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Behind the Headlines by Jason Gehrke

Coffee chain fined $1.44 million in joint employer case

 

The franchisor of Sydney-based coffee brand 85 Degrees has been fined a total of $1.44 million because of its “systemic failure to ensure compliance within its franchise network, according to a Fair Work Ombudsman (FWO) media release.

 

The action brought by the FWO against 85 Degrees related to the underpayment of minimum rates, overtime entitlements, weekend, public holiday, and evening work penalty rates, and casual loadings. Nine workers were underpaid a total of $32,321 with individual underpayments ranging from $239 to $15,198. Underpaid workers have been backpaid by individual franchisees who have not faced court action by the FWO.

 

The penalties incurred by 85 Degrees are the third highest ever secured by the FWO with the franchisor being held liable under the responsible franchisor entity provisions related to underpayment contraventions, and record-keeping and pay slip contraventions. 

 

85 Degrees was penalised $475,200 in 2022 for exploiting young Taiwanese students in Sydney and had entered into an enforceable undertaking with the FWO in 2015 in response to underpayment and record-keeping contraventions. The presiding Federal Court judge noted that those prior compliance issues and repeated contravening conduct indicated a systemic failure by the franchisor to ensure compliance within the franchise network, despite not having directly underpaid any individual themselves.  Read more

 

Competition concerns raised over $8.8 billion franchise merger

 

The Australian Competition and Consumer Commission (ACCC) has raised concerns that a proposed merger of retail pharmacy franchise Chemist Warehouse and listed pharmaceutical supplies company Sigma Healthcare will decrease competition in pharmacy retailing, according to an ACCC media release.

 

The proposed merger includes plans to list on the Australian Securities Exchange (ASX), which would value the merged entities at around $8.8 billion.

 

The merger is planned as a reverse listing through Sigma but is subject to ACCC approval as Chemist Warehouse supplies approximately 600 pharmacy-led stores through its franchise arrangements, while Sigma supports 240 pharmacies under its Amcal and Discount Drug Store brands. 

 

In a release, the ACCC said it is concerned that following the transaction, the newly-merged company may have the ability and incentive to favour Chemist Warehouse stores or worsen terms to non-Chemist Warehouse stores it supplies which could raise their costs and make them less competitive. It also has concerns about the potential for Chemist Warehouse to access data from Sigma about competitor pharmacies. 

 

The Pharmacy Guild of Australia has previously urged the ACCC to urgently review the deal. Public submissions into the ACCC review close on June 27.  Read more 1; Read mor HYPERLINK “https://www.brisbanetimes.com.au/business/companies/chemist-warehouse-sigma-agree-to-merger-to-create-8-8-billion-titan-20231211-p5eqgp.html”e 2

 

Creditors owed $45m to get nothing from Godfreys collapse 

Creditors of collapsed vacuum and cleaning retailer Godfreys will not receive any of the $45 million owed to them, while 460 former employees of the business owed more than $10 million may receive just 73 cents on the dollar, according to a media report.

 

Godfreys closed its doors forever on May 31 after administrators declared that no viable offers had been received for the business which the owners placed into voluntary administration on January 30 this year. Among the 264 creditors are vacuum cleaner manufacturers Bissell, Electrolux, EcoVacs, and TEK, and the Australian Taxation Office which is reportedly owed $883.000.  Read more

 

GYG float increases another $100m but list price questioned 

 

Australian-based Mexican food chain Guzman y Gomez (GYG) has increased its initial share offer to raise an additional $100 million above the $242.5 million underwritten share offer previously announced, according to a media report. 

 

The initial public offering (IPO), underwritten by investment banks Barrenjoey Markets and Morgan Stanley, was set to issue 11.1 million shares at a set and guaranteed price of $22 per share thereby raising $242.5 million but with one of its largest shareholders, TDM Growth Partners, selling down an additional $92.6 million, that figure has risen to $335.1 million. On that sell down, TDM’s holding in GYG will decrease to 26.2% from 29.7%.

 

The existing shareholders are not selling all their shares, but those which are being sold would value the brand at around $2.2 billion overallRead more 1; Read more 2

 

Meanwhile, international financial service analysts and Australian fund managers have suggested that GYG’s list price of $22 a share is too high and that the chain’s growth plans may be unrealistic, according to media reports.

 

American investment research and management service firm Morningstar has valued the shares at $15, nearly 30% less than the IPO price. Morningstar’s valuation is based on reservations that GYG can achieve its growth forecasts which include expanding its footprint in Australia to 1,000 stores within two decades, and meet its international expansion plans, particularly in the United States. 

 

While Morningstar’s analysis and concerns are shared by some Australian fund managers, others are confident the IPO will be successful, particularly since Capital Research Global Investors, one of the world’s largest global quick-service restaurant investors, has already subscribed for sharesRead more 3; Read more 4 

 

Private equity bids for multi-brand auto chain 

 

Private investment firm Bain Capital has made an unsolicited, conditional, and non-binding bid of $5.40 per share for listed multi-brand automotive franchisor Bapcor, according to a media report.

 

The $1.83 billion buyout proposal is reportedly still being assessed by Bapcor but one of the business’ co-founders and large investors has described the share price offer as too low and below fair value, while blaming poor management on the company’s current position. 

 

Shares in Bapcor fell as much as 35% in May after a two-day share market trading halt following a profit downgrade announcement and news that the company’s recently appointed CEO had resigned two days before he was due to start work. Bapcor is the parent company of automotive franchise chains including Autobarn, Autopro, Midas, ABS, Shock Shop, and Battery TownRead more

 

Button batteries prompt recall/removal for two major food chains

Bubble tea franchise Chatime and burger chain Hungry Jacks have recalled promotional items over safety concerns related to button batteries, according to media reports.

