Italtile price-fixing ruling may rock franchise game

A Competition Commission investigation established that Italtile compelled franchisees to charge prices set centrally and that any deviations in price required prior head-office approval…Italtile, which trades through brand chains Italtile and CTM, also threatened to terminate franchisees that did not sell products at the set prices, making the franchisor price mandatory.

www.businessday.co.za
September 21, 2005

Italtile price-fixing ruling may rock franchise game
Nicola Jenvey

DURBAN — Ceramic manufacturer and retailer Italtile was yesterday slapped with a R2m administrative fine for contravening the Competition Act — in a move that seems to fly in the face of franchising principles.

The fine followed a September 2001 complaint by three franchisees, in which they alleged the national group had abused its dominance in the industry. A Competition Commission investigation established that Italtile compelled franchisees to charge prices set centrally and that any deviations in price required prior head-office approval.

Italtile, which trades through brand chains Italtile and CTM, also threatened to terminate franchisees that did not sell products at the set prices, making the franchisor price mandatory. Consequently, the commission found Italtile guilty of price fixing and negotiated the fine, and the Competition Tribunal yesterday upheld that decision.

The ruling has major implications for franchising and national branch networks, as a basic franchising premise is consistency of brand and service for customers across the chain.

It also implies that national advertising campaigns dictating prices to franchisees may not be legal.

The issue also seems to divide franchise operations from national branch networks, in that the latter may legally have prices set by head office, but franchise operations would be contravening the Competition Act by applying the same principle.

Government has touted franchising as a sound economic growth tool, as potential franchisees are purchasing into an established system with franchisor support and commitment.

New franchisees are not breaking into markets with an unknown product.

Franchize Directions MD Bendeta Gordon said yesterday that franchising ensured a consistent business model and product for customers and franchisees. These meant franchisors set recommended prices, particularly when products were being advertised nationally.

She believed there could be a margin of flexibility for local market conditions, but essentially there needed to be recommended prices for franchisees.


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