Franchise inquiry report imminent, serious reform expected

Adele Ferguson
Mar 3, 2019
AFR
“I’m just a broken-down, old bushie, but when a business falls over, we can say ‘belly up’, ‘tits up’, ‘fall over’ or whatever. It goes broke. Do you understand what I’m saying now?”
It was a question a clearly frustrated Senator John Williams asked former Retail Food Group (RFG) senior executives at a joint parliamentary inquiry into the $170 billion franchise industry.
It was one of a number of colourful moments during an explosive 12-month inquiry into a sector that has been dogged with scandals and problems for decades.
The inquiry was sparked by scandals such as at 7-Eleven where franchisees resorted to wage fraud to cope with the business model.
The report is imminent, with a possible release date later this week. The industry, which comprises 1100 different franchisors, 80,000 franchisees and almost half a million employees, is bracing for serious reform.
The franchise inquiry was triggered by Senator John Williams in early 2018 in response to a string of scandals that highlighted serious flaws in the sector, most notably a power imbalance between the franchisor and franchisee and the abuse that has caused.
Some franchisees have described the relationship as one of master and slave, akin to indentured servitude.
Scandals included convenience store giant 7-Eleven, where franchisees engaged in systemic wage fraud to cope with a brutal business model; pizza giant Domino’s, Pizza Hut, Caltex and RFG, which includes brands Donut King, Michel’s Patisserie, Brumby’s, Gloria Jeans, Crust and Pizza Capers.
These scandals turned out to be the tip of a very ugly iceberg in the franchise sector. Some franchisors do the right thing, but many don’t. It isn’t a case of a few bad apples.
During the course of the inquiry franchisees from a range of other franchise groups revealed bullying, blackmail, suicides, contracts being changed after being signed, churning, gouging, opaque marketing funds and unconscionable contracts.
The committee was supposed to report in September 2018 but after being deluged with hundreds of submissions it was postponed until March – a move that made the industry nervous that this inquiry might be different from the previous 17 parliamentary inquiries and recommend significant reform.
Recommendations are speculated to include changes to the franchising code, which Jim Penman, founder of Jim’s Group, which runs 4000 franchisees, describes as virtually useless. “It does almost nothing to protect franchisees and allows vulnerable people to be ripped off by unscrupulous operators,” he told the parliamentary inquiry.
Other recommendations are expected to include stronger unfair contract terms, stiffer penalties for breaches of the code and more meaningful information disclosure to franchisees, which have been criticised as lacking transparency and allow franchisors to shift the goal posts without consultation.
The report is also expected to address gouging by franchisors, particularly when it comes to charging their franchisees excessively for products such as flour and milk that could be bought far cheaper if they were allowed to source it elsewhere.
Other recommendations are expected to address the hoary issue of unprotected lease terms in shopping centres which has allowed some of the more unscrupulous franchisors to sign up new franchisees to compete with existing ones in the immediate trading area.
There is also a hope by franchisees that the committee addresses the issue of remediation and redress instead of having to rely on the courts, which are costly and can take years.
This was epitomised in a recent judgment handed down against RFG in a battle that took five years.
In February, the Brisbane District Court found RFG made false and misleading statements to one of its Michel’s Patisserie franchisees, who bought a Michel’s franchise in Townsville in May 2012 and closed it a year later, with losses of hundreds of thousands of dollars.
In a 71 page judgment, District Court Judge Jennifer Rosengren found that RFG contravened the Australian Consumer Law by making misleading claims to the franchisees about the quality, range and frequency of delivery of products when they signed the franchise contract.
“Representations about such matters to potential franchisees ought not to be made lightly. They are significant statements. If they are inaccurate but are relied upon, there may be significant financial consequences that follow,” the judge wrote.
“It follows that RFG did not have reasonable grounds to make the oral representations. I am therefore satisfied that they should be characterised as ‘conduct that is misleading or deceptive or likely to mislead or deceive’ within the meaning of the Australian Consumer Law.”
The court heard that the products sent to the franchisee regularly arrived in an unsaleable condition. “Damage to the products included splits through the middle, freezer burns and/or an appearance of a cake having melted and being refrozen. She [the franchisee] would photograph them … and throw most of them away…” the court heard. Special order birthday cakes or wedding cakes arrived late or not at all.
The franchisee emailed RFG over many months but little changed. The court dismissed a counterclaim by RFG seeking $651,000 for unpaid franchise fees and other costs.
RFG is considering its legal options.
But there are many Michel’s franchisees – and others – who suffered similar problems but couldn’t afford the legal battle. They walked away financially devastated.
Since The Age and The Sydney Morning Herald first raised the RFG scandal in December 2017, its shares have fallen from $4.40 to close on Friday at 25¢ a share.
Investors will pour through the report to see whether it singles out any particular companies or individuals for referrals to the regulators, or whether some of the recommendations will impact profitability.
The franchise industry has been the subject of many parliamentary inquiries since 1976, but the latest, chaired by Michael Sukkar, has been the most eventful.
Bullying, threats and intimidation of franchisees forced the committee to warn the peak industry body, the Franchise Council of Australia (FCA), that franchisors needed to act appropriately after “many” franchisees expressed a fear of being sued or disadvantaged if they gave evidence.
It wrote: “the committee would welcome your response to this letter within seven business days … detailing what policies and procedures the FCA has in place and what action the FCA would take if it became aware that a franchisor was threatening, or taking, action against submitters or witnesses to the franchising industry”.
The letter was triggered after Foodco, which owns Muffin Break and Jamaica Blue, was caught sending a threatening letter to franchisees warning them legal action would be taken against anyone who has made “unsubstantiated defamatory claims” against Foodco to the inquiry.
Foodco denied this was the case but it prompted deputy chair of the parliamentary committee, Senator Deborah O’Neill, to warn, “Silencing, by implied or actual threat, those who want to speak up and inform the democratic processes of the nation is both immoral and illegal.”
Later in the year, the committee became embroiled in a legal battle with three witnesses who repeatedly refused to appear before the inquiry. The committee took the rare step of slapping a summons on the three former executives of RFG: Tony Alford, a former chief executive and major shareholder of RFG; Andre Nell, another former chief executive; and former senior executive Alicia Atkinson.
Alford and Atkinson went to the High Court to stay an order for them to attend the hearing, arguing it was unconstitutional for a parliamentary committee to force individuals to attend the hearings.
The High Court ruled in favour of the parliamentary committee, with Justice Michelle Gordon saying concerns about appearing before a joint parliamentary committee were “ill-defined and hypothetical”.
The report will be released before the next election, which means it will either fall through the cracks or become an election issue.
Let’s hope it is the latter. If not, we will be back again with another inquiry and more franchisee devastation.