Behind the Headlines with Jason Gehrke

Jason Gehrke | Director | Franchise Advisory Centre

Modified Franchising Code released

A modified version of the Franchising Code of Conduct, dated 1 March 2017, has been released to reflect new terminology used in the Corporations Act.

The last material changes to the Code came into effect on 1 January 2015, and the 2017 update has been released in response to the passing of the Corporations and Other legislation Amendment (Insolvency Law Reform) Regulation 2016. The updated Code contains only minor amendments to reflect terms relating to a body corporate that is externally administered.

Franchisors are advised to make a minor change to their disclosure documents in Item 4.2(c), and in their franchise agreements where the agreement deals with a special circumstances right to terminate) to use the new terminology. Franchisors should also give out this latest version of the Code.

Failure to disclose background results in $150k in fines

The Federal Court has awarded fines of $100,000 against Western Australian-based food franchise Pastacup and $50,000 against its former director Stuart Bernstein for not disclosing Bernstein’s involvement in two failed former franchisors of Pastacup. The fines resulted from proceedings instigated by the Australian Competition and Consumer Commission (ACCC), which sought declarations, injunctions, penalties, findings of fact, and costs against Pastacup and Bernstein, who co-founded Pastacup in 2008, and which was placed into administration in 2014.

This is the first time the ACCC has sought penalties for breaches of the Franchising Code of Conduct since the Code was overhauled to encompass penalties for breaching key provisions.

The ACCC alleged that Bernstein’s directorship and management of two previous Pastacup franchisor companies that became insolvent should have been disclosed by Pastacup to potential franchisees.

Union seeks termination of Subway and pizza agreements

The Shop, Distributive and Allied Employees Association (SDA) has applied to terminate enterprise agreements with sandwich chain Subway, and legacy agreements relating to several pizza brands, according to the Fair Work Commission website.

The Subway enterprise agreements date back to 2004, and the pizza agreements relate to former brand Pizza Haven in 2005. Pizza Haven was acquired by Eagle Boys, which in turn was acquired last year by Pizza Hut.

Retail Food Group’s shares are sixth most shorted on ASX

Multi-brand listed franchisor Retail Food Group (RFG) has asked its shareholders to stop lending their shares to short-sellers who are betting on a further collapse of the company’s share price after it has already declined 37 per cent since January, according to a media report.

RFG is currently the sixth most shorted stock on the Australian Securities Exchange (ASX), with 12.4 per cent of its shares in a short position, meaning that investors are expecting the share value to decline further.

RFG issued a $3.3 million profit downgrade in June amid concerns about the effect of new accounting standards that will require retail shop leases to be recognised as liabilities on future balance sheets.

Collins Foods burns Snag Stand

Listed franchise operator Collins Foods has decided to close down its fledgling Snag Stand business as it concentrates on its growing portfolio of KFC stores and its relaunch of the Taco Bell brand in Australia, according to a media report.

The gourmet sausage and burger brand was acquired by Collins Foods in 2013 as an early stage investment opportunity, however the brand failed to launch and has only three stores in Queensland and one in Canberra, which will now be closed at a cost of $1.2 million.

Collins Foods also owns the diminishing chain of Sizzler restaurants, but recently acquired the country license for Taco Bell, whose parent company Yum! also owns KFC.

ASIC ends Harvey Norman investigation

The Australian Securities and Investments Commission (ASIC) has ended its investigation into the accounts of listed electrical and furniture franchise Harvey Norman, according to a media report.

The investigation commenced in March and was reported to cover the year ending June 30, 2016 following a failed shareholder vote at the company’s AGM to change the way financial performance of franchisees was reported, with more than $1 billion shown in the company accounts as loans to franchisees.

Franchise founder charged over $30m tax fraud

The founder of RAMS Home Loans has pleaded not guilty to fraud offences allegedly as a result of avoiding more than $30 million in tax obligations, according to a media report.

The charges against Sydney businessman John Kinghorn date back to 1997 when he claimed he did not control an unlisted company incorporated outside Australia. Additional charges relate to dishonestly influencing a commonwealth public official between 2004 and 2007 through his use of companies registered in the British tax haven of Jersey. Kinghorn floated the RAMS network ahead of the Global Financial Crisis, with the company’s share’s plunging to less than half their value within two months, costing investors millions before Westpac bought the business.

SumoSalad seeks $3m capital to fund new growth

SumoSalad, which controversially threw down the gauntlet to shopping centre landlords last year by placing two of its leasing entities into administration, has announced a new strategic direction and a $3 million capital raising to fund its growth, according to a media report. The new strategy will see Sumo moving away from shopping centre food courts to expand into other locations including airports, transport hubs, universities and Caltex service stations.

The company will also grow its premium format ‘Green Label’ stores, as well as upgrade its direct-to-consumer offerings through a partnership with Menulog to deliver to homes and workplaces.

In June, Sumo put two of its leasing companies into administration to force shopping centre landlord Scentre to renegotiate terms. The company claimed the bold move, which affected the leases of up to 14 stores in Westfield centres, was in response to constantly rising rent costs while centres increase the number of competing food retailers by up to 300 per cent in their tenancy mixes without any corresponding growth in pedestrian traffic.

Le Wrap and Ali Baba food franchises merge

Food chains Ali Baba Lebanese Cuisine and Le Wrap have merged their networks to form the Retail Systems Group, which will operate 63 stores across Australia.

The merger is expected to capitalise on synergies between the two brands, improve support to franchisees and broaden the reach of both brands.

Supplier blamed for email data breach

A former supplier to Domino’s in Australia has been blamed for sending personalised emails to Domino’s customers which asks to reconfirm their suburb details, according to a media report.

The pizza chain insists no data breach has occurred and that customers do not need to change their passwords or user information, but that a former supplier who ceased working with the company in July was responsible for the unauthorised sending of the emails.

Coffee franchisee referred to AFP over enterprise agreement

A franchisee of coffee chain Zarraffa’s has been referred to the Australian Federal Police by the Fair Work Commission after the commission found the franchisee had provided false information when applying for an enterprise bargaining agreement (EBA), according to a media report.

The West Ipswich franchisee used consultancy Platinum Employee Relations to develop an EBA for their business which included statutory declarations that the staff had voted on alternative pay rates when no staff were actually employed at the time.

The Fair Work Commission approved the EBA application based on the statutory declaration, however the franchisees sought to unwind it following concerns raised by Zarraffa’s head office. The initial inaccurate statutory declaration for the agreement and the witness statements of the parties will now be referred to the Australian Federal Police “for investigation as to whether a crime has been committed”, the full bench of the Commission said.