“On the verge of bankruptcy”: Red Rooster franchisees allege troubles as senate inquiry submissions roll in

Submissions to a Senate inquiry into franchising have slammed the sector’s national code of conduct, with franchisees at Red Rooster operator Craveable Brands emerging as another group in the franchising space claiming they are “in distress”.

Senator John Williams secured a Senate review of the franchising the sector in March after a range of high-profile stories of challenges in the space, from underpayments to company collapses. So far, a range of parties have made their voices heard through submissions to the inquiry, with everyone from academic experts to franchise operators claiming the legal framework for franchising doesn’t protect franchisees in the way that the legislation is intended.

What have we learned from the submissions so far? Here are three key things you need to know.

More claims of tough business models

The franchisee association of food business Craveable has provided one of the more emotive submissions so far. The group has claimed many franchisees are on “the verge of bankruptcy” due to a range of challenges including the cost of goods and rebates, the impact of customer loyalty programs and the pressure caused by the company’s introduction of food delivery services.

Craveable Brands is backed by Archer Capital and operates 570 Australian stores across the Red Rooster, Oporto and Chicken Treat brands.

The franchisee association has submitted to the Senate that their franchisor has failed to act in good faith in its communication with franchisees and that many are on the brink thanks to the company’s high cost of goods, which it says comes in at 38% of sales.

The franchisees also accuse the company of poor planning in its food delivery initiative, which began two years ago. In 2016, Red Rooster chief executive Chris Green told SmartCompany, “Delivery is the most amazing thing that could have happened to Red Rooster” and that it would contribute to big sales growth. 

Some franchisees have claimed that they were “pressurised” into introducing delivery into their stores, which has led to “cannabilisation” of in-store sales and “cash flow issues for franchisees”.

SmartCompany has contacted Craveable Brands for comment on the claims. The company did not provide comment prior to publication, however, a spokesperson for the company has told Fairfax it rejects the suggestion there is widespread discontent among its franchise operators.

“”It contains several inaccurate claims that omit vital context about the operation of the broader franchise system,” the spokesperson said of the submission.

Franchising Code attacked

Meanwhile, experts and franchisors have highlighted in submissions that the structure of the franchising code is not fit for purpose.

National franchise operator Jim’s Group said at present, the disclosure requirements that franchisors have to give are “densely legalistic” and difficult even for executives to understand.

Jim’s Group also submitted that franchisees have no real ability to fight with head office in court, because “the legal system is so cumbersome and expensive”.

Others, like Manpower Group, said the code does provide a clear outline of how franchisors should behave, but the volume and complexity of paperwork that franchisees can be given is too much, making it difficult for them them to read and understand their rights.

“Who is going to read it and, more importantly, who is going to understand the content?” the home services franchise business asked.

Franchise law expert and academic at the University of New South Wales Dr Jenny Buchan reflected in her submission that the current franchising code includes implications that “franchisors don’t fail”, which is a serious problem given recent company collapses including that of grocery business Aussie Farmers Direct.

The current code of conduct doesn’t allow franchisees enough power in the event of a franchisor head office becoming insolvent, and was written with a much simpler company structure in mind than those in operation in Australia, Buchan wrote in her submission.

Alternatives presented

The submissions also include suggested changes to current franchising law and how franchisors report on success in their businesses.

Jim’s Group has suggested a national star rating for franchisors, where an independent third party surveys franchisees each year about the performance of the businesses and head office communication, to generate a rating for each organisation.

Manpower has also advocated for the introduction of a directory of currently operating franchises, to compile information for prospective buyers.

However, as the inquiry kicks off, others in the franchising sector warn that many stories to come out of this inquiry may come down to tough business conditions that changes to regulation alone cannot solve.

Former chief executive of Pizza Hut and Sizzler in Australia Chris Levy says the challenges revealed by many food retail businesses, like Red Rooster, also come down to high rents and tough landlords.

“There are so many outside factors also existing in the marketplace. One is that rents for these businesses have escalated way, way beyond CPI, and there’s just nothing these businesses can do,” he tells SmartCompany.

“Landlords have a huge amount of money and the protections are now gone. It used to be that if you were in a big shopping centre, they wouldn’t put a competitor within 500 metres of you, for example. That protection went out years and years ago.”

When it comes to these factors, changes to the franchising code won’t stop it from still being challenging to do business, he says.

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