'Manifestly failed': Damning report calls for franchise sector overhaul

Cara Waters and Adele Ferguson
March 14, 2019
The Age
The parliamentary inquiry into the $170 billion franchising sector has called for a total overhaul of Australia’s franchising system in a damning report released on Thursday.
The bipartisan report calls for new laws, greater enforcement powers and penalties for the regulator and a suite of changes to the franchising code.
It says the current regulatory environment has “manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance”.
The report draws parallels between the franchising sector and the behaviour uncovered in the banking royal commission.
“The extent of poor corporate governance in some areas of franchising is comparable to that in the financial services sector,” it said. “There are deeply rooted cultural problems that will not be resolved by a franchisor replacing a few senior executives.”
The report calls on the government to establish a franchising taskforce to examine and implement its recommendations, made up of representatives from Treasury and the Department of Jobs and Small Business.
It recommends a suite of changes to the franchising and oil codes, including the inclusion of civil pecuniary penalties and giving the Australian Competition and Consumer Commission (ACCC) more responsibilities and greater enforcement powers to “root out misconduct and exploitative behaviour” in the franchise sector.
It recommends improvements to disclosure including provision of all financial information when franchises are sold or transferred including Business Activity Statements and greater clarity and accountability around marketing funds.
The report recommends the taskforce examine making unfair contract terms in franchise agreements illegal, investigate options for a public franchise register with franchisors providing updated disclosure documents and template franchise agreements annually in compliance with the Franchising Code.
It recommends civil penalties if franchisors fail to comply.
It recommends that the ACCC, the Australian Taxation Office and the corporate watchdog ASIC launch investigations into embattled Retail Food Group, its current and former directors and officers for potential insider trading, tax evasion, quality of audit, director duties and continuous disclosure.
The report calls for more accountability on marketing funds and where the money is spent. Most franchise business models require franchisees to pay a percentage of sales to a marketing fund but the accounts have scant details of how the franchisor spends the money.
Evidence to the inquiry revealed “a substantial amount” of intimidatory behaviour and misconduct by franchisors leading the inquiry to call for whistleblower protections.
To stamp out the practice of excessively charging for products, including flour and milk, the committee recommends that the ACCC collect data to ensure franchisees aren’t being gouged.
It recommends mandatory disclosure in percentage terms of all supplier rebates, commissions and other payments in relation to the supply of goods or services so that potential franchisees understand the overall cost of buying into a franchise.
The report said the inquiry took a “holistic approach” to address the systemic problems in the sector and recommended the government “avoid cherry picking, and instead implement all the recommendations in [the] report as soon as possible”.
Senator John Williams, who was crucial in calling for the inquiry into franchising, said none of the 17 inquiries into the sector over the past 30 years had worked.
“The work has now been done. It is time for the government to act,” he said.
Senator Williams said he was aware the industry had serious problems but was shocked at what the inquiry uncovered.
“It was worse than expected. It was like the royal commission into banking,” he said.
Former ACCC head Alan Fels said the franchising code has been “somewhat disappointing” and needed strengthening to be effective.
“The problems with the code have been longstanding and systemic and accordingly strong medicine is required and this report goes a considerable distance in that direction,” he said.
The efficacy of the Franchise Council of Australia was questioned in the report which said the body “does not appear to provide a balanced representation of franchisor and franchisee views” however Mary Aldred, chief executive of the FCA said the industry body welcomed the inquiry’s findings.
“Traditionally we could have done more to incorporate the input of the views of franchisees, I am very alive to that,” she said.
The parliamentary inquiry was triggered by a series of media investigations by The Age and Sydney Morning Herald into 7-Eleven, Domino’s Pizza, Pizza Hut, Caltex and Retail Food Group where franchisees described franchising as “indentured servitude” or slavery.
The series exposed crushing business models that pushed franchisees to the wall, leading to a range of issues including financial ruin and marriage breakdowns. To make ends meet, some franchisees engaged in wage fraud.