortune of USD$11billion.

Specsavers

Specsavers Pty Ltd, renowned for its clever consumer advertising campaigns and catchy ‘Should have gone to Specsavers’ tagline, was established by Doug and Mary Perkins in the Bailiwick of Guernsey in 1984, after the couple sold their chain of Bristol optical stores for GBP£2 million in 1980.

The company is purported to be “the largest privately owned group of opticians in the world” with 1,444 optical stores across the Channel Islands, UK, Ireland, the Netherlands, Scandinavia, Spain, Australia and NZ.

Around the world Specsavers employs more than 30,000 people and turns over a yearly revenue of GBP£1.5 billion (2010/11). The headquarters are still in Guernsey which operates a ‘Zero-Ten’ corporate tax system where most companies pay 0 per cent corporate tax and a limited number of banking activities are taxed at 10 per cent.

Specsavers launched in Australia in January 2007 as a supplier, then opened its first franchise partner store in February 2008. It then launched in New Zealand in late 2008 and to date has opened 302 stores across Australasia.

Doug and Mary Perkins, who nearly hit the summit of the Sunday Times Rich List of Britain’s wealthiest 1,000 people with an estimated fortune of GBP£1.15 billion (AUD$1.8 billion), attribute the success
of Specsavers to their franchise model.