Sundae, bloody sundae

"I think we have a structural problem in the mechanics of how things are working," Cowin told BusinessDay. ''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." He dismissed the idea that an explicit good faith provision in the code would create too much uncertainty for franchisors.

Sydney Morning Herald
August 10, 2010

Sundae, bloody sundae
Wendy's franchisees are asking whether the ice-cream chain's business model is built to fail, writes Stuart Washington.

Therese Evans was a franchisee of the ice-cream retailer Wendy's for six years. Evans and her husband built the business to a point they were known locally 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 premises for a debt 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 had been used to fund their forays into the Singleton franchise and another in nearby Cessnock.

Now Evans and other existing 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 categorically 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.

"Most" franchisees were profitable, he said, 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."

McKay said the Singleton store had been "temporarily closed after the franchisee failed to fulfil fundamental terms of the franchise agreement".

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

The Evanses' predicament has revived questions about whether a broken federal government 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 contributing $130 billion to the economy a year.

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

"Abuse of this power can lead to opportunistic practices including encroachment, kickbacks, churning, non-renewal, transfer, termination at will, and unreasonable unilateral variations to the agreement," its report found.

The bipartisan committee recommended "good faith" be explicitly included in the code and cited explicit obligations of good faith in the 2006 Oil Code regulations, the Trade Practices Act, the Victorian Fair Trading Act and Native Title legislation.

Parliamentary committees in Western Australia and South Australia in 2007 and 2008 made similar recommendations.

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

Instead a reference to good faith has been squeezed into the code, rather circuitously not restricting the ability to use good faith - a measure critics see as condemning franchisees to labyrinthine court cases to prove unconscionable conduct.

The lobby group, Franchise Council of Australia, argues an explicit reference to good faith would create uncertainty for franchisors.

In practice, Evans describes a situation in which Wendy's mandated where franchisees bought supplies of dishwashing liquid, other cleaning chemicals and ice-cream. She claimed Wendy's charged above-market rates for these goods, alleging soft-serve ice-cream prices went from about $50 to about $80 a carton at one point (it is now about $55).

Trevor Banks, who operates a Wendy's franchise at Mount Druitt, said he had documented 33 products supplied by Wendy's that had increased by an average of 8 per cent over six months last year.

''I firmly believe that our overhead costs are excessive,'' he said. ''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.''

They are not isolated complaints among Wendy's 300 franchisees in Australia and New Zealand. A group of concerned franchisees forced the then chief executive, Nicola Milne, to hold a profitability forum in February this year, BusinessDay has learnt.

They expressed concern at a franchising system in which they pay royalties of 6 per cent of their total turnover, a further 5 per cent in a marketing fee - and Wendy's prices for the goods it supplies.

A Wendy's franchisee who spoke on condition of anonymity said Milne had confirmed at the meeting that turnover of $400,000 was a break-even point. He said the figure was about 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. He also said it was rare for a Wendy's franchisee to be terminated.

Beecroft said he was unaware of the size of the increase in soft-serve ice-cream costs.

Speaking about charges generally, he said: ''In principle these costs are competitive with similar quality products you would get elsewhere.''

Jack Cowin is no pushover as a franchisee. He owns 300 Hungry Jack's outlets nationally and the KFC brand in Western Australia and the Northern Territory. He is also a substantial franchisor in his own right, with about 59 sub-franchisees reporting to him.

The BRW Rich 200 list records his fortune at $538 million - and even with this significant sum he believes the current laws allow franchisors to push franchisees around.

"I think we have a structural problem in the mechanics of how things are working," Cowin told BusinessDay.

''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."

He dismissed the idea that an explicit good faith provision in the code would create too much uncertainty for franchisors.

When the Treasurer, Wayne Swan, used the words "good faith" four times in a two-minute interview about negotiations on the mining resources rent tax, Cowin sent him a note: "Meanwhile, when you're dealing with people with their life savings on the line, you can't define it? It's a bit of a nonsense."

Tim Castle, a partner with Atanaskovic Hartnell representing some Wendy's franchisees and Cowin, said there were systemic issues in the franchising industry.

"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."

The franchise council's chief executive, Steve Wright, was unavailable for interview. Through a spokesman, he said that if there had been unconscionable conduct, the Evanses could successfully sue Wendy's.

But Castle, who does not act for the Evanses, said franchisees were generally not in a position to successfully sue after they had already gone out backwards.

http://www.smh.com.au/business/sundae-bloody-sundae-20100809-11u0x.html


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Risks: 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 , Churning (serial reselling), Encroachment (too many outlets put in territory), Franchisee abandons their investment, Good faith, fair dealing, Gouging on supplies, 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, Renewal of contract denied, Successful for the middleman, System designed to fail for franchisees, Unilateral changes in business model drive franchisees' profits down, Unproven business model, Australia, 20100810 Sundae bloody

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