‘It was always the franchisee’s fault’
THE banking sector is not the only one in the sights of corporate regulators and politicians.
The troubled franchising industry, which is valued at $146 billion and encompasses businesses from hamburger chains to mobile dog washing, is also under the spotlight amid allegations franchisees are being ripped off by some franchisors.
While franchising may allow inexperienced people to "buy a business in a box" there is growing criticism that the only winners are the franchisors, many of them large companies with the power to enforce unfair arrangements on franchisees.
High-profile brands such as Domino's and Retail Food Group (RFG) have in recent months copped the lion's share of criticism over poor treatment of financially stressed franchisees.
But they are not the only ones.
On Friday, the Parliamentary Joint Committee on Corporations and Financial Services will meet in Brisbane to hear evidence as part of its inquiry into the operation and effectiveness of the Franchising Code of Conduct.
The inquiry attracted almost 100 submissions, many from franchisees who complained of excessive franchisor fees, unfair supplier kickbacks and poor advice.
Robert Whittet, who operated two Jamaica Blue coffee shops in Toowoomba with partner Emma Forsyth, says he lost $2.5 million in his ill-fated franchise business.
Whittet, who will appear before the parliamentary inquiry today, complains that revenue and profitability were overstated by the franchisor Foodco. His business was forced into liquidation in April.
He alleges Foodco accepted commissions, or kickbacks, from suppliers, and he was not given enough in-store support.
"It was always the franchisee's fault and if you didn't maintain your franchisee fees, you were in trouble with default notices," he says.
"It was obvious that products supplied from our major suppliers were costed at retail, whereas we could buy the same product from our local Coles and Woolworths considerably cheaper."
A Foodco spokesman refutes Whittet's claims. "Our first store was established in Toowoomba in 1995 and our current franchise partner has successfully expanded his operation to two stores," the spokesman says.
"It is in no one's interest to pursue practices which would lead to a failed franchise."
The spokesman says any supplier rebates subsidise the company's national conference, advertising programs and procurement management
Supporters of franchising say the system is not broken but just needs tweaking. They point out that close to 80 per cent of small franchisees survive their first five years, compared to 80 per cent of stand-alone businesses that fail.
Brisbane commercial lawyer Derek Sutherland says the sector is being tarnished by the actions of a few who engage in opportunistic, dishonest or unconscionable conduct. The corporate regulator ASIC should be given power to ban such people from the industry.
Sutherland stresses franchisees also need to exercise accountability for their own actions and decisions.
"That may mean they need to be compelled to take steps to protect themselves and seek independent advice," he says.
Sunshine Coast couple Bryan and Amanda Kelly, who operated a Brumby's store in Maroochydore for four years until 2013, were initially told that the store was a "gold mine" and would make a bigger profit than a similar store in Brisbane's CBD.
Brumby's is one of the brands operated by Gold Coast-based RFG, which also operates Donut King, Michels's and Gloria Jeans chains.
"We realised within the first two weeks that the sales figures were considerably lower than what was presented in the profit and loss (statement) of previous owners," the couple says.
The Kellys say operating costs were also higher than expected, partly because they were forced to buy ingredients and products from RFG-approved suppliers.
"On several occasions we purchased products from local suppliers. That saved us a lot," they say. "But RFG issued us with a breach of contract warning if we were to continue. There is no scope for bargaining power with suppliers."
The Kellys say that overwork and stress meant they eventually had to walk away from the business.
RFG, under new chief executive Richard Hinson, says the company is cutting the cost of key ingredients such as flour to Brumby's franchisees, and also ramping up field support to individual businesses.
It also has made it mandatory for prospective franchisees to obtain independent financial advice before buying a franchise.
The committee will hold additional hearings in Sydney and Melbourne later this month before making a final report to Parliament by September 30.