Australia’s largest franchisors named and shamed in Senate Inquiry

gloria-jeansThe Senate will have a long list of allegations to consider when it examines the effectiveness of the Franchising Code of Conduct in the coming months, after former partners in some of Australia’s largest franchise networks delivered scathing critiques of the sector in submissions to an inquiry.

Domino’s, Pizza Hut, 7-Eleven, Retail Food Group, Foodco and Craveable Brands have all been named by disgruntled current or former franchisees who say they were misled and ultimately let down by Australia’s franchising system.

Called in March, the inquiry is shining a light on practices within the scandal-ridden industry after several high-profile media investigations in recent years that have alleged widespread wage underpayment and unscrupulous business practices within some franchise networks.

The possibility of new regulation – in addition to legislation introduced in 2017 to increase franchisor responsibility for wage underpayment within their networks – now looms over the industry like a cloud ahead of 30 September, when the committee is due to hand down its findings.

The allegations would concern many in the electorate:

“I am 70 years of age and now working to try and keep the family home and repay significant loans incurred in relation to the franchise business,” one former Video Ezy franchisee said in a submission to the inquiry.

“We could not afford the wages of another baker to assist and I ran myself to the ground in working these long nights alone,” one former Brumby’s franchisee said. “I now have been diagnosed with Rheumatoid Arthritis and Fibromyalgia … I am barely able to get out of bed in the mornings and can no longer work to support my family.”

There’s little doubt that more goes into many franchise failures than the conduct of franchisors but as the Senate will consider within the scope of its Terms of Reference, the effectiveness of the code guiding behaviour in the sector has, in the opinion of both franchisees and prominent franchisors, failed.

“The current Franchising Code does almost nothing to protect franchisees, allowing vulnerable people to be ripped off by unscrupulous operators. The whole system is no more than a feeding trough for lawyers,” Jim’s Mowing founder Jim Penman said in his submission to the inquiry.

Submissions to the inquiry draw on several common themes: that the current code does not mandate adequate disclosure from franchisor to franchisee, that there’s a lack of specialised advice available to prospective franchisees trying to deal with a complex system, and that it is too difficult for franchisors to terminate franchisees who breach their agreements.

Due diligence can be “impossible”

In separate submissions to the inquiry academics Courtenay Atwell and Jenny Buchan from UNSW Business School expressed concern that prospective franchisees have found it difficult to conduct due diligence on networks they are considering entering.

This was a common problem outlined by former franchisees who made submissions to the inquiry.

Buchan noted that as many franchise networks have become larger and more complex over time it has become difficult for franchisees to properly consider their options.

“[Due diligence] is expensive, sometimes impossible and not always helpful,” Buchan said, using a 2007 franchise dispute case where not even the court could accurately identify the franchisor as an example. “If the court could not establish the accurate identity of the franchisor, what hope is there for the franchisee to conduct thorough due diligence,” she said.

In more than half a dozen public submissions former franchisees complained that in one form or another what they had been led to believe prior to entering a franchise network was in stark contrast to the reality of operating their businesses.

“We believed at the time that we had carried out our due diligence by getting advice from a solicitor and accountant, only to find out when it was too late that these professionals were not equipt [sic] with full expertise and knowledge to advise us correctly,” one former RFG-owned Gloria Jeans franchisee said.

“We discovered after only a few months of working in the stores, that the P and L’s we were provided with were not a true reflection of the costs of running the two kiosks and the Gloria Jeans model we had to work with was well and truly broken.”

Retail Food Group maintained that its franchise recruitment processes are “rigorous” and that disclosure requirements under the code do not need to be expanded.

“Ultimately, it is RFG’s view that the information required to be disclosed is adequate to enable a prospective franchisee to make a reasonably informed decision about the business opportunity,” the franchisor said in its submission.

Need for qualified advice

There was also a recurrent view in submissions from former franchisees, franchisors and associated industry stakeholders that there is a lack of franchise specialists prospective franchisees can turn to for advice.

In her submission Atwell called for each state and territory and law society, as well as all professional accounting bodies in Australia, to establish accredited specialist status to those qualified to provide franchising advice.

Further, she recommended that the Franchising Code establishes a requirement for prospective franchisees to consult with an accredited specialist prior to signing the dotted line if the fee is over $30,000 and they aren’t exempted under a sophistication subclause for those with existing stores.

“The provision of advice in the pre- and early-contractual stage that is unconnected to that which is provided by the franchisor is an essential component of a prospective franchisee’s due diligence,” she said.

Penman, who oversees a franchise network of more than 350 franchisees, agreed.

“Most lawyers have no experience with franchising documents and cannot give a sensible opinion,” he said.

Penman recommended that a star system, similarly to the health food ratings used on processed foods, be introduced and made publicly available so that prospective franchisees can easily access the views of existing franchisees within a network.

Penman said Jim’s Group has been employing that system successfully for twelve years, although one former franchisee submitted to the inquiry that he was misled by Jim’s Group about prospective revenue for a franchise in 2015.

RFG did not respond to a request to comment about the submissions claiming it had misled franchisees but did say in its submission that there is scope for the code to perspective mandatory independent legal and financial advice in relation to a proposed franchise opportunity, preferably from accredited professionals.

Brumby’s founder Michael Sherlock said in his submission that franchise documents should be registered and made publicly available to increase transparency in the sector, another common point of criticism.

Rebates and marketing lack transparency

Specifically, Sherlock complained that there’s not enough transparency around marketing slush funds put together by franchise networks and supplier rebates received by franchisors.

He wants to see the current law amended to force franchisees to spend marketing money on sales driving activities and also changed to provide franchisees with more information about rebate agreements suppliers have with franchisors.

“Transparency is needed so franchisees get back to enjoying the buying power of the group and franchisors cannot use rebates as their main source of revenue,” he said.

A disgruntled Craveable Brands (Red Rooster, Oporto, Chicken Treat) franchisee claiming to represent the interests of the network has also criticised supplier rebates, saying that partners in the network are paying above market rates for goods like water.

But in its submission to the inquiry the Franchise Council of Australia (FCA) said the franchising code is not an appropriate vehicle through which to deal with supply arrangements.

“There are already existing laws under the Australian Consumer Law and unconscionable conduct provisions that regulate conduct of franchisors seeking to impose mandatory supply arrangements in their franchisees,” the FCA said.

“In many cases franchisees do directly or indirectly benefit from rebates from suppliers where a franchisor is able to share those benefits including contributions to a marketing fund.”

Terminating rule breaking franchisees

Several franchisors, including 7-Eleven and Red Rooster owner Craveable Brands, have expressed concern that the current code makes it too difficult to terminate franchisees who breach the terms of their franchise agreements or the Fair Work Act.

“There is a small minority of franchisees that refuse or make it difficult for a franchisor to collect the necessary information to substantiate compliance [with the Fair Work Act],” Craveable said in its submission.

“If a franchisee deliberately and repeatedly frustrates this process and fails to provide the necessary information then there should be an immediate right on the part of the franchisor to terminate.”

7-Eleven has said it experienced this problem after cracking down on wage underpayment within its own network in recent years, after a string of revelations came to light in the media.

“7-Eleven’s experience demonstrates that the barriers to terminating a franchise agreement in cases of underpayment are difficult enough for a company the size of 7-Eleven to pursue through the courts, let alone the two-thirds of Australian franchisors that are small-medium businesses,” the company said in March.

RFG said in its submission that the current termination provisions under the code are appropriate in the “vast majority” of situations and that it is appropriate to restrict a franchisor’s right to terminate, although it also said it would not like to see the grounds for termination narrowed.

 

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