ACCC’s warning shot for franchising

The new chairman of the Australian Competition and Consumer Commission, Rod Sims, came out with all guns blazing yesterday in a series of speeches in Melbourne.

He warned airport operators about excessive charges, he took a shot at supermarket chains that might be tempted to abuse their power and he told the franchise sector that it has an “image problem”.

Actually, there is some doubt over whether Sims actually used those words when he faced the Franchise Council’s national convention yesterday – SmartCompany has been contacted by a number of senior industry figures who say the delivery of Sims’ speech differed from the rather aggressive text, which you can read here.

That’s a very interesting change and one we’ll come back to. But either way, this was a speech designed to put a warning shot across the bows of the sector. And for that reason it’s worth taking a look at the speech in a bit of detail.

In the text of the speech, Sims mentions the “image” of franchising no less than five times. He referred to the long series of inquiries into the regulation of the franchise sector, commenting that this highlighted the fact there has been an “awareness of the challenges in franchising for many years”.

Most pointed though were Sims’ comments about the level of complaints in the sector.

“The ACCC’s complaints data supports the proposition that there are problems in the sector. In the last financial year the ACCC received just over 600 franchise-related complaints… as the Chairman of the ACCC, it is difficult for me to ignore these statistics.”

Sims said a “particular cause” of the problems in franchising was the power imbalance in the sector.

“Franchisors are often large and well-resourced companies that hold substantial power in the franchising relationship. They coordinate the operations, they own the brand and, in many cases, they control the supply of the key products for the franchising business.

“On the other side of the equation, franchisees are often couples or individuals, many of whom enter the franchising relationship without a great deal of business experience, but nevertheless invest large sums of money (and sometimes their nest egg) to buy into and be part of a franchise. They often invest the money without doing sufficient due diligence checks.

“This can make franchisees vulnerable and this inherent imbalance in power is open to abuse.”

Sims indicated the ACCC would be ramping up its monitoring of the sector, pursuing potential breaches of the Franchising Code and continuing to conduct audits within the sector, including potential random audits.

He also urged franchisors keep lines of communication open and try to work through disputes quickly.

“I would urge all franchisors to consider referring franchising disputes to mediation as early as possible, even if it means arranging a private mediation outside of the systems I have just referred to.

“If franchising parties stop talking to each other or if they resist attempts by the other party to arrange mediation, inevitably the dispute will escalate to a point of no return.”

Most of this is sensible stuff which I am sure most franchisors would agree with.

The sector has recognised it improving disclosure and education of potential franchisees is the best way of managing franchisee expectations and proactively reducing the level of disputes.

The sector is also broadly supportive of improved dispute resolution mechanisms. No-one wants to be in war with their business partners.

Where I think the ACCC and franchisors would differ is around the idea of an image problem.

While Sims might say 600 complaints is a problem he cannot ignore, these statistics need a bit of context. Given there are 70,000 franchisees in the $128 billion franchise sector, 600 complaints represents a dispute rate of less than 1%.

Not perfect, but perhaps not symptomatic of a massive problems.

It’s also interesting that the two of the three major franchise breaches pursued by the ACCC which Sims cited in his speech – the Seal-A-Fridge case and the Allphones case – relate to breaches that occurred more than five years ago, although they only made it through the courts last year.

Could this suggest that recent changes to the Franchising Code have resulted in improvements in franchisor behaviour? Let’s hope so.

As Sims said yesterday, franchising is a large and important sector in Australia that does need a strong regulator. Franchisee advocates have long argued that the ACCC doesn’t do enough to protect the little guys in the sector, so Sims’ aggressive stance will be welcome.

But does the franchise sector have an image problem? I’m not sure a dispute rate of below 1% bears that out. Perhaps that’s why the delivering and text of the Sims’ speech may have changed.