Franchise code audit may deter retailers

BLAIR SPEEDY
June 03, 2013
The Australian

PROPOSED changes to the Franchising Code could lead to increased operating costs and dissuade foreign retailers from entering the Australian market, a sector specialist has warned.

Rebecca Bedford, head of national franchising at law firm Minter Ellison, said several changes proposed in a government review of the code could increase compliance costs and impose such heavy restrictions on how franchisors dealt with franchisees that investors would be scared off the sector.

“The overall impact could lead to investors moving away from franchising to another retail model in Australia, and any increase in compliance costs is likely to be ultimately passed on to consumers,” she said.

The government is considering 18 recommended changes to the code following the review, headed by lawyer and small business specialist Allan Wein.

Ms Bedford said a number of the recommended changes would clarify existing ambiguities in the code that had previously led to disputes between franchisors and franchisees.

However, a recommended prohibition on franchisors from imposing “unreasonable significant unforeseen capital expenditure” on franchise operators meant businesses would no longer have control of how their brand was presented, she said.

“This could impact on some industries more than others, for example, the automotive industry where showroom upgrades are quite common and necessary,” she said.

The Wein report also urges the introduction of an obligation to “act in good faith,” including during negotiations, effectively introducing a higher standard of conduct than applies in any other contract negotiation under common law, and potentially increasing compliance costs.

The report has also recommended penalties for breaches to the code, further increasing compliance costs and deterring both local investment in franchise systems and expansion into Australia by foreign franchise retailers.

Ms Bedford said foreign retailers looking to open in Australia may instead choose to open their own store networks — a more expensive capital commitment that would reduce their opportunities for expansion and potentially keep them away altogether. “When mums and dads retire, they’ll often decide to open up a franchise, but if the master franchisors decide to go with a different distribution model you’ll be cutting that whole sector out of work.”