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It started out as a simple question: is a $75,000 liquidator’s fee for the $117,000 sale of a small shop appropriate? Thus I enter the disreputable world of business deaths and promises not met. One online search leads to another and I start to question whether my combing of court liquidation records is proving informative or simply entertaining (a type of schadenfreude). Then the suggestion is made that the business failure in question would not have happened had the shop been within a franchise – few franchisees fail, so it was claimed. Meanwhile the Franchise Association of New Zealand – the obvious next search target – is reporting “… around 4 out of 5 independent businesses cease trading within five years from their launch”. My quest now turns from one of checking the efficient use of time to a search into the efficiency of statistics – do the numbers being quoted reduce the data to information representative of the population of small businesses, be they franchises or independents?

  • It turns out that in the US and UK more than half the franchise systems disappeared within 10 years of starting during the 1980s (Stanworth (1998) and also Shane)
  • The same study reports US franchisee closure rates of around 4% p.a., rising to 9% if franchisee sales are also included, and something similar in the UK
  • A quick glance through the failure list of franchisee loans guaranteed by the US Small Business Administration (NB presumably a biased sample given they were seeking a SBA guarantee in the first place) shows some very large failures.

The picture emerging from these and other studies is that franchise systems can offer some real advantages – the obvious buying power and brand that comes with size, plus the financial management discipline that small businesses often lack – but it comes at a price and is no assurance that business will succeed. Some franchisors and some franchisees do fail but this proportion varies by sector, by age of the business and according to the business cycle. As for independents …

  • Of the small NZ business started in 2003, there were 47% of businesses with 1-5 employees still in existence by 2010 and over half still in existence amongst the 6-19 employee firms i.e. discontinuance of around 8-11% p.a. (Statistics NZ)
  • A look within some NZ shopping malls in the 1990s showed the rate of shops ‘closing to prevent further losses’ averaging 4% p.a., similar to an earlier study in Australia (Cox and Vos (2005))

These statistics are hardly definitive, but that’s the point. Small businesses vary a lot, be they franchises or not. There is a high churn – many closures but even more start-ups, and plenty of business sales – and a variable proportion ‘failing’; creative destruction at work, we trust. And here’s the rub: the business in question failed largely because of a death and a preference to seek an opportunity elsewhere. In other words, it was personal. Small business is personal, and we do things for reasons other than wealth maximization. So, no, a franchise was unlikely to have prevented this one failure but my colleague was on the right track: the signaling advantage of a franchise system would probably have prevented having to pay the exorbitant liquidation fee when it came to selling up.

Dr Frédéric Boissay of the European Central Bank will discuss the implications of financial integration and global imbalances in terms of output, welfare, wealth distribution, and policy interventions at the University of Auckland this afternoon. His modeling points to, on the one hand, financial integration permits a more efficient allocation of savings worldwide in normal times. On the other hand, however, it also implies a current account deficit for the developed country. The current account deficit makes financial crises more likely when it exceeds the liquidity absorption capacity of the developed country.

See Calendar of Events for other economic presentations in NZ.

Nationwide spending through the Paymark electronic payments network dropped 6% from year-ago levels on Tuesday 22 February, the day of the second major Christchurch earthquake, mostly due to a 33% spending drop in the Canterbury region. Subsequent to this there has been only partial recovery in Canterbury and some shift in spending to South Canterbury, but spending beyond these two regions has resumed at the faster-than-of-late 6% p.a. witnessed earlier in February.

The intention of this blog is to highlight economists’ work and provide material to support education and general understanding, especially as it relates to economics in New Zealand. It is not a forum for advocacy (other than better use of economics). Posts are categorised using the JEL Classification System and tagged as considered appropriate. Authors are generally Councillors of the NZAE. Anyone can provide comments. Any views expressed are not necessarily those of the NZAE.

We all like success. But do we really understand why some succeed and others do not? Outliers by Malcolm Gladwell is a superb book offering some insights. Just as importantly, it is readable. Gladwell is a story-teller. He has purposely pitched the book at the ‘popular audience’. He is doing something right judging by the book topping overseas best-seller lists recently.

Not surprisingly success is a combination of ability, effort and timing. It is the last two factors on which Gladwell focuses, suggesting for example that 10,000 hours of ‘practice’ was a huge part of the success of Bill Gates and the Beatles, as well as fortunate timing. Another interesting statistic is the prevalence of March quarter birthdays amongst top Canadian ice hockey players, suggestive that a 1 January cut-off for children’s sports teams has biased the chances of sporting success later in life.

The New Zealand Listener recently ran an extensive review of these themes, including a check on the birthdates of the All Blacks. And, yes, the same bias appears to be present.

Gladwell also explores the role of communication. Communication matters, especially in the cockpit of a commercial plane. You will be pleased to know that New Zealand pilots score well in terms of a “power distance index”. In plain terms, we are willing to speak up, even if the message will upset our supposed superiors. But don’t get too complacent: we don’t score so well when it comes to numbers – for a very logical reason, it turns out.

The stories and insights just keep on flowing, building a fascinating picture of success as a legacy. The popular myth is that of overnight success but more likely success builds gradually. So you are right, in part: it was your parents’ fault all along. But think again. Buried in your past are the seeds of your own success, be it a work ethic or an attitude or a stubbornness or merely some chance acquaintance.

The major criticism of the book appears to be ‘so what?’ The stories are entertaining but the key message is hardly new. That may be the case. But that does not disempower the book. To me, reconsidering what determines my likely success, and considering under what conditions I might succeed, is well worth the time.

You will probably enjoy this book if you liked: Black Swan, another recent top-seller jammed with wonderful stories by Nassim Taleb.