IFA Convention: USA issues that may be relevant to us in Australia
With such large distances between Australia and the rest of the world, it’s not always top of mind that the challenges faced in franchising in other countries, like the United States of America, can align to the challenges we may face in Australia.
This year’s trip to the International Franchise Association Convention in San Antonio Texas, certainly opened up a much deeper understanding of the challenges that franchising faces in the USA.
Like any convention that we attend in our work lives, you can take away what you want from them, however, there were a lot of really interesting topics that opened my eyes as to the different challenges that they face in the USA, and also the challenges that are so similar to what we face in Australia. Some of these might be a cautionary reminder to us of what we may have to look forward to or how to avoid going down similar paths.
Perception of Franchising
Something that came up very strongly at the IFA Convention was the misunderstanding that the general public have about franchising. Currently, some studies being conducted by the International Franchise Association in the USA are providing the industry with some sobering results. There is a real lack of understanding by the general public of what franchising is all about. As we in the industry understand, franchising offers a unique opportunity for people that aspire to better their lives and own their own, and ultimately build wealth; under a brand that supports their success to achieve their goals. However, it would be fair to say that this is not always the perception the public has of franchising.
When people drive past an Autobarn store or walk past a Hairhouse Warehouse store, they immediately think of a big corporate brand. Few people understand that the business they are going past is actually a small business most likely owned by a local operator. The same is true in USA where franchise brands are being lumped in together with larger multi-national brands.
Aziz Hashim, who is the first franchisee to serve as Chair of the IFA; is now leading the charge on changing this PR deficit that franchising faces.
As he puts it, “There is no better business model than franchising to create opportunities for all groups, irrespective of their educational background or financial position.”
Thought : Do customers see your franchisees as small business owners?
What does Joint Employer mean? In terms of what this means in franchising, it is where an employee of a franchisee, is considered under the law to be employed by both the franchisee and the franchisor, essentially having a joint employer. This means that the franchisor, can be held responsible for the actions of franchisees in their dealings with employees. This is currently being tested in court in the USA, in a court case against McDonald’s by the National Labor Relations Board (NLRB). A decision in the courts in favour of the NLRB has the potential to change franchising in the USA and the way those businesses are run. The IFA is mounting a strong case against this, however, it has the potential to drag on in court for quite a while yet before a final outcome is established.
Franchising once again is being perceived as big business, not a collection of small businesses. This Joint Employer dispute is evidence of this. It is inconceivable to people that work in the franchising sector, that an employee of a franchisee for a brand in one location, is considered under law, to have a joint employer in the franchisor.
In Australia, we need to remain informed of what is going on with this joint employer dispute, particularly in light of the recent scandal involving 7-Eleven franchisees underpaying employees. In fact, the Greens MP Adam Bandt introduced a Bill into Parliament in October 2015 to legislate franchisors as a joint employer so that franchisors were made liable if any of their franchisees underpaid staff. Although this Bill has not passed, it shows the lack of understanding of franchising, and also that as a sector, we need to stay diligent to the possible changes that can profoundly affect our industry. What is happening in the US can certainly have a flow-on effect for us here in Australia.
At the IFA I met with several franchisors that have already started taking steps towards dealing with this Joint Employer issue. For example, many have removed access to any HR support from their intranets and refer their franchisees to relevant industry bodies for advice and support in this area. Some have gone as far as not providing any job description templates or anything that can be seen as them being a joint employer. In one session I attended, the CEO of a large national brand in the US kept correcting herself when she referred to the franchisees in her network as franchise partners. Even the terminology that they use to refer to their franchisees has started to change.
Although in Australia we have not seen big effects on the franchise sector thus far, it is something that as an industry we need to keep an eye on. The Franchise Council of Australia is certainly keeping pace with this as they have already made submissions in Senate hearings.
Thought : Are you aware of the impact joint employment would have on your business?
