Behind the Headlines

Behind the Headlines | Jason Gehrke | FCA

Behind the Headlines

Franchise inquiry report finds 71 recommendations for change

The long-awaited final report of the inquiry into the Australian franchise sector and the effectiveness of the Franchising Code of Conduct has made a total of 71 recommendations for outright changes to the Code, or other changes to conduct in franchise relationships.

The Parliamentary Joint Committee on Corporations and Financial Services report was finally released on March 14 after being delayed three times – the report was originally due on 30 September last year, before being extended to 6 December, then 14 February.

The inquiry report, titled Fairness in Franchising, recommends sweeping changes to the Franchising Code of Conduct covering 20 broad topics, as well as increased powers for the Australian Competition and Consumer Commission (ACCC) to investigate and prosecute breaches of the Code, including – among other things – banning non-compliant franchisors from granting new franchises.

New Franchising Taskforce to consider recommendations

A major recommendation of the Inquiry’s Fairness in Franchising report is the establishment of a new Franchising Taskforce to oversee the feasibility and implementation of many of the inquiry’s recommendations, and to link government agencies including the Department of Treasury, the Department of Jobs and Small Business, and the ACCC.

This taskforce would be responsible for evaluating the detail required to enable many of the recommendations, and while the report includes suggestions as to the composition of the taskforce, it does not elaborate on its methods of operation, reporting requirements or deadlines, potentially creating future uncertainty around the implementation of significant recommendations.

RFG targeted for further investigation amid administration claim

The inquiry report noted that almost half of the submissions received from franchisees related to grievances with multi-brand listed franchisor Retail Food Group (RFG) or one of its brands.

An entire chapter of the 22-chapter report is dedicated to a case study of RFG, and is highly critical of its performance as a franchisor. The chapter highlighted RFG’s acquisition on average of one new brand per year following its listing on the Australian Securities Exchange (ASX), which created an appearance of growth but often masked a high rate of store closures that in some years matched or exceeded the number of new outlets opened.

The report highlights escalating costs to franchisees imposed by the franchisor through fees, charges and rebates as practices designed to transfer profits from franchisees to the franchisor, and recommends that RFG and its current and former directors and senior executives be investigated by the ACCC, the Australian Tax Office (ATO) and the Australian Securities and Investments Commission (ASIC) for breaches of the Franchising Code, Australian Consumer Law, insider trading, tax avoidance, and breaches of disclosure and director’s duties, among others.

Two of the inquiry’s nine public hearings were devoted exclusively to testimony relating to RFG, including the final hearing prior to which former RFG managing director Tony Alford and one other executive unsuccessfully appealed to the High Court in a bid to avoid giving testimony.

The report also noted that RFG continues to trade with the support of its lenders, with the company itself issuing a statement just two days before the release of the inquiry report to deny that it was contemplating the appointment of administrators.

Inquiry the most far-reaching yet

The final report of the current franchise Inquiry is the widest and most far-reaching of any franchise inquiry conducted to date, with the report itself running to 369 pages, containing 71 recommendations, and taking input from nine hearings and 409 submissions.

By contrast, the last joint committee inquiry into franchising, Opportunity not Opportunism, conducted 10 years earlier in 2008, ran to 165 pages, contained 11 recommendations, and took input from four hearings and received 168 submissions.

Nearly a year passed between the release of the 2008 inquiry report and the announcement by the then federal minister, Craig Emerson, that the government would accept eight of the 11 recommendations in part or in full, which were included as amendments to the Franchising Code that took effect from 1 July 2010.

What next following the release of the inquiry report?

The release of the franchise inquiry report on 14 March is unlikely to result in any immediate changes to the Franchising Code, based on the experience of the 2008 inquiry.

In 2008, the report’s recommendations were first considered by the Minister for Trade – a process at the time which took nearly 12 months – before deciding which recommendations to accept (not all recommendations were accepted at the time).

In the current political climate, with a federal election due in May, there is a very limited window of opportunity for the current minister, Michaelia Cash, to assess the report before the election is called and the government goes into caretaker mode. If Ms Cash does not respond quickly, the report may be considered by the next minister at some point after the election.

Either way, many of the report’s recommendations require consideration by a Franchising Taskforce – which is yet to be assembled, and for which no reporting timeframe has been established. Even if the taskforce were convened prior to the election, it would likely take some time to assess the large number of recommendations the inquiry report has referred to it.

