FINAL WORD
Professor Andrew Terry on on whether franchising is a flawed business model.
Adecade ago John Rau, today the Deputy Premier of South Australia, commented that “in a perfect world we would not have franchises at all because I think they are nonsense’. Rau’s argument was, essentially, that it is the franchisees who bear most of the risk and that when their capacity to absorb the risk is exhausted they will be replaced by somebody else “until such time that there are no fools left in the queue”.
The reality of course is that the scenario described by Rau is not an accurate description of franchising as it is practised by the 1000+ franchise systems in Australia. Franchising could not survive, let alone thrive as it so obviously has, and deliver its well documented economic, commercial and social benefits, in such circumstances.
A number of well publicised scandals within the sector over the last few years has nevertheless adversely impacted on the reputation of franchising. The practices within particular systems including 7-Eleven, Caltex, Domino’s and Retail Food Group have received massive media attention - attention reminiscent of that two decades earlier when sustained commentary on the considerable economic and social costs of inappropriate franchising practices led to the introduction of a comprehensive and sophisticated regulatory regime for franchising in the form of the Franchising Code of Conduct and the prohibition of unconscionable conduct in business transactions.
Today’s franchisees have the benefit of a regulatory environment that provides them with real and significant protection through combatting the information and power imbalance, and the resulting opportunity for opportunistic conduct, inherent in the typical franchising relationship. The protection granted by the Franchising Code of Conduct as well as under the general law has been continually expanded over the last two decades.
That the well-publicised problems continue in the face of the world’s most stringent regulatory regime for franchising makes it legitimate to consider whether the franchised business model is flawed. Are franchises indeed nonsense?
DISAPPOINTING
The scandals that have received so much attention relate to only a limited number of franchise systems.
This of course provides little comfort to those affected within these particular systems - but some comfort can be taken that these are not generic problems and issues and that the vast majority of franchise systems, and the franchisees within them, are not affected.
It is of course massively disappointing that those systems which have attracted most attention are among our largest and most established and most prominent systems who should be leading the sector by their good example.
It is nevertheless pleasing - and of course appropriate - that in all cases problems have been acknowledged, the need for remedial action accepted, and practices improved.
Given the longevity of, and the interdependency within, the franchisor/ franchisee relationship, franchising is frequently referred to as a ‘commercial marriage”. That between a third and a half of all marriages end in divorce is of course a very sad statistic but does this lead to the conclusion that marriage is a flawed and wretched institution?
What do the faults and failures in franchise chains amount to in the
franchise sector overall?
A COMMERCIAL MARRIAGE
Marriage may not be for everyone. The institution of marriage may need to change. The attitudes and practices of those in a marriage may need to evolve from how it has been. There are similarities with franchising. Neither model is flawed. Both models are works in progress.
It is not intended to trivialise or discount the pain of a failed franchisee to point out that a free enterprise system cannot guarantee business success. Entrepreneurship inevitably involves risk. Australia’s regulatory framework goes further than any other country in seeking to remove risks to the franchisee arising from the imbalance of power and information inherent in the franchisor/franchisee relationship while leaving business risks for the parties themselves.
Franchisors who disregard their legal obligations deserve the appropriately harsh legal consequences and the franchisor lobby has no interest in supporting recalcitrant franchisors who damage not only franchisees but the reputation of the franchise sector. But the best protection for franchisees remains education, informed due diligence, and specialist advice.