“Marriage breakdowns and bankruptcies”: Calls for inquiry into franchising sector after years of concerns from franchisees

A federal politician has called for a parliamentary inquiry into Australia’s franchising sector following reports of “suicides, marriage breakdowns and bankruptcies” among franchisees.

But while allegations about the operations of franchise operator Retail Food Group have made headlines this week, franchisees have been drawing attention to complexities in the system for years.

In the wake of an investigation into the experience of franchisees at franchise chains including Donut King and Michel’s Pattisserie this week, Nationals senator John Williams has told Fairfax there should be a parliamentary inquiry into the franchising sector.

He said small businesses are clearly “done over and going broke”, and a wider scale investigation must take place next year to address problems within the world of franchising.

In a statement to SmartCompany this morning, executive chairman of the Franchise Council of Australia Bruce Billson says while “it is not quite clear” what Senator Williams has in mind with comments about an inquiry, the industry body has always been happy to discuss the world of franchising governments and the broader community.

“The FCA is always happy to engage constructively with politicians, government agencies, opinion leaders and the franchise community,” Billson says. 

The former small business minister says the FCA is “bewildered” that despite promoting extensive due diligence work on the part of franchisees before entering an agreement, some of that advice seems “not to be getting through in some cases”.

“Objective and evidenced-based analysis of how we might be able to make franchising even more successful and how to retain Australia’s reputation as an international leader in franchising is always worthwhile and a focus of the FCA,” he says. 

Earlier this week, legal experts told SmartCompany that stories like the claims against Retail Food Group are a reminder to businesses that franchise agreements are long-term contracts with limited scope for early exit when there are concerns about profitability.

However, this week is far from the first time that franchisees have drawn attention to a power imbalance that can exist between franchise operators and individual business owners. For many years, franchisees have told SmartCompany horror stories of profitability concerns, the inability to sell businesses, and significant stress related to the collapse of franchised operations.

Beyond the news of this week, here are some of the key concerns raised over the past five years.

Lockouts, lost profits and family breakdowns

Franchise owners have previously told SmartCompany of the stress and anguish caused when they have been unable to move on from unprofitable franchises. In 2014 and 2015, a number of franchise owners at ice-cream and hotdog business Wendys said they were left stranded with businesses they were unable to sell.

A former franchisee claimed in 2014 that 116 Wendys stores had either collapsed or been purchased back by management over the preceding eight years. Around this time, a former franchisee of the business told SmartCompany the pressure placed on franchisees to build a profitable business within the requirements of the franchise network led to personal and professional stress, and he was forced to sell the business in 2008 for $25,000.

“For my own personal time in Wendys, the pressure exerted by Wendys destroyed a 30-year marriage between myself and my then wife, who later committed suicide,” the franchisee said at the time. 

Beyond concerns about store sales, franchisees have also reported serious trouble with franchise operators when it comes to negotiating rental agreements, gaining workplace rights like maternity leave, and even being locked out of their shopfronts. 

Concerns about profitability of stores and the lack of control franchisees have over advertising, marketing and in-store fitouts have been also been raised across a number of other chains. In 2014, franchisees at Eagle Boys pizza spoke out about being on “the brink of losing everything” after investing heavily in stores that struggled.

Lack of control over the actual costs of running a franchise have also made news over the past few years. The previous franchise structure of embattled convenience store chain 7-Eleven was labelled “unusual” by franchising experts in 2015, given how much of each franchise’s gross profits were collected by head office.

The previous 7-Eleven model involved taking a 57% cut of a franchise’s gross profits which covered rent and utilities, leaving the franchisee responsible for staffing, wagers and superannuation.

A key concern across several of these cases is the lack of control the franchisees had over decisions made by head office about royalties, advertising, store fit-outs or pricing. For exmaple, in 2015, 288 Pizza Hut franchisees took then owner Yum! Restaurants to court over claims its $4.95 pricing strategy had forced many franchises to the brink.

A new franchising code and penalties for operators

There have been a number of reviews of Australia’s franchising system over the past few years, but the changes implemented have focused on specific aspects of franchise ownership and operation, rather than a comprehensive review of the sector.

The revised version of the Franchising Code of Conduct came into effect on January 1, 2015, establishing an expectation that the franchisor and a franchisee act “in good faith” in their dealings with each other.

The new code has seen some businesses fined by the consumer watchdog over the past year for failing to disclose the full details of the past business activities of a franchise networks’ founders to prospective franchisees.

Meanwhile, amid widespread concerns about employee underpayments in franchise networks, the government successfully passed the Fair Work Act (Vulnerable Workers) Bill in 2017, with the aim of making franchise operators more responsible for the actions of individual franchises.

A holding company or franchise entity can now be held responsible for the actions of franchisees if they breach workplace law and it is found the holding company should have known franchisees were committing a breach.

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