In the meantime, franchisors should assess the likely impact of the recommendations on their businesses, and what changes they may need to implement to accommodate the inquiry’s recommendations.

Boost Juice prepares for stock exchange listing

The private equity majority owner of Boost Juice is reportedly preparing the chain’s parent company, Retail Zoo, to be floated on the ASX in the second half of this year, according to a media report.

The Australian Financial Review reported that Bain Capital, which owns a 70% stake in the group, is preparing to exit via an initial public offering. In addition to signature brand Boost Juice, Retail Zoo also owns Salsa’s Fresh Mex Grill, cafe chain Cibo Espresso, and burger chain Betty’s Burgers & Concrete Co. Bain acquired its stake in the company in 2013 when the business was valued at $185 million.

Australians win international franchise competition

Brisbane-based City Cave Float and Wellness Centre has won the NextGen in Franchising Award at the 2019 International Franchise Association annual conference in Las Vegas, according to the FCA.

The annual competition invites millennial entrepreneurs from around the world to submit innovative business ideas that they could develop and grow using a franchise model.

Financial services franchise reports $34m loss

Listed wealth-management franchise Yellow Brick Road (YBR) has reported a half-year loss of $34.15 million, following a decision to write down the goodwill value of its brand by $31 million on top of an operating loss of $2.6 million for the half.

The company’s shares were formally suspended from trading on 1 March because it had not filed its half-year accounts. The value of goodwill on its balance sheet has not changed since 2016, and some of that goodwill relates as far back as to the 2014 purchase of non-bank lender Resi Mortgage. In recent years, ASIC has indicated that the impairment of non-financial assets is a key focus.

Media storm erupts over ‘entitled millennials’ comments

An Australian franchise executive triggered international headlines after commenting in a news interview on workplace changes that that young workers are no longer willing to do unpaid work experience to advance or start their careers, referring to them as ‘entitled millennials’ who expect too much, according to a media report.

The comments by coffee franchise Muffin Break’s general manager Natalie Brennan quickly went viral, generating a backlash from social media users who misread the comments as supporting worker exploitation. Brennan attempted to clarify her stance as referring to internships and work experience for head office, rather than cafe-based roles. However, a number of successful business people who began their careers in unpaid positions, along with other management peers, agreed that millennials have ‘unrealistic expectations’, with regards to both starting salaries and seniority of starting positions.

Australia's last Blockbuster store closes

The last Australian store of home movie and video game rental franchise Blockbuster has closed in Perth, leaving one remaining store operating in the United States in Bend, Oregon, according to a media report.

The owners of the Perth store expressed regret at having to close, attributing the demise of the business to the rise of streaming services such as Netflix.

One in 20 Aussies have worked at Macca's

Fast-food giant McDonald’s has employed appoximately 1.3 million Australians, or 5% of the population, since it first opened in Australia in 1971, according to a media report.

Most employees were under the age of 25 and for many of them it was their first job. Many former employees praise the company for preparing them for future employment with valuable life skills, practical on-the-job training, and access to courses. McDonald’s is currently the largest national employer of youth in Australia and creates 3000 new jobs each year.

Swim school franchise faces further scrutiny

The FCA has requested an investigation by the ACCC into troubled swim school franchise Jump!, following an increasing number of complaints against the company from franchisees and contractors, according to a media report.

While Jump! is not a member of the FCA, the industry body maintains that ‘poor behaviour by franchisors affects all franchises’, recommending that the ACCC investigate potential breaches of the Franchising Code by the company. A representative from Jump! reportedly stated they welcome a review by the ACCC, maintaining an earlier stance that issues related to the delivery – or lack thereof – of operational businesses to paid-up franchisees are due to tightening regulations and the need for third-party approvals.

Franchisor guilty of unconscionable conduct

Former hand car wash and detailing franchisor Geowash has been found guilty in the Federal Court of a number of offences including acting unconscionably, making false or misleading representations, and breaching the Franchising Code of Conduct by failing to act in good faith, according to an ACCC press release.

A three-year long investigation by the ACCC into Geowash culminated in the court finding, among other things, that the business made false or misleading representations on its website by indicating monthly average revenues to prospective franchisees with no ‘reasonable basis’ for the claim, and suggesting commercial relationships or affiliations with major corporations, such as Kia, Shell, and IKEA, that did not exist. Geowash was placed into voluntary administration in October 2016.