 

A Garfield toy included in Hungry Jack’s children’s meals and speciality reusable cups sold by Chatime both contain button batteries which can pose a risk of choking or serious injury to young children if separated from the item in which they are installed. Australian Consumer Law prescribes mandatory information standards for products containing such batteries. The warnings did not appear on the Hungry Jack’s or Chatime promotional items, which resulted in the recalls. 

 

Chatime has removed the cup from sale but has not announced whether refunds will be offered to customers who already purchased the cups for $26.95 in store, and $21.95 online. Hungry Jack’s has offered customers a replacement toy without a battery or to dispose of any returned Garfield toys.  Read more 1; Read more 2  

 

World’s largest franchisee acquires NZ restaurant chain 

 

The world’s largest multi-unit franchisee, Flynn Group, has acquired Wendco, the sole franchisee of fast food chain Wendy’s in New Zealand, according to a media report.

 

Flynn is now the sole franchisee for Wendy’s in both Australia and NZ operating 20 restaurants across NZ and planning to develop 200 restaurants in Australia over the next decade.

 

Flynn’s acquisition of Wendco is the Group’s third international investment over the past year, the first of which was the purchase of the master franchise license for Pizza Hut in Australia in July 2023. Brands operating under the Flynn umbrella in the United States include Planet Fitness, Taco Bell, Panera and Arby’s.  Read more

 

Franchise class action ends in draw

 

A class action lawsuit brought by 130 former and current Michel’s Patisserie franchisees against listed multi-brand franchisor and parent company Retail Food Group (RFG) has been settled with a binding deed that involves no admission or payment, according to a media report.

 

The class action filed in October 2021 sought millions of dollars in damages over alleged losses incurred by franchisees when “fresh to frozen” changes were implemented in 2015 and 2016. The changes reportedly negatively impacted the quality and reputation of the bakery chain and required some franchisees to drive long distances to collect frozen cakes which they would later decorate in their stores. 

 

Pending court approval, the settlement effectively results in a nil-all draw with RFG writing off historical debts allegedly owed by the franchisees in return for them dropping the class action. Further, RFG is not required to make any admission in regard to the claims, nor make any payment to the applicant, any class member, or to applicant or litigation funders’ costs.  Read more

 

Pizza chain fined $2.5m for spam marketing

 

Pizza Hut Australia has been fined $2.5 million and has accepted a comprehensive three-year court-enforceable undertaking after it was found to have sent more than 10 million marketing messages across a four-month period in breach of spam laws, according to a media report.

 

The Australian Communications and Media Authority (ACMA) found that Pizza Hut sent nearly 6 million  texts and emails from January to May 2023 to customers who had not consented or who had withdrawn their consent to receive marketing.

During the same period, the brand also sent more than 4 million marketing messages without an option to unsubscribe. Pizza Hut has committed to appoint an independent consultant to review its compliance with Australian spam laws, and must report regularly to ACMA.  Read more

 

Government accepts all 23 Code Review recommendations

 

Six months after receiving the final report of the 2023 Review of the Franchising Code of Conduct, and more than three months after the report was tabled in Parliament, the Minister for Small Business has today announced that the Australian government supports all 23 recommendations made by the Review in full or in part.

 

Among these includes the recommendation to move to a licensing system for franchisors as an added protection for franchisees, which the government has committed to explore in consultation with the franchise sector. 

 

A draft of a new, remade Franchising Code will be released later this year and will be implemented from 1 April 2025. The government has accepted a recommendation about simplifying disclosure information by merging the Key Facts Sheet into a franchisor’s disclosure document, but has not indicated if this will be required by October 31 this year when most Australian franchisors are due to update their disclosure documents.

 

Of the 23 recommendations made by reviewer, Dr Michael Schaper, the government agrees in full with 21 recommendations, and agrees in principle with two others. The first of the recommendations agreed to in principle is the development of a comprehensive online resource similar to the government’s Moneysmart.gov.au website, but this may only happen after a franchise licensing system has been determined. The other is amending the Code so that franchisees can seek a “no adverse costs” order when bringing a matter against the Franchisor for a breach of the Code or the Australian Consumer Law.

 

The government will also increase the powers of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) to also include the ability to name and shame franchisors who fail to participate meaningfully in alternative dispute resolution, and provide additional resources for ASBFEO to also provide low-cost legal advice on alternative dispute resolution matters. (A further expansion of ASBFEO powers may also arise from a statutory review due by June 2025).

 

“The Albanese Labor Government is committed to supporting Australia’s franchisors and franchisees to grow and strengthen their business,” says Small Business Minister Julie Collins.

 

“I have heard the challenges in the franchising sector, particularly in relation to imbalances of power between franchisors and franchisees, which is why our response is targeted at improving partnerships in the sector. We want a fair playing field for the sector, which is better for everyone, and this is what our response delivers.”

 

Code reviewer Dr Schaper says he is pleased to see the government accept all the recommendations, and a commitment to acting on these.

 

“More examination of the move to a licensing system, rather than the current legal enforcement model, is particularly welcome,” says Dr Schaper.

 

“This proposal has the potential to lead to major improvements in franchisor-franchisee relationships. The government’s commitment to consult the sector further on this is an opportunity to shape the nature of franchising well into the future.”

 

To read the Government’s response to the Code Review report, click here.