Behind the headlines with Jason Gehrke

Jason Gehrke | Director | Franchise Advisory Centre

Jason Gehrke | Director | Franchise Advisory CentreThis article appears in the Sep/Oct 2016 issue of Business Franchise Australia & New Zealand

Store upgrade dispute escalates over termination

A dispute about store upgrade requirements between restaurant chain Nando’s and a multiple-unit operator in Melbourne led to a late-night store seizure and a court injunction preventing termination of the outlets pending the outcome of a claim against the franchisor, according to a media report.

The dispute commenced in November 2015 when Nando’s issued a notice of breach to the franchisees for failing to undertake store refurbishment works, resulting in the late night seizure of two stores in Narre Warren and Clayton on January 11 this year. However two days later the franchisees launched legal action against Nando’s, alleging breach of contract, bad faith, misleading and deceptive conduct, and breaching consumer law. The suit alleges Nando’s issued a list of works, costs and timetable, but did not negotiate the works in good faith before terminating the franchise agreements and seizing the stores.

The Supreme Court issued an injunction blocking the termination of the agreements until the court case is finalised, possibly in October when a five-day trial is scheduled to proceed.

Meanwhile Nando’s has expressed disappointment that the matter could not be resolved outside of court, and indicated that other franchisees are refusing to upgrade their stores pending an outcome from this case.

Eagle Boys collapse follows years of losses

The collapse of pizza chain Eagle Boys follows at least three years of losses, a reduction in the size of its network by more than 50 per cent, growing discontent among franchisees, a failed capital raising and a price war sparked by rival Domino’s Pizza, according to media reports.

The company and a number of related entities was placed into administration owing an estimated $30 million following group losses of $2.6 million in 2012, and approximately $900,000 in 2013 and again in 2014.

Accounts for 2015 had not been prepared by the time the company was placed in administration, according to a media report. At its peak, Eagle Boys was the second-largest pizza chain in Australia with 340 stores, however it has shrunk over the years and now has little more than 100  stores following the closure of 13 company-owned stores by the administrators. It was sold by its founder to a private equity consortium in 2007.

Late last year Eagle Boys unsuccessfully sought to raise $20 million in capital for up to 100 per cent equity in the company, with the proceeds to be used to retire debt, open company-owned stores, and increase advertising.

The capital-raising attempt followed a pizza price war which saw market leader Domino’s drop prices to as little as $5, which was then matched by Pizza Hut whose franchisees subsequently launched an unsuccessful class action against their franchisor for loss of profits.

Several groups are reported to be interested in buying Eagle Boys, including existing pizza operators Domino’s and Retail Food Group, which owns gourmet pizza brands Crust and Pizza Capers. Other potential buyers which have previously expressed interest include Franchised Food Group (the owner of Cold Rock, Healthy Habits and several other brands and Minor DKL, owner of The Coffee Club.

Franchisors to be held liable for franchisees’ staff underpayments

Franchisors will be held liable for the wage underpayments of their franchisees under similar policies released by both major political parties prior to the federal election, meaning that the new government may have bipartisan support when it tables legislation on the issue.

Citing exploitation of workers in 7-Eleven stores among other reasons for the need for such a policy, Labor will reverse the onus of proof under Section 550 of the Fair Work Act 2009 so that franchisors can be pursued as accessories to wage underpayments unless the franchisor can prove that they could not have reasonably known or reasonably been aware of the breaches.

The Labor policy is sterner than a similar Coalition policy released in May, which allows for franchisors who have taken reasonable steps to educate their franchisees about their workplace obligations, and have assurance processes in place, to avoid prosecution. Both Labor and Coalition policies also promise a ten-fold increase in penalties imposed on individuals and corporations who fail to properly pay workers, up from the current amounts of $10,800 and $54,000 respectively.

Both policies also indicate further potential changes to the Franchising Code of Conduct to impose payment liabilities on franchisors where franchisees have underpaid workers, with Labor proposing to add further amendments that will allow the Fair Work Ombudsman to recover  underpayment claims from the franchisor, with franchisors subsequently able to pursue franchisees for any underpayment amounts.

Union-brokered wage deals under attack

Wage deals negotiated by the Shop, Distributive & Allied Employees Association (SDA) with major employers such as Coles and McDonald’s have come under fire again for failing the “better-off overall” test when compared to the relevant awards, according to a media report.

A part-time Coles nightfill worker is taking the grocery chain to the Fair Work Commission to argue that the workplace agreement negotiated by the SDA with Coles actually pays workers less than the retail award, and consequently fails the “better-off overall test”.

The case could have implications for the franchise sector, with major brands such as McDonald’s operating under workplace agreements negotiated with the SDA in Australia, and which if moved to the retail award, could result in signfiicant wage cost increases for businesses operating under such agreements.

Franchised Food Company acquires Healthy Habits

Multi-brand group Franchised Food Company, operator of six existing brands, is adding a seventh to its portfolio with the announcement that it will buy the 24-store Healthy Habits chain from book retailer Dymocks.

Healthy Habits is a sandwich bar concept that commenced operations in Melbourne in 1992 before it was sold to the Sydney-based book retailer in 2009. Franchised Food Company owns ice-cream and treat brands including Cold Rock Ice Creamery, Mr Whippy, Trampoline, plus Nutshack, Pretzel World and Europa Coffee.

The sale, for an undisclosed amount, sees the Healthy Habits network operating under its new ownership from July.

Franchised Food Company CEO Stan Gordon says that the acquisition is part of a strategy to diversify from being a “treat” business.

Australian Geographic’s 67 stores to close

In a further blow to the retail sector following the collapse of Dick Smith, the 67-store chain of Australian Geographic stores will close in early 2017 if a buyer cannot be found in the meantime, according to a media report. The company has lost money in recent years and has suffered declining revenues due to increased retail and online competition. The business will continue trading in the meantime.

Burger franchisees prove commitment by skydiving

Potential new franchisees for Queensland-based food franchise Burger Urge must prove their commitment to the brand and a fearless approach to business by leaping out of an aeroplane as part of the chain’s franchisee selection criteria.

The skydiving challenge for potential franchisees is a test of their commitment to Burger Urge’s “dangerously good” brand promise, and must be successfully completed before a franchise agreement can be signed.