Like many industrialised countries, wage pressures is one of those constant hot topics. It has hit a new high in the USA with talk of changes to their minimum wage. There is currently a push to increase the minimum wage from $7.25 to $15 per hour. Any business in Australia would think “what are they complaining about”, as even at $15 this is far below minimum wage costs in Australia, and even higher when you add penalties. But in reality, although the minimum wage is $7.25 per hour, it is hard to find any franchise business in fact paying this. Each state in the USA also has their own provisions on top of that, which increases the wage rate; individual cities also have their own requirements and most importantly, if a business wants to attract the right employees, they will generally have to pay more to attract and maintain good quality employees. This in fact already increases the hourly minimum rate in most states and cities that these businesses operate in. In the city of Seattle in Washington State, on June 2, 2014, the city passed a local ordinance to increase the minimum wage of the city to $15 an hour, giving the city the highest minimum wage in the United States, which will be phased in over seven years, to be fully implemented by 2021.
During my visit, I met a number of multi-unit franchisees and franchisors that were talking about how this has meant a re-think in their business model in Seattle as a result to ensure their businesses remain sustainable.
In Australia we have much more highly regulated wage and employment conditions, which means that we do have higher labour costs. In visiting several brands in the USA and talking to many people in franchise systems, I found that although wages are lower, their wage percentages in their businesses are not as far apart as they are in Australia. They seem to have more staff rostered on, with more defined roles that are carried out by different staff. Our higher wage costs in Australia means that we need to be more efficient and multi-skill and multi-task our staff to a far greater level than is done in the USA. In fact, it would be fair to say that we get higher productivity in most cases from our staff, and must be more efficient.
The current wage pressures that are being experienced across some parts of the USA are not too dis-similar to the penalty rates discussions that are currently taking place in Australia. The highly regulated labour system that we operate in, makes us a high cost nation to operate a business, but on the flip side, there is a lot more uniformity in the regulations that we need to follow, whereas in the USA, regulations change from state to state, region to region and city to city.
Thought : Do your franchisees understand their employment obligations?
Having met several different franchise brands in the USA, it was interesting to learn some of the regulatory regimes that they need to deal with from state to state. Unlike Australia, where we have the one Franchising Code of Conduct which covers us for every state and territory, in the USA, at the federal level franchising is regulated in accordance with the Federal Franchise Rule and the franchise regulations implemented and enforced by the Federal Trade Commission.
At the state level there are various franchise registration and regulation obligations imposed on franchisors. A franchisor’s franchise registration, filing and/or disclosure obligations vary on a state-by-state basis with the most stringent requirements typically associated with the franchise registration states.
While Federal Law provides an overriding framework regulating the offer and sale of franchises throughout the entire country, fifteen states have enacted their own franchise laws that supplement and add additional regulations to be followed by franchisors.
In fact, some brands simply opt out of opening stores in particular states because of the regulatory regime. Interestingly enough, there is only one brand in the USA that has claim to having franchises in all 50 states. That brand is Sport Clips, a men’s and boy’s hair cutting brand that is based in Texas. Currently they have 1,500 franchisees with plans to expand to 2,500.
However, despite the regulation, the industry is very robust, and franchisors work within the regulatory framework that is required of them. In Australia, although some of the regulations and requirements on franchisors may be considered onerous, the fact that we have one code that covers every state and territory allows us to be more streamlined, and makes it far less complicated to open franchises nationwide.
Thought : Does your brand fully comply with the Franchising Code of Conduct?
The sheer number of units that a franchise brand can open in the United States is the thing that strikes you first. The size and population in the USA means that where some brands in Australia may see 200 units as their market penetration, in the USA, the equivalent may be 2,000 units or more.
Regardless of the regulations, or challenges that are put before the franchise community, they carry on with business. There is something about the American culture which is to be admired in this regard. There is a level of entrepreneurship and an ‘anything is possible’ culture that helps them propel forward in a much more forthright way.
Like us, they have their challenges. In a smaller market like Australia, there is no doubt that we must be better and more efficient at what we do to endure and thrive. In the end, franchising is a collection of small businesses under one brand. The best thing that governments can do to support their economies is to reduce the burden on small business rather than continually add on regulatory pressures. As in the USA, it is small business that has outperformed big business and is also the driver of job growth.
There are certainly some current issues that we share with the USA, as well as challenges that are different between us, but in the end, we are striving for the same thing, to grow our businesses and ensure that we have a prosperous society.
Peter Fiasco CFE , Franchise Development Manager, Hairhouse Warehouse; Committee Member of Victorian State Chapter of FCA.