Franchising leaves a bad taste for some

March 24, 2012
The Age

Many franchisees believe they are vulnerable when a contract ends, but the law provides no residual rights, writes Stuart Washington.

Trevor Banks wants to stay in the ice-cream business. But he does not want to stay in it with the ice-cream franchise Wendy’s. After paying $250,000 to establish a Wendy’s franchise at the Mount Druitt Westfield in 2007, he started questioning the model he found himself in.

”The franchising model to my mind is to join with a group that would effectively give you increased buying power, leverage, economies of scale,” he says. ”And it [Wendy’s] delivers on none of them.”

Banks, 46, estimates his likely losses from his foray into franchising at $200,000, and is now in the end game of negotiations with Wendy’s about where he can base his new store – an unbranded ice-cream shop.

He swallows tears during the interview as he remembers the death of a fellow Wendy’s franchisee, Therese Evans, who died mid-stoush in 2010 as Wendy’s moved to close her Singleton store over a debt she put at $7000.

Banks, who has been an internal agitator about Wendy’s perceived failings, estimates its store numbers have fallen from about 300 to 270 in the past two years, and says the fall indicates a sick franchising system.

His assessments are roundly rejected by the Wendy’s franchisee action council, which portrays him as out of step with other franchisees.

Dale Eichner, a franchisee at Mount Barker in South Australia, says the franchisor, owned by the private equity group Navis Capital, has actively worked with franchisees in recent years to address the cost of goods sold to offset falling sales.

”It’s not a collective view, it’s Trevor Banks’s view,” Eichner says. ”I have got a store that makes good money. I sympathise with Trevor but you can’t turn around and blame the franchisor for everything.”

The dispute is a sombre message on a weekend when there will be plenty of good cheer at the annual franchising expo at Homebush.

While the stallholders hand out pamphlets for some of the 1100 franchise systems operating in Australia today, Banks can take some grim comfort that he is not alone.

Jack Cowin, 69, with a fortune of more than $500 million built on successful forays in franchising Burger King and Kentucky Fried Chicken stores, is taking the owner of the KFC brand, Yum!, to court.

Cowin, a confidant of the mining magnate Gina Rinehart, claims Yum! is using the expiry of franchising agreements on 15 stores in Western Australia next Wednesday against him and devaluing the sale of his 46 stores.

And one of Sydney’s most successful car dealerships, the Trivett Group, is reported to be in hot dispute with Porsche about the proposed termination of its franchise to sell the luxury cars.

Bernie Ripoll, the head of a 2008 parliamentary inquiry into franchising, believes the time is right to adopt franchisees’ calls for an explicit reference to good faith in the Franchising Code of Conduct.

”I think what is key to this is it takes parties to act in good faith at the start of a contract, the middle of a contract but the key part is towards the end of the contract, which is often where problems will arise,” he says.

”Ordinary people spend a lot of their hard-earned money buying a franchise, building it up.

”Towards the end of that contract term they find themselves with almost no rights.

”If you don’t have a renewed franchise, you have nothing at all; there’s no goodwill, there’s nothing. You pick up your kit bag and go home.”

The inquiry’s recommendation for good faith to be explicitly included in the code was not adopted by the then minister responsible for franchising, Craig Emerson.

And that’s the way it should be, says Steve Wright, the executive director of the Franchise Council of Australia, who says the concept of good faith is implied in common law.

”We say it’s there already, we say it exists,” he says.

Wright mounts arguments that franchisees have got it pretty good under the existing code, without the need for a David franchisee to take a Goliath franchisor to court.

First, he says, there is compulsory mediation available, and second, the code was revised in July 2010 to require the franchisor to present a constructive attitude in mediations. As another safeguard, he points to disclosure requirements on franchisors to provide prospective franchisees with contacts of others in the network and, importantly, former franchisees , as well as disclosing any litigation either threatened or under way.

But for all those safeguards, Wright reverts to something that sounds a lot like legalese when he addresses the term ”pushed out” being applied to franchisees at the end of a contract term.

”The law is very clear in franchising as it is with other contract and agreement law: when the agreement expires, the agreement expires. There is no residual rights or residual value that exists for either party when the agreement runs out.”

A rough translation: if you’re at the end of your franchising contract, the franchisor can do whatever it wants.

It’s not an argument that Cowin finds particularly acceptable after founding the KFC business in 1969.

His case argues that Yum! is using non-renewal of the 15 stores to push him into a situation in which he cannot gain full value from a sale of his 46 West Australian stores.

”It’s a confiscation of the franchisee’s goodwill into their pockets whereas what should happen on a good faith basis is they should allow a sale of that business without unreasonably interfering with the value of the asset to their advantage,” he says.

For its part, Yum! – a multinational fast food giant that offers the brands KFC, Pizza Hut and Taco Bell – says Cowin was first advised his franchise contracts would not be renewed in 2003.

The seeds of the dispute are understood to lie in Cowin’s involvement with Domino’s Pizza – a competitor to Pizza Hut – although the stake in Domino’s is now held in a trust controlled by Cowin’s children.

In a background briefing on the issue, Yum! states: ”Despite having more than eight years to arrange its exit from those stores, [Cowin’s company Competitive Foods] has failed to sell its stores or make other arrangements with Yum to allow the stores to be occupied by a new franchisee.”

Cowin draws a parallel to the Trivett Group, the luxury car dealership, which was reported in The Australian to be locked in a dispute with Porsche after threatening it would not renew its franchise after holding it for 16 years.

The executive chairman, Greg Duncan, would not comment on the dispute but said of franchising in general: ”The current franchise law is unjust and inequitable; I honestly believe it’s in the interests of franchisees, franchisors and consumers that the laws be amended.”

Cowin says: ”The car industry is also living on the same knife edge of somebody wanting to confiscate their business through non-renewal. That goes a long way towards saying this is a franchising issue – there’s some structural issues here, which the government should be dealing with to [address] unfair practice.”

And for Banks, he’s waiting for the outcome of a tortuous negotiation to see if he can start again with a new ice-cream store 4.5 kilometres away from his existing one.

A spokeswoman for Wendy’s says Banks was not representative of other franchisees. ”He has made repeated claims about the company and his circumstances that are misleading and incorrect,” she says.

”He has also ignored appeals from his fellow franchisees to desist from promoting mistruths and misinformation about Wendy’s.

”Mr Banks’s assertions about the Wendy’s business model are quite simply incorrect: Wendy’s cannot succeed as a company without successful franchisees.”

Banks’s new store is a move opposed by Wendy’s because it is within a five-kilometre exclusion zone from his existing store, as set out in his agreement with Wendy’s.

”It’s not a case of me wanting to get out; it’s an absolute necessity,” Banks says. ”The business model has failed me; I have not failed the business model.”

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