Why is Kleenmaid such big news?

The collapse of Kleenmaid is much bigger news than its relatively small size as a franchise system would suggest.

First and most significantly there is the impact on an estimated 6000 customers around the country. Many of these have paid some or the full amount upfront for their appliances, and are unlikely to ever receive the appliances, or their money back.

Thousands more now have warranties that are worthless, and own equipment for which spare parts are no longer available.

Those customers who have paid for appliances will have designed and built kitchens or laundries in new or renovated homes specifically to fit those appliances. Without the Kleenmaid appliances, the customers face the additional burden of buying replacement items and potentially incurring additional costs to modify kitchens and laundries to get the replacement items to fit.

In short, because of the specialised nature of the Kleenmaid range, there may be no direct alternative for customers to switch to without bleeding even more cash above their existing losses.

The most significant difference with other retail franchised and non-franchised insolvencies is that Kleenmaid customers have lost huge sums of money – up to $27 million according to the company’s administrators.

Unlike the retail jewellery franchise Kleins, which collapsed last year with debts in excess of $20 million, customers did not pay in advance for their products, and did not pay such large sums for their purchases. When Kleins went broke, the worst thing that happened to its customers was that they would have to shop somewhere else for their cheap jewellery – and because there is no shortage of choice in that market segment, they did. Purchases of $20 to $100 in fashion items were easily transferred to other retailers, and the customer was no worse off.

Kleenmaid customers on the other hand are stuck. They are locked in by their deposits to the retailer, and the proprietary nature of the retailer’s products. It is because of this that the media has understood the public interest of following the Kleenmaid collapse, and why it has generated so much coverage compared to other recent retail collapses such as Kleins, Strathfield and EzyDVD.

What compounds this from a news point of view is that the Kleenmaid customers who have lost their money are also beset by the uncertainty of the times, particularly the worsening employment market where corporate layoffs are daily news and no-one is immune from losing their job.

It is statistically inevitable that some unfortunate Kleenmaid customer will lose their job and suffer even greater financial distress than they are already under. Combine this with a softening real estate market and constant talk of recession, and Kleenmaid customers have suddenly become the new face of economic hardship as portrayed by the media.

From a franchising point of view, the Kleenmaid collapse is also topical. Despite its relatively small size as a retail franchise system, the number of customers affected by its demise brings greater attention to the as-yet unresolved inquiry into franchising conducted late last year by a Parliamentary joint committee.

The inquiry’s report was presented to the Federal Government on 1 December 2008, and is still to receive an official government response to its 11 recommendations for reform of the franchising code of conduct.

What has been overlooked in many of the media reports is that Kleenmaid’s 15 retail franchisees and 30 service franchisees are likely to see the value of their businesses evaporate completely. Without ongoing stock from Kleenmaid to sell, the retail franchisees have no future under the Kleenmaid brand, and without Kleenmaid to co-ordinate warranty repairs and maintenance schedules, the service franchisees are equally challenged.

All franchisees will lose, but particularly those who joined Kleenmaid as recently as November last year and have seen their investment disappear in just a few short months.

Kleenmaid is also believed to hold the head leases on all stores (both franchised and company-owned), which means the administrators can terminate these contracts, which would leave franchisees not only without products to sell, but without a premises to sell them from either.

Retail jewellery chain Kleins also held the head leases for all of its franchisees’ stores, and when these were terminated all franchisees lost the right to occupy their premises and were required to vacate, leaving behind whatever goodwill might have been salvageable, as well as thousands of dollars sunk into shop fitouts.

However up to 60 franchisees – mostly located in smaller shopping centres – were able to negotiate directly with their landlords to either take on new lease terms or agree to a new lease for the balance of the existing term. It is unknown how many of these former franchisees have been able to continue to trade while the economy deteriorated further in recent months.

Not only could some of the Kleins franchisees continue to occupy their sites, but they could also source alternative supplies. The range of alternative suppliers for fashion jewellery accessories (previously provided by Kleins) is considerably greater than the range of alternative suppliers for Kleenmaid-branded products.

(If franchisees can’t get Kleenmaid goods from Kleenmaid, they can’t get them anyhere else – certainly not without finding huge sums of capital and sourcing the products direct from the company’s European suppliers).

Unfortunately, franchisees may also suffer further loss if they are found to be debtors of the franchisor. Under Kleenmaid’s franchise agreement, franchisees did not stock products in their stores, but operated showrooms featuring only display items. Customers could see the products and pay for them in store, but all payments were forwarded to the Kleenmaid national office, which would despatch the products to the customers’ homes.

Franchisees would generate their income through commissions paid to them by Kleenmaid, so long as those commissions were greater than the amounts franchisees were required to pay to Kleenmaid each month.

Payments to Kleenmaid included advertising ($10,000), training and computer support ($2000) and rent. A clawback clause in the franchise agreement would require franchisees to repay commissions if a customer cancelled an order (if the commission had been previously paid).

Even though sales proceeds went direct to the franchisor, between the required monthly payments and the potential for commission clawbacks from cancelled sales, it is possible for Kleenmaid franchisees to still owe the franchisor money at the end of a month. If this is the case, the administrators will be duty-bound to pursue all debts owed to Kleenmaid, even if it is from franchisees who are themselves owed money for sale commissions for a subsequent month.

In other words, there will be no set-off where franchisees owe money to the franchisor, and the franchisor owes the franchisee money. The franchisees will be required to pay their debts to the franchisor in full, while at the same time standing helplessly in line as unsecured creditors waiting for the money owed to them.

This was also the situation faced by Kleins franchisees last year, who found that their first official communication from the company’s administrators was a demand for payment, rather than information about the future of the business to which they had married themselves.

The Kleenmaid situation will continue to unfold publicly as more information is revealed. As with any business collapse, there are lessons for those willing to observe and learn. Unfortunately for stakeholders such as customers, franchisees, employees and suppliers who are immersed in this problem, these lessons will come at huge cost.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

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