Raising the bar for franchisor responsibility—but at what cost?

Steve Wright | Acting CEO | Retail Council

Franchising is a dynamic part of Australia’s service and retail sectors. As Retail Council Acting CEO Steve Wright observes, the franchise brand has taken some knocks recently, but the big question is will it learn from the experience and emerge in better shape for future challenges...

People have been taken aback by what they have seen on TV and read in the news about what has happened at – and to – 7-Eleven. Possibly none have been more heavily impacted than the owner - franchising veteran and FCA Hall of Fame Russ Withers - and former FCA chairman and  7-Eleven CEO Warren Wilmott who took blame and quickly and quietly left the company.

Under a new management, 7-Eleven is going above and beyond to set matters right and do whatever it can to buttress the business from any future fraud and law breaking within its franchise network.

What 7-Eleven comes up with to systematically address the issue may well be the light under the bushel for the franchise sector.

Ultimately it is highly likely the deep process re-engineering 7-Eleven is undertaking will set a new benchmark for how franchise brands protect themselves from the kind of threat one of their best has experienced in the past year.

Success is important because this has been a costly exercise for 7-Eleven and the sector. Tens of millions have already been expended in back-payments to (mostly former) franchisee employees and the process is not finished yet.

Then there is the cost of designing and applying new systems such as biometric (facial recognition) shift scanning, which the company hopes will help deliver a comprehensive fix. Workplace Ombudsman Natalie James has described the changes as the “most robust” of any franchise system in the country.

The good news for the sector is that this may be a case where the whole can benefit from adversity suffered by one or a few.

In this case what we may see emerge is a new standard in franchisor responsibility and risk management – one which will serve to give greater certainty of legal compliance and improved systems for cost management at both franchisor and franchisee level. A new model, perhaps, for others to examine and adopt, in part, or whole, in their own way as best fits the system in question.

Ultimately, doing so can help deliver greater confidence of forecasting profitability and identifying any financial vulnerability at the earliest time – rather than when it is too late.

This is very important for the ongoing success of the franchise model.

What the ABC-Fairfax exposé on 7-Eleven did was paint in stark relief the importance of clear visibility of franchisee compliance and financial performance.

Without such visibility, how can brand owners truly be sure about the financial health of their franchisees; about their compliance with business absolutes such as employment law.

If they cannot be sure about franchisee financial health and/or employee pay compliance, then they are in constant danger of brand damage – quite likely caused through no fault of their own and executed in ways quite difficult to police and counter. “…How the hell do I deal with this sort of thing?” may well have been muttered under the breath of more than a few brand owners as they read the newspaper stories about 7-Eleven.

But that reaction is not really good enough for the franchise brand and its future. Hopefully the 7-Eleven experience can help others avoid the pitfalls.

To flourish, franchising like every business brand, needs its constituent parts to be operating smoothly and without fear of imminent break-down. This is important not just for the here-and-now success of franchise brands, but for their ability to find new franchise partners for future expansion. It is not good for franchising to see so critically attacked one of its showcase businesses: 7-Eleven is an accomplished, industry-awarded and financially successful business, for franchisor and franchisees, proven over decades and through major expansion of the brand’s retailing activities and its now 650-strong network. 7-Eleven’s owner, Russell Withers, sits comfortably in the top echelon of the Franchising Hall of Fame maintained by the Franchise Council of Australia. His embarrassment at what had happened inside the brand he had nurtured from its inception and over 30 years, was palpable.

There was no questioning his commitment to setting the matter straight when Withers appeared before a Parliamentary committee (convened for a different purpose but which gleefully grabbed the opportunity to interrogate him). To his credit (and to his significant financial loss), Withers did two big things; 1) He took responsibility and stood aside as chairman so that the matter could be addressed without any suggestion of him trying to sweep it under the rug; and 2) He gave an open-cheque personal assurance that underpaid franchisee employees would be properly compensated no matter the cost, even though he must have known such a commitment would be exploited by unscrupulous opportunists, some of whom may still be within his business.

That was the start of a long campaign of brand repair for 7-Eleven; one which has had its ups and downs, but which now can clearly see the light at the end of the tunnel. This situation has already cost 7-Eleven almost $60 million. When it is all done and dusted the cost might run north of $100 million.

That is enough to send shivers down the spines of any franchise owners in service and fast food businesses which run long hours (sometimes 24 hours) nigh on every day of the year.

The Age did not have to think very hard to come up with a long list of companies it decided should be in the spotlight. It pointed its finger at a number of highly successful small-store, home delivery food brands, but there was another it singled out for extra attention: Caltex.

As an operator of petrol stations and longhours convenience stores, it had similarities to 7-Eleven. Again, to its credit, Caltex acknowledged the problem up front. It too is setting about fixing things.

But the Australian Financial Review (AFR) noted one very big difference in the reaction, though it did not make any comparison with 7-Eleven.

Caltex, the AFR said, was now considering whether it would continue with the franchising model. It cited risk of corporate reputational damage as the key influencing factor, adding that the franchise brand itself was under attack.

In other words, Caltex was wondering aloud whether the prospect of the franchisor being held responsible for franchisee misdeeds it regarded as outside its direct control was actually worth the reputational risk of continuing with the franchise model. Perhaps it may be better to withdraw to the relative safety of a direct employee relationship with store managers.

In submission to the parliamentary inquiry, one of the sector-wide issues raised by 7-Eleven was its belief that the most recent changes to the Franchising Code of Conduct had pushed more onus of responsibility on franchisors and made it harder for franchisors to effectively discipline recalcitrant franchisees.

Reading between the lines is a perception that franchisees are feeling stronger in their insistence that there is no cause for termination of a franchise contract so long as any breaches are rectified. And that acts committed by them can be acceptably described as being ‘forced upon them’ by the brand owners, as if this somehow frees them from any culpability.

Caltex says it will not tolerate wage fraud or underpayment of staff by franchisees. It will cancel the contracts of perpetrators. It is adopting a harder line than 7-Eleven has taken in the past year.

It will be interesting to look back in a year’s time and track the progress of each case. It seems likely that the individual brand damage and the sector damage will continue for some time yet.

The big question is will the franchise brand emerge with a more resilient future, or one where new franchisees are harder to find and new franchisors become fewer.

Steve Wright is known for his depth of experience in corporate and investor relations, industry representation and financial market activity. A former CEOand company director, he has represented small and large international companies including five years as Executive Director of the Franchise Council of Australia.

The Retail Council is the voice of Australia’s top retailers driven to achieve sustainable growth of retail in Australia for the benefit of the consumer, the industry and the economy. Formed in 2006, the Retail Council represents members committed to advancing retail in Australia, fostering economic growth and supporting job creation. Retail Council members are part of an industry that is a top ten contributor to Australia’s Gross Domestic Product (GDP) contributing more than $134 billion of total economic activity through more than 127,000 retail operators nationwide and providing jobs to more than 1.25 million Australians.

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