Franchise ownership not always a dream

Trevor Banks believes the high price of the materials he's forced to source from Wendy's is a big barrier to his franchise's success. TREVOR BANKS: That makes it very, very difficult to be able to charge a retail price that is fair to the customers and to our clientele, but also to maintain a profit margin that we require in order to pay the rents and to pay our overhead costs, wages, etc.

Australian Broadcasting Corporation
June 28, 2010

Franchise ownership not always a dream
Despite the glossy brochures, the dream of owning a franchise can easily turn sour.
Reporter: Andrew Robertson


TICKY FULLERTON, PRESENTER: Franchising is a growing sector, and if you believe the glossy brochures, owning a franchise is a way for small business people to get the income and the lifestyle they've always wanted. But a significant proportion of franchise owners are finding that that's far from the case.

In the first of two special reports on this booming sector, Andrew Robertson looks at the reasons why the franchise dream can turn sour.

ANDREW ROBERTSON, REPORTER: Trevor Banks operates the Wendy's Ice Cream franchise at Mount Druitt in Sydney's west. It hasn't turned out as he'd hoped.

TREVOR BANKS, WENDY'S FRANCHISEE: We're not getting that national leverage that we're promised when we purchase stores. We're not getting that price advantage for our purchase of equipment or food or our cost of goods.

ANDREW ROBERTSON: Trevor Banks believes the high price of the materials he's forced to source from Wendy's is a big barrier to his franchise's success.

TREVOR BANKS: That makes it very, very difficult to be able to charge a retail price that is fair to the customers and to our clientele, but also to maintain a profit margin that we require in order to pay the rents and to pay our overhead costs, wages, etc.

ANDREW ROBERTSON: Talia Strickland was a Wendy's franchise owner at Nepean not far from Mount Druitt.

TALIA STRICKLAND, FORMER WENDY'S FRANCHISEE: They sold me a store that they know is never gonna make a profit.

ANDREW ROBERTSON: Talia Strickland had hoped her Wendy's franchise would secure her financial future. Instead, it was a bruising experience which has left her heavily in debt.

TALIA STRICKLAND: They review you. I got 100 per cent, I got 90 per cent. They came out and mystery-shopped my girls. They got 100 per cent and 90 per cent. So I was doing everything in their system to do better than the last owners and my store still wasn't making the money.

ANDREW ROBERTSON: They're claims Wendy's private equity owners categorically reject, insisting it's in no-one's interests for franchisees to fail.

TOM BEECROFT, DIRECTOR, NAVIS CAPITAL: We work very hard and very closely with those who are not doing so well to try and help improve their business, but human nature being what it is, there'll always be some people that choose to blame us for their problems rather than trying to fix them.

ANDREW ROBERTSON: Franchising is a $130 billion-a-year industry which employs around 400,000 people. Many of the most popular brands in Australia are delivered through franchises. However, according to a study by Griffith University in Queensland, the experiences of Talia Strickland and Trevor Banks are typical of a significant level of disenchantment in the sector.

Griffith University found 50 per cent of franchisees believe they're not being given accurate information by their franchisors. 30 per cent say they can't rely on the franchisor to keep promises. 28 per cent say they didn't trust their franchisor to be honest; while on the other side of the fence, 30 per cent of franchisors said they didn't trust their franchisees.

Report author Professor Lorelle Frazer believes much of the tension between franchisors and franchisees is a result of franchisees not fully understanding what they've signed up for.

LORELLE FRAZER, GRIFFITH UNI: The problem with most first-time franchisees is they've previously been employed and this is probably the first time they've entered business, so they don't have a lot of business skills or business acumen.

ANDREW ROBERTSON: Professor Frazer says this inexperience is often reflected in a lack of proper due diligence when people are considering buying a franchise.

LORELLE FRAZER: In our survey, we found that 50 per cent of franchisees admitted they relied on their gut feeling when making a decision about entering a franchise, and not surprisingly, a similar proportion said that their expectations had not matched reality.

ANDREW ROBERTSON: Mike Padden has worked on both sides of the franchising fence. He's a founding member of the franchisor body, the Franchise Council of Australia. He's also a franchisee.

MIKE PADDEN, FRANCHISE SYSTEMS GROUP: It is their responsibility to go through the due process to make sure that, one, they have the money to do - to buy the franchise; b.) that they have the working capital. And often they don't realise how much working capital they need. And three, they have to talk to other franchisees.

ANDREW ROBERTSON: Wendy's is very sensitive to the vocal criticism it's received from some of its disgruntled franchisees, which it believes is unjustified. Trevor Banks has received this letter from Wendy's lawyers, which accuses him of telling lies, being disruptive and offensive and damaging the Wendy's brand. It also threatens him with the loss of his franchise if he doesn't keep quiet.

It's a threat Navis Capital's Tom Beecroft doesn't back away from.

TOM BEECROFT: The franchise agreement includes a clause that the franchisees agree not to disparage the brand, and it's important to us that we follow through on that. It's important to our franchisees that we don't have people out there trying to destroy the value of their businesses.

ANDREW ROBERTSON: In the book world, Dymocks is Australia's biggest franchised operation. Lynne Allister owns the store at Rouse Hill in Sydney's north-west. She believes her good experience of franchising has been helped by realistic expectations.

LYNNE ALLISTER, DYMOCKS FRANCHISEE: You need to be aware that they're not responsible for guaranteeing your sales. They're not going to manage the business for you. And you need to take that on board and know upfront. We did know that, so I suppose we feel our expectations were in line with what we received.

TREVOR BANKS: I would have liked to have get what I paid for. And I think that's all any of us want, is to receive what we paid for and what we were promised.

ANDREW ROBERTSON: Both Griffith University and the Australian Competition and Consumer Commission have free material available for people wanting to become franchisees to help them make the decision with their eyes wide open.

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