Franchising under fire

THE franchising industry is coming under the spotlight amid allegations franchisees are being ripped off by some franchisors.

While franchising may allow inexperienced people to “buy a business in a box”, there is growing criticism that the only winners are the franchisors, many of them large companies with the power to enforce unfair arrangements on franchisees.

High-profile brands such as Domino’s and Retail Food Group have in recent months copped the lion’s share of criticism over poor treatment of financially stressed franchisees. But they are not the only ones.

The parliamentary joint committee on corporations and financial services meets in Brisbane today to hear evidence as part of its inquiry into the franchising code of conduct.

The inquiry attracted almost 100 submissions, many from franchisees who complained of excessive franchisor fees, unfair supplier kickbacks and poor advice.

Robert Whittet, who operated two Jamaica Blue coffee shops in Toowoomba with partner Emma Forsyth, says he lost $2.5 million in his ill-fated franchise business.

Mr Whittet, who will appear before the inquiry today, complains that revenue and profitability were overstated by the franchisor Foodco. His business was forced into liquidation in April.

He alleges Foodco accepted commissions, or kickbacks, from suppliers, and he was not given enough in-store support.

“It was always the franchisee’s fault and if you didn’t maintain your franchisee fees, you were in trouble with default notices,” he said.

“It was obvious that products supplied from our major suppliers were costed at retail, whereas we could buy the same product from our local Coles and Woolworths considerably cheaper.”

A Foodco spokesman refuted Mr Whittet’s claims, saying any supplier rebates subsidised the company’s national conference, advertising programs and procurement management.

“Our franchisees are free to source non-branded supplies from wherever they choose if the non-branded supplies are equal in quality and cheaper than those provided by our preferred suppliers,” he says.

Supporters of franchising say the system is not broken but just needs tweaking. They point out that close to 80 per cent of small franchisees survive their first five years, compared to 80 per cent of standalone businesses failing.

Brisbane commercial lawyer Derek Sutherland said the sector was being tarnished by the actions of a few and the corporate regulator ASIC should be given power to ban such people from the industry.

“Franchisors know if they choose the wrong franchisee it can ultimately cost them significantly more in wasted time and money as well as frustration,” he said.

Mr Sutherland said franchisees also needed to exercise accountability for their own actions and decisions.

“That may mean they need to be compelled to take steps to protect themselves and seek independent advice,” he said.