The rapid increase in the use of courier services over the last several years might have caught your interest, but has that industry growth translated to substantial profits for courier businesses? If you are thinking of entering the courier industry and buying a franchise, you ought to ask the question – is a courier franchise profitable?
Industry profitability on average
According to the Australian Tax Office (ATO) the key benchmark range for businesses in the courier industry is total expenses to turnover. The benchmark ranges by turnover size is below:
- For courier businesses with a turnover between $50,000 and $100,000, total expenses divided by annual turnover is between 40% to 56%
- For courier businesses with a turnover between $100,001 and $300,000, total expenses divided by annual turnover is between 48% and 72%
- For courier businesses with a turnover above $300,000, total expenses divided by annual turnover is between 79% and 91%
According to this data, most courier businesses are profitable on average with profit margins being higher for smaller businesses. Whether a particular franchise is profitable or not depends on many factors that will be explained below.
How do courier businesses generate profits?
Although it is important to know how things are on average in the industry, if you are thinking about buying a franchise it’s more important to know how a courier franchise can be profitable and what factors influence its profitability. First, let’s look at the courier franchise business model:
Couriers gain revenue by selling delivery services to customers. Some couriers specialise in niche markets, marketing and streamlining themselves towards a particular sub-industry such as couriers of medical goods or confidential documents. Others try to be all-encompassing and deliver anything to anywhere. Courier businesses increase their sales and revenue by marketing to find new customers and building relationships with existing customers to consolidate lines of work. Courier services compete with each other by increasing customer satisfaction, competitive pricing, speed of delivery, reliability and other factors.
In order to turn revenue into profit, courier businesses manage expenses. Expenses and investments are necessary to operate the business and remain competitive but to be profitable they have to be kept under control. Expenses that a courier business have to account for are:
- Vehicle expenses: This is one of the major expenses of courier businesses. According to the ATO, the benchmarks of vehicle expenses for courier businesses divided by annual turnover ranges from 5% to 22%. Small businesses usually have vehicle expenses as a higher percentage than large businesses. Vehicle expenses include purchasing or leasing, cleaning, servicing, repairs, fuel, and more.
- Staff wages: Courier companies may employ many couriers but also other staff including: finance and accounting, administration, marketing, customer service and management.
- Marketing: In order to reach more customers investment in marketing is a cost that courier businesses need to manage.
- Property: Courier businesses that are small may not need any property and can save on those costs but larger businesses may find it worthwhile to have warehouses, offices and parking spaces. This increases the amount of property related expenses.
- Equipment: Small businesses could be run from only a smartphone and a computer but larger businesses will find it beneficial to invest in equipment to increase their efficiency. This might include: uniforms, scanners, software, and more.
- Insurance: all courier businesses need to have adequate insurance to protect the staff, the public and the business itself. Insurance needs to be carefully managed so that the appropriate level of cover is obtained for the lowest price.
- Other expenses: Interest paid on loans, tax, depreciation and amortisation all need to be factored in.
In addition to the above costs, franchisees need to be aware of the cost of starting a franchise.
- Capital investment: this could vary widely depending on what franchise you are joining. In some cases you could get started with your own vehicle and smartphone, in other cases you could be required to buy an already set up franchise with an investment of $250,000 or more.
- Initial franchise fee: this is the cost that you pay to the franchisor to gain the benefits of joining their franchise. Again, this could vary widely from merely hundreds of dollars to hundreds of thousands.
- Ongoing franchise fees: this could be a fixed fee due monthly or a percentage of your monthly sales. Franchise renewal fees could be required if the franchise agreement has a termination date.
Risks of owning a franchise
Since you are tied by your franchise agreement to the franchisor, if things go poorly for them it could also adversely affect your franchise and your profits.
- The franchisor could go bankrupt and take down the whole franchise system with it.
- Some of the franchisor’s brand might not be properly protected or might become tarnished. Since you are buying into this brand it could affect you.
- You could be forced to make bad business decisions by the franchisor. Even if they have been successful in the past, they may make bad decisions in the future. You might also be obligated to go along with decisions that are against your values or otherwise sell your franchise with a sale fee.
Benefits of being a franchisee
Buying a franchise is not just all costs and fees. It also comes with substantial benefits which may make buying a franchise worthwhile and profitable compared with starting your own business or buying an independent business. For you to decide whether a particular franchise is going to be profitable and worth it, weigh up these benefits with the costs and risks.
- The right to use an established brand
- The use of a proven, successful courier business model
- Training, coaching, ongoing support and advice from experienced and successful people in your industry
- Shared advertising and marketing costs
Protect your courier franchise or independent business with the right insurance
Whether you decide that a franchise or independent business is right for you, make sure that you protect your hard work and investment with appropriate insurance. For couriers insurance in Perth, contact us at GSK Insurance Brokers. We have put together an insurance package for courier businesses that covers all the bases and we can further tailor it to your specific needs whatever they are. We have been serving our clients with deep specialist knowledge, tailored advice and excellent service all in the best interest of the clients for over forty years – we’d love to help you protect what’s important to you too.