A sundae too far away for franchisees

"But what you see in some cases … is that after the system is established, the franchisor can use its powers and control to increase its return through increased charges or by changing the business model at the expense of the franchisee." Evans is now picking up the pieces. "The way they get you to run it, there's no profit, there's no nothing,'' she said.

August 10, 2010

A sundae too far away for franchisees
Stuart Washington

Therese Evans was a franchisee of ice-cream retailer Wendy's for six years. Evans and her husband built the franchise to the point where they were known in the Hunter Valley town of Singleton as "the pink people".

Last Wednesday night, Wendy's ended a six-year relationship and locked the couple out of their business for a debt Mrs Evans puts at $7000. The move by Wendy's has been personally mortifying and financially devastating.

She and her husband have been left with a $200,000 debt on their home and a $300,000 debt on her mother's home.

Both debts had been used to fund their forays into Wendy's franchises, one in Singleton and the other in nearby Cessnock.

Now Evans and other Wendy's franchisees are asking whether Wendy's business model is built to fail.

"It was all about pushing unit sales, but for us there was not much in it," Evans said on Friday.

Tom Beecroft, a director of Wendy's owner, Malaysian private equity group Navis Capital, said it was incorrect to suggest franchisees were on a hiding to nothing.

''We have a number of franchisees that are doing extremely well; the system is doing well," Beecroft said.

He said "most" franchisees were profitable, without providing further details, and when franchisees were not profitable, Wendy's attempted to help them.

In a statement, Wendy's chief executive Rob McKay said: "Wendy's made numerous attempts to help the franchisee - not only with their financial position, but with the overall management of the business. These offers were repeatedly rejected."

Problems in the relationship accelerated when Mr and Mrs Evans walked away from the Cessnock franchise they had held for four years on June 19, a move seen by Wendy's as "abandoning" the franchise and breaching their franchise agreement.

The couple's predicament has revived questions about whether a federal government broken promise - that it would explicitly include the notion of "good faith" in the Franchising Code of Conduct - could be exacerbating franchisees' problems.

Their experiences are far from unique in a sector credited with contributing $130 billion a year to the economy.

A federal parliamentary committee inquiry into franchising in December 2008 noted franchisors necessarily held more power.

As a step to keeping abuse of that power in check, the bipartisan committee recommended "good faith" be explicitly included in the Franchising Code of Conduct.

Federal Small Business Minister Craig Emerson ignored the recommendation, despite his 2007 election commitment to enshrine good faith in the code.

In practice, Evans describes a situation in which Wendy's mandated where franchisees bought supplies of dishwashing liquid, other cleaning chemicals and ice-cream.

Evans claimed Wendy's charged above-market rates for these goods, alleging soft-serve ice-cream prices were lifted from about $50 to about $80 a carton at one point (they have now fallen to about $55).

Another Wendy's franchisee, Trevor Banks, operator of an outlet at Mount Druitt, in Sydney's west, said he had documented 33 products supplied by Wendy's that had increased in price by an average of 8 per cent over six months last year.

''Food costs, costs of goods which largely we have to buy in through Wendy's approved sources are expensive … we lose in our unit sales,'' Banks said.

They are not isolated complaints. BusinessDay has learnt that a group of concerned franchisees forced the then chief executive, Nicola Milne, to hold a profitability forum in February.

They expressed concern at a franchising system in which they pay royalties of 6 per cent of their total turnover and a further 5 per cent in a marketing fee - plus whatever Wendy's makes out of supplying goods to its franchisees.

A Wendy's franchisee who spoke on condition of anonymity said Milne had confirmed at the meeting turnover of $400,000 was a break-even point for a Wendy's franchise. He said the figure was around the average turnover of Wendy's franchisees, suggesting many run at a loss.

Beecroft said turnover was not the predictor of a franchise's break-even point, given large variations in rental costs, and stores with turnover below $400,000 were profitable.

Jack Cowin is no pushover as a franchisee. He owns 300 outlets under the Hungry Jack's brand nationally and is a substantial franchisor in his own right, with about 59 sub-franchisees reporting to him. On the BRW Rich 200 list, he is recorded as having a fortune of $538 million. Even so, he believes the law allows franchisors to push franchisees around.

"I think we have a structural problem in the mechanics of how things are working," Cowin told BusinessDay. "My personal view is, unless the government does something to protect the small operator who does not have the resources to challenge these things, we're going to have a big imbalance of power."

Tim Castle, a lawyer representing some Wendy's franchisees and Cowin, said the heart of the problem was that ''the franchisor incentive is to maximise the volumes and thus royalties; on the other hand, the franchisee seeks to maximise profit after all the royalties, fees and costs have been paid", he said.

"When the franchise system is growing, both parties have an incentive to co-operate and earn a fair return.

"But what you see in some cases … is that after the system is established, the franchisor can use its powers and control to increase its return through increased charges or by changing the business model at the expense of the franchisee."

Evans is now picking up the pieces. "The way they get you to run it, there's no profit, there's no nothing,'' she said.

Source: The Age


Brought to you by WikidFranchise.org

Risks: 1st generation of investors knowingly sacrificed, 30 different programs of kickbacks, shelf allowances and inside money, Belief in a Just World (BJW): people deserve their fate, Blame the victim (Just-world effect), Business model had never created adequate investor returns, Call for franchise law, Can't afford to sue, Cannon fodder, Churning (serial reselling), Death, Dispute resolution, Encroachment (too many outlets put in territory), Franchisee abandons their investment, Franchisor takes back high-volume store, Fraud victims changed deeply and often not for the better, Good faith, fair dealing, Gouging on supplies, Health consequences, Must buy only through franchisor (tied buying), Only 3 ways out: resell to next loser, independence & be sued or abandon and go bankrupt, Opportunism: contract creates powers which are used to strip investor value during relationship, Opportunism: self-interest with deceit, Private equity, Renewal of contract denied, Stores shuttered, Strong back and weak mind, Successful for the middleman, System designed to fail for franchisees, Unilateral changes in business model drive franchisees' profits down, Unproven business model, War of attrition, Australia, 20100810 A sundae

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License