Does franchising need fixing?

It was an extraordinary attack. In late June, the Opposition’s small business spokesman Steven Ciobo dramatically called on Federal Small Business Minister Craig Emerson to respond to a parliamentary inquiry into the franchising sector which recommended major changes to Australia’s Franchising Code in December 2008.

“I plead on behalf of all those people in the franchising sector for this Minister and this Government to start doing something,” Ciobo told the House. “Eleven recommendations came from the committee, and I put it to the minister that, in the main, all 11 recommendations are relatively non-controversial. This Minister and this Government need to act.”

“Stop stalling – people’s lives are potentially being destroyed as a result of this Government’s inaction, and it is time that they did something.”

It’s extremely evocative language, but it does highlight the depth of feeling that exists in the franchising sector.

One side of the fence is centered on a group of vocal franchisees and ex-franchisees who have proven to be highly effective at getting their case heard by politicians on both sides, and at a Federal and State level.

They argue that the way the franchising sector currently operates can disadvantage franchisees and believe the sector is in need of new regulation. The failure of franchise systems including Kleins, Midas, EzyDVD and Kleenmaid has only added weight to these arguments.

Frank Zumbo, an associate professor at the University of New South Wales and an advocate for franchisee rights, says there are “underlying tensions” in the sector that have been exacerbated by the state of the economy.

“These underlying tensions are putting a number of franchise systems under pressure and I believe we’ll see more collapse during the next year or two, simply because they are marginal.”

That view is not shared by those on the other side of the debate. The franchisors, led by the Franchise Council of Australia, believe the sector, which generates $128 billion each year, is functioning well. While Franchise Council chief executive Steve Wright says his organisation is open to ways to improve the sector, he does not believe major changes are needed.

The battle over the introduction of new franchising regulations has raged for more than 18 months. Its beginnings can be traced back to wealthy entrepreneur Jack Cowin, owner of the Hungry Jack’s fast food chain and the former owner of more than 40 KFC franchises in Western Australia.

Back in 2007, KFC’s parent company, YUM, offered to buy Cowin’s KFC licenses for a price that Cowin considered too low, and did not take into account the goodwill built up while he ran the stores.

YUM then refused to renew Cowin’s licenses; as each store agreement ended, ownership reverted to YUM. Cowin was incensed and immediately started pushing for change, including the introduction of a “good faith” clause into the Code.

Agitation by Cowin and a vocal band of franchisees and ex-franchisees resulted in parliamentary inquiries in Western Australia (the report was released in April 2008), in South Australia (report released in May 2008) and finally at a Federal level.

The Joint Standing Committee on Corporations and Financial Services inquiry into the sector, which was chaired Labor MP Bernie Ripoll, handed down its bipartisan report in December 2008.

After a six month delay, Emerson announced in late May that he would undertake further “targeted” consultations on the report before making a formal response .Interested parties were given until July 10 to respond to an options paper released by Emerson in late June.

Industry sources have told SmartCompany only two organisations have been consulted as part of the process: the Franchise Council of Australia and the Australian Competition and Consumer Commission. Exactly which organsiations have responded to Emerson’s option paper is not known, as all submissions were treated in confidence, but it is believed representatives from Jack Cowin’s company Competitive Foods have travelled to Canberra to lobby the Department of Innovation.

No date has been set for the release of Emerson’s report, although one source in the sector has been told he will comment in Parliament by the end of the month. Despite the bipartisan report’s strong recommendations, most observers are expecting Emerson’s changes will be relatively minor, although frannchisee groups remain hopeful.

Only one thing is really certain – whatever he does, Emerson is almost guaranteed to annoy a large number of voters whichever way he goes.

Cracking the Franchise Code

Opposition small business spokesman Steven Ciobo got it wrong when he described the 11 recommendations in Bernie Ripoll’s franchising inquiry report as “non-controversial”.

Depending on what side of the franchising fence you sit on, the report’s recommendations are a matter for fierce debate.

The key recommendations include:

• The introduction of a “good faith” clause in the franchising code. The inquiry found that the interdependent nature of franchise contracts leaves franchisees “vulnerable to opportunistic conduct” and argued a good faith clause would deter such behaviour. The suggested wording of the clause is: “Franchisors, franchisees and prospective franchisees shall act in good faith in relation to all aspects of a franchise agreement.”
• That the Government explores avenues to better balance the rights and liabilities of franchisees and franchisors in the event of franchisor failure. The string of high-profiled franchise collapses shone a harsh light onto the issue of franchisor failure and, the inquiry made a number of recommendations on this issue, including recommending amending the franchise code so that franchisors are forced to provide a clear statement of the liabilities and consequences of franchisees in the event of franchisor collapse.
• Forcing franchisors to disclose to franchisees, before the franchise agreement is entered into, the process that will apply in determining the end of franchise arrangements. One of the most common allegations made by disgruntled former franchisees involves the way their franchise agreements were terminated and their franchises sold to new franchisees, often without compensation. The Parliamentary inquiry specifically recommends that franchisors need to outline the way equity in a franchise would be transferred at the end of an arrangement.
• The amendment of the Trade Practices Act to include pecuniary penalties for breaches of the Franchising Code. The committee believes the introduction of these penalties would help the ACCC in its enforcement role “by providing a greater deterrent for conduct that contravenes the code”.
• The ACCC being given power to investigate when it receives credible information about breaches of the franchising code. The ACCC has been criticised in the past be taking too long to investigate franchisee complaints, although the consumer watchdog has denied these allegations.
• The Government investigate the development of a simple online registration system for franchisors. This would require franchisors to annually lodge a statement confirming the nature and extent of their franchising network and providing a guarantee that they are meeting their obligations under the franchising code and the Trade Practices Act.