Behind the Headlines with Jason Gehrke – May/Jun 2018

New inquiry to review Australian franchise sector

The Australian franchise sector will be subjected to its fourth national franchise inquiry in 12 years with the Senate recently passing a recommendation for a joint Parliamentary inquiry to report back to government by September 30 this year. The new inquiry was moved by Nationals Senator John Williams, who indicated in the media as early as December 2017 that he would seek an inquiry to explore any regulatory deficiency in the franchise sector following widespread media reports in the Fairfax press about franchisees of Retail Food Group and other brands.

The new inquiry will be conducted by the Parliamentary Joint Committee on Corporations and Financial Services, and will consider for both the Franchising Code of Conduct and the Oil Code:

• The operation and effectiveness of the Code with a focus on disclosure on likely financial performance, contractual rights, termination rights and geographic exclusivity, leasing arrangements and tenants’ rights, and running costs and costs of goods to be acquired through prescribed suppliers;

• The effectiveness of dispute resolution procedures under the Code;

• The impact of unfair contract laws on franchise agreements;

• Whether the Oil Code (and other industry codes) contain advantages or disadvantages for franchises in comparison to the Franchising Code;

• Termination and restraint of trade provisions;

• The enforcement of both Codes, and any other related matter.

Additional details regarding the inquiry are yet to be released, but with a report due by September 30, further information is expected to be released soon.

Franchise sector to face sixth inquiry in 12 years

The new franchise inquiry will be the fourth national inquiry, and sixth overall inquiry in 12 years – for an average of one inquiry every two years – making the Australian franchise sector perhaps the most probed business sector in Australian history.

The three previous national inquiries are:

• The Wein Inquiry of 2013 which led to changes to the Franchising Code of Conduct that came into effect on 1 January 2015;

• The Ripoll Inquiry “Opportunity not Opportunism” conducted in 2008, which led to Code changes in 2010; and

• The Matthews Inquiry in 2006, which led to Code changes in 2008.

In addition to the three national inquiries since 2006, two additional state inquiries into the franchise sector were held in Western Australia and South Australia in 2009. With the newly-announced federal inquiry, this makes six inquiries in 12 years for an average of one enquiry every two years.

Aussie Farmers Direct closes; 100 franchisees out of business

Home delivery franchise Aussie Farmers Direct has been placed into administration and ceased operations, with nearly 100 franchisees left without a business and in many cases owed thousands for completed deliveries, according to media reports.

The company, which was founded in 2005, was losing more than $1 million a month in 2014 and 2015 according to one report, and was being propped-up by its investors who are owed most of the company’s debt. Attempts by the owners to sell the business or raise additional capital were unsuccessful, resulting in no option but to close according to administrators KordaMentha.

The collapse is being blamed on competition from grocery giants Coles and Woolworths, however franchisees claim that the company strayed from its original premise of supplying quality produce direct from Australian farmers into becoming a general grocery provider. Franchisees are also critical of the decision to fold the company on the same day payments were due to them for completed deliveries.

Several companies have reached out to Aussie Farmers Direct franchisees via the administrators to offer delivery contracts or employment, with one franchisee turning to crowdfunding to offset their losses.

Caltex to end franchising, business model questioned

Fuel retailer Caltex has announced it will cease all franchising operations by 2020 and take over operation of its 433 franchised sites but denies its decision is linked to wage fraud, which a Fair Work Ombudsman investigation has claimed occurs in much of its network. Caltex is preparing to spend up to $120 million to take control of its franchise network, with the 433 stores owned by 237 franchisees, for an average cost of around $277,000 per outlet.

Franchisees may be offered a financial incentive to exit their franchise agreements early, or face the prospect of receiving nothing except the value of their stock at the end of their agreements. Franchisees who have agreements which extend beyond 2020 may receive greater incentives to exit.

The company says its move to a wholly company-owned model is to accelerate the pace of change in its network as it rolls out new retail models, however franchisees are concerned that they may not receive enough compensation to cover their debts.

The company has also come under fire from a Fair Work Ombudsman (FWO) investigation, which revealed that 75 per cent of Caltex stores it had audited were underpaying staff, leading to FWO chief Natalie James claiming that Caltex presided over “a non-compliant and unsustainable operating model”.

RFG store closures could reach 460

Embattled multi-brand listed franchisor Retail Food Group has announced that it expects to close between 160-200 stores by mid 2019 following an external review of its business, however one financial analyst has estimated this figure might need to be closer to 460 stores, according to a media report.

An analyst at financial services firm UBS has said that new conditions imposed by the company’s banks will be difficult to sustain and could mean that it will need to shed more than double the anticipated number of stores in order to stay within its lenders’ new debt to earnings ratio requirements.

The analyst estimates that RFG will need to close 36 per cent of its 1,545 stores in its Australian network over two and half years, while gaining potentially 100 new stores in its international network.

RFG’s shares were suspended recently ahead of its announcement of an $87.8 million half-year loss, compared to a profit of $32.7 million for the corresponding period in the previous year. The company also announced it would write down $138 million off its balance sheet through provisioning $35.7 million for store closures, and booking impairment charges of $45 million against its Michel’s Patisserie brand, $34.5 million against its coffee division, and $4.5 million against its Pizza Capers brand.

Nuts franchise goes bust

Victorian based kiosk-style snack food franchise John’s Nuts has entered voluntary administration, according to a media report. Franchisees of the seven-store chain have allegedly been left in “a terrible condition”, with the administrator disclaiming all leases. However, franchisees have been given access to John’s Nuts recipes so they can continue to operate their business independently.

High rents demanded by large shopping centres are considered a contributing factor to the company’s voluntary administration.

700 KFC outlets closed in UK due to delivery bungle

Around 700 of fast food chain KFC’s 800 outlets in the United Kingdom were forced to close due to a shortage of chickens following a change to the company’s delivery contractor, according to a media report.

The delivery meltdown occurred on the first day that new delivery contractor DHL took over from former provider Bidvest, with DHL stating that it was working through “operational issues” involving a logistics software partner.

The supply chain disruption is expected to take up to a month to fully resolve, with stores progressively reopening, or operating with limited menus. Around 80 per cent of the KFC stores in the UK are operated by franchisees whose businesses will be seriously damaged as a result of the supply chain disruption.

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