Franchises are often considered, and sold as, a win-win business-model by both franchisors and franchisees. However, the recent Fairness in Franchising Report by the Federal Parliamentary Joint Committee on Corporations and Financial Services, released in March 2019, highlighted that franchisors are currently winning at the expense of their own franchisees.
The scathing report has recommended sweeping changes to the current Australian Franchising Code of Conduct highlighting that the industry has “manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance.”
The Committee responsible for delivering the 369-page report, stated that:
“During this inquiry, much was made of: firstly, improving the awareness of prospective franchisees and ensuring that they have access to appropriate legal and business advice prior to entering a contract; and secondly, improving the accuracy and meaningfulness of the information provided to prospective franchisees.”
71 core recommendations were proposed in the report which included dramatic process improvements concernng the current Franchising Council of Australia (FCA) to attempt to restore the industry’s power imbalance. The key findings claim the FCA “influenced the development of the current regulatory arrangements to benefit the interests of franchisors and potentially to the detriment of franchisees.”
The FAC estimate that in 2016, there were 79,000 franchise operators employing 470,000 people across the Nation. The same report estimates the industry contributes more than $146B to the Australian economy; which is 8.9% of the national GDP. On top of this, the industry is growing. The FAC has forecast revenue will increase by 2.5% annually from 2016 to 2020.
In addition to revenue growth, the FAC is also forecasting the number of franchisees will reach 90,500 by 2020. Obtaining new franchisees is vital for franchisor brand success. The aforementioned report has singled out major franchisors due to their exploitation of franchisees and experts are concerned this may impact the previous growth forecasts. The authors stated in the report that “the actions of certain franchisors have caused enormous reputational damage to the sector. This needs to be rectified for the benefit of the entire franchising industry.”
Retail Food Group Limited, one of Australia’s largest franchise groups, was heavily targeted with the report calling for further investigations into the group’s potential insider trading, tax evasion, quality of audit, directors’ duties and continuous disclosure. Whilst the report covers a wide range of recommendations for various groups including the ACCC, the FCA and franchisees; the focus is arguably on improving the transparency and accountability of franchisors.
Restoring the win-win scenario
The answer is not to disseminate the model; but to rebuild trust between franchisees and franchisor to restore the win-win scenario. The current situation has resulted in a war between the two parties.
In 2016, 25% of franchisees had a dispute with their franchisors which lead to mitigation, mediation or litigation. The most common disputes were compliance related issues.
Source: Franchising Australia Report, 2016, Griffith University.
These results are not surprising considering the extent of dissatisfaction within the franchisee conglomerate.
Franchisors: it’s time to step up and bring back the trust
Whilst the Fairness Report’s 71 recommendations will take time to be reviewed by the industry and respective government departments, franchisors can take immediate action to support current and potential franchisees. It is an opportune time for innovative and thought-leading franchisors to step up and showcase to the industry how trust can be earned. This means implementing immediate actions and policies such as:
- Increasing disclosure: a core report recommendation (6.1.) focuses on franchisor Up-front and pre-contractual disclosure. As important as this is at the beginning of a relationship, it should be a regular activity to engage franchisees in the overall business performance. A strategic way to approach this can be to establish an internal benchmarking tool, specific to the franchise so all franchisees can gain access to continuous performance results.
Supporting franchisees to increase profit margins: franchisees/store owners will often have individual strengths and weaknesses which they bring into the business. As valuable as general training is, targeted support based on a franchisee’s business performance will achieve a greater outcome. Identifying capability gaps can greatly support this strategy. This can be achieved by implementing franchise-wide tracking tools to compare store vs. store to assess who is excelling and who needs additional support. It can also identify franchise wide trends which may need to be addressed.
- Providing regular productivity reports: in addition to standard financial reports, franchisors can go beyond and provide franchisees with individual productivity reports highlighting employee outputs compared to income. Further, franchisors can be provided with comparative analysis on each store in the franchise, and industry, so franchisees know exactly how well they are performing. This can showcase productivity areas for improvement and reward success.
- Addressing expense transparency: one of the biggest issues which arose from the inquiry was the lack of transparency about the way franchisors spend marketing slush funds paid for by franchisees. Again, leading franchisors can take this opportunity to showcase marketing and other overhead expenses to franchisees to build (or rebuild) a trusting relationship. Further, franchisors can share industry wide best-practice and benchmarks so franchisees can feel assured that expenses are being ‘utilised’ strategically and relative to industry standards.
- Engaging with the greater industry: beyond the confines of the franchise brand, franchisors can increase engagement with other businesses in the industry (e.g. retail, hospitality) to assess future trends and potential issues. However, the key will be sharing this information with franchisees to ensure they can leverage the situation. This is particularly important with new or struggling franchisees that may need additional support through a downturn. Further, understanding industry-wide trends can support franchise brands justify investments into new technologies such as automation and e-commerce.
Investing in change
The franchise sector will take time to heal from the beating delivered by the Fairness Report. However, franchisors can get on the front foot and invest in innovate software to improve transparency, increase productivity and drive positive engagement with franchisees. Disclosure was one of the biggest concerns highlighted in the report – and it’s something that is easily remedied.
Achievements should be shared and celebrated, and issues should not be concealed. With a combination of government legislation and industry-wide cooperation, it is forecast engagement strategies and increased transparency that will be the ultimate focuses for the sector in the foreseeable future. In the end, a win for the franchisee needs to be both a physical and emotional win for the franchisor: and vice versa. Once this is achieved, let’s hope franchisors and franchisees will once again be on the same team.
Benchmarking offers specific project packages designed for franchisors to support franchisees. Talk to us today to find out if our innovative platform is suitable for your group.
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