By Peter Buckingham CFE
Gelare International is an ice cream Franchisor based in Perth, who want to expand into Melbourne. The core product of Gelare cafés is its own brand of ice-cream, but the cafés also sell waffles, pancakes, yoghurt, vegan ice-cream, smoothies and coffee. They were taken to court over misrepresentation around a site at Forest Hills Chase in Melbourne, and found guilty on the 13th October 2015. There is still more to come on this case as the judge plans to hear from both parties on costs, but has awarded $788,980 against Gelare International, its Director and an associate working with Gelare.
This is another case that should highlight to Franchisors that they need a process and sales prediction tools if they are going to make any statements to their potential Franchisees. The SWAG approach just does not cut the mustard – Scientific Wild Arse Guess – as was stated in a previous court case.
If you make sales predictions for your Franchisees and really cannot justify those numbers, be prepared to add “Your Honour” to the end of every sentence you make. Gelare International has just found that out. As much as they felt they had done “the right thing”, the Federal Circuit Court and Judge Riley disagreed.
Gelare International now join Billy Baxter and Foodco in feeling the Judges’ wrath, mainly around what the Court and the ACCC’s Code of Conduct see as Misrepresentation – stating facts to a potential franchisee without some basis to justify these numbers.
The case is very complex, and whilst I am not a lawyer, my reading of the judgement places one of the major concerns over the predicting or stating what sales the store will do in the future, and not having any reasonable grounds to justify these statements.
The basis of the sales prediction that the Franchisee was told was that the average Gelare store sold $430,000 pa, and that the store at Doncaster sold around $650,000 and that the Forest Hills store should be better than Doncaster. The Franchisee was told this was a very conservative estimate, partly based on the Director’s 20 years’ experience. There was quite a lot of dispute over these statements, leaving it with the Judge to give his views on what was truthful in these meetings. When the Franchisee actually put in their application, they stated a revenue estimate of $600,000, which the Judge felt must have come from the Franchisor.
After the Franchisee closed the store, Gelare International reopened the store in October 2012 under company operation, and ran it until final closure (March 2014), and were only able to achieve sales of $200,000 pa.
Whilst there is another round to come before a final Judgement with some questions being raised as to the jurisdictional limits of this court at $750,000.
The final verdict
If you do wish to pass on sales estimates for a site, invest the money in a proper process with experienced statistical consultants, as the cost will be a fraction of the cost of the dispute, and the damage to the Brand you will have in any case similar to this.
To read the judgement in full, click here.
Peter Buckingham is the Managing Director of Spectrum Analysis Australia Pty Ltd, the leading Geodemographic and Sales Prediction Modelling Company in Australia. He worked for Caltex for 20 years in many areas including site selection process. He is also a Director and past Vic / Tas President of the Institute of Management Consultants and awarded the Certified Franchise Executive status recently by the FCA. Peter is contactable by email at:firstname.lastname@example.org or visit www.spectrumanalysis.com.au