Australia is the land of franchising - there are more franchised systems here than anywhere else in the world!
Recently two high profile franchising disputes have filled the daily news- the franchisor’s decision to make its pizza hut franchisee’s sell $5.00 pizzas that decimated many Pizza Hut shops and the 7-11 scandal that saw employees being grossly unpaid. Like many business arrangements, franchising works well until it doesn’t…then it tends to spectacularly fail.
Last year headlines shocked the nation with claims that 7-11 stores underpaying staff with wages as low as $12.00 per hour (with the award being a minimum of $17.29). The ABC’s Four Corners claimed that up to 60% of franchisees were involved in underpaying their workers. The Franchisor went into damage control promising to oversee the payroll functions of the franchisees workers. Franchisees who have correctly paid workers are nervous and have reported a drop in sales as customers assume they too did the wrong thing. Rumours of a class action are circulating.
Who has control?
A franchisor often has the ultimate authority over the franchisees’ business. How much authority depends on the wording of the agreement. Some franchising systems will not allow any change in their system and must approve all advertising and premises. Many food franchised businesses will actually hold the lease in their name and sub-lease it to the franchisee, in addition to choosing all third party suppliers. Others are far more flexible, providing general guidelines about the use of the system and suggestions for advertising. Rigid requirements can cause conflict when a franchisee sees the rigidity as stifling innovation and profit. Franchisors worry that in failing to “follow the system” the franchisee will undermine the business model diluting its worth.
How could it go wrong?
Tensions can emerge when the interest of the franchisee differs to that of the franchisor. In the example of the Pizza Hut case the head franchisor, Yum, wanted to take on Domino’s who had gained a large portion of the market share with their successful cheap pizza range. When Yum required their franchisee’s to start selling cut price pizza’s too, the franchisees responded that they could not turn a profit on a $5.00.
Some franchisee’s banded together and commenced a class action that was fiercely defended by Yum. They argued that the franchisor has an obligation to make decisions that would allow the franchisee to make and increase profits. Ultimately, the Court pointing to a clause in their franchise agreements that stated Yum could unilaterally change pricing and did not guarantee that any pricing decisions would be profitable. You can read more about that decision in our previous article linked above.
Expansion or Dilution?
Often a franchisor wants to increase its market share by expansion whereas a franchisee can see the same expansion as a threat to its own profitability. When considering whether to buy into a franchise, do so with open eyes. Read every single clause in the agreement and try to chat to existing franchisees about their experience. Seek legal and accounting advice. Be territorial- if your agreement does not give you an exclusive territory, ask why not? The Franchising Council of Australia has great online resources for potential and current franchisees to read. Despite these tensions, franchising remains a popular choice and many people do find them profitable businesses to own and operate.