tag:theconversation.com,2011:/global/topics/franchising-9788/articles
franchising – The Conversation
2018-09-05T10:37:23Z
tag:theconversation.com,2011:article/102298
2018-09-05T10:37:23Z
2018-09-05T10:37:23Z
Asking customers to donate when they buy stuff may be good for business
<figure><img src="https://images.theconversation.com/files/234910/original/file-20180904-45163-18gtl6e.jpg?ixlib=rb-1.1.0&rect=78%2C52%2C8688%2C4252&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Do you want to make a donation with that?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/customer-paying-their-order-credit-card-343157249">Shutterstock.com/Jacob Lund</a></span></figcaption></figure><p><em><a href="https://theconversation.com/desea-donar-el-cambio-de-la-compra-pedir-donaciones-beneficas-en-el-supermercado-es-un-buen-negocio-102813">Leer en español</a></em>.</p>
<p>Cashiers asking customers to donate small sums to charity while they’re at cash registers, known as <a href="https://engageforgood.com/2017checkout/">checkout charity</a>, is becoming a big business.</p>
<p>All that spare change, taken together with donations solicited through e-commerce, collectively raised at least US$440 billion in 2016 from retailers like <a href="https://www.petcofoundation.org">Petco</a>, <a href="https://wm.childrensmiraclenetworkhospitals.org/">Walmart</a> and <a href="https://givingworks.ebay.com/about/">eBay</a>. According to <a href="https://engageforgood.com/">Engage for Good</a>, a cause-related commerce group, roughly 3 out of 4 Americans have been asked to donate to charities ranging from <a href="https://www.riteaid.com/shop/info/about-us/rite-aid-in-the-community">Children’s Miracle Network Hospitals</a> to <a href="https://www.wegmans.com/about-us/making-a-difference/feeding-the-hungry.html">local foodbanks</a> while buying stuff.</p>
<p>Franchisees often say they are <a href="https://www.alignable.com/forum/small-business-philanthropy-on-the-rise">reluctant to participate</a> in this practice based on an assumption that consumers dislike donating at checkout and that these campaigns will negatively impact sales. Because I do <a href="https://scholar.google.com/citations?user=KK3MyMcAAAAJ&hl=en&oi=ao">research about franchising</a>, I wanted to see if those concerns are valid.</p>
<h2>Is reluctance warranted?</h2>
<p>To get a clearer picture of how customers feel about checkout charity appeals and if it makes them less likely to return to its restaurants, I was on a research team that looked into how checkout charity may affect sales at retailers, restaurants and supermarkets – plus the public’s perception of those brands. </p>
<p>We partnered with a national fast-food restaurant chain that provided data in exchange for an analysis of their checkout charity campaign and declined to be identified.</p>
<p>Marketing professors and experts in consumer behavior and marketing strategy <a href="http://www.clemson.edu/business/about/profiles/mgiebel">Michael Gibelhausen</a>, <a href="https://scholar.google.com/citations?user=jyJDoVgAAAAJ&hl=en">Helen Chun</a>, <a href="https://scholar.google.com/citations?user=ap-UVxMAAAAJ&hl=en">Liwu Hsu</a> and I conducted multiple studies including a restaurant field study where we intercepted customers in the restaurant to get their feedback immediately after they were asked to donate.</p>
<p>Three controlled online experiments investigated the underlying psychological processes at play. We also reviewed sales and checkout charity data provided by the fast-food chain, which has approximately 1,000 U.S. locations. </p>
<h2>A warm glow</h2>
<p>As we explained in the <a href="https://scholarship.sha.cornell.edu/articles/1038/">Cornell Hospitality Quarterly</a>, an academic journal, we found that such campaigns can benefit a franchise’s bottom line. This occurs because checkout charity can make consumers feel what economist <a href="https://scholar.google.com/citations?user=FvzjvLoAAAAJ&hl=en&oi=ao">James Andreoni</a> calls a “<a href="http://www.econport.org/econport/request?page=man_pg_experimentalresearch_impurealtruism">warm glow</a>” from their giving. These positive feelings, we believe, can lead customers to spend more money in the future at the same restaurant chain.</p>
<p>We found that asking customers who refuse to donate had no effect on their emotional response to the brand or their willingness to return for another meal. </p>
<p>However, the customers who donated felt good about it. Based on our analysis of sales data, we believe they also felt better about the chain we studied and were more likely to return. </p>
<p>In short, raising money for causes through checkout charity may increase sales without costing businesses anything in terms of customer satisfaction.</p><img src="https://counter.theconversation.com/content/102298/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Benjamin Lawrence does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Checkout charity research suggests that it can boost sales and doesn’t ward off customers who don’t contribute.
Benjamin Lawrence, Aziz Hashim Professor of Franchise Entrepreneurship and Associate Professor of Hospitality, Georgia State University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/100167
2018-08-06T19:38:54Z
2018-08-06T19:38:54Z
How to improve the appeal of franchising for women
<figure><img src="https://images.theconversation.com/files/230331/original/file-20180802-136664-1icqldp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The franchise sector might be missing out on opportunities to attract female entrepreneurs.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/download/confirm/721112086?src=SSuunVxy52n4Lb4tIbg9eA-1-30&size=huge_jpg">Shutterstock</a></span></figcaption></figure><p>The franchise model should represent a business model of choice for women. The format has a lower risk profile, as it offers a level of perceived reassurance that the concept has been tested in the marketplace. It also minimises some of the historical disadvantages women face when entering self-employment. </p>
<p>Yet contrary to the stereotype of women being risk-averse, <a href="https://www.tandfonline.com/doi/abs/10.1080/0965254X.2018.1482946">our research</a> has found many are willing to take risks in business and embrace innovation. </p>
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Read more:
<a href="https://theconversation.com/senior-female-bankers-dont-conform-to-stereotypes-and-are-just-as-ready-to-take-risks-71891">Senior female bankers don't conform to stereotypes and are just as ready to take risks</a>
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<p>We identified another factor that might limit women’s uptake of franchising opportunities. Many remained unaware of key benefits such as support from government and franchisors, which includes initial investment and working capital. </p>
<p>This matters for both the franchising sector and the broader economy. Entrepreneurs are considered a major source of economic growth, and <a href="https://www.afr.com/news/special-reports/businesses-of-tomorrow/the-rise-of-femaleled-businesses-and-entrepreneurs-20180304-h0wyzq">more and more of them are women</a>.</p>
<p>Yet a number of factors often constrain women’s choices in business. These include lack of business experience, lack of access to capital and formal and informal business networks, and the need to balance work and family commitments. In fact, <a href="https://www.startupmuster.com/reports/Startup-Muster-2017-Report.pdf">women founded only about 25% of start-ups</a> in Australia in 2017.</p>
<h2>Risk-taking propensity</h2>
<p>Our research explored the effects of different risk-taking levels among women on their likelihood of adopting a franchise business model. The chart below illustrates influences on the identified risk-taking groups – low, medium and high risk propensity. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/229570/original/file-20180727-106524-1ue8gpf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/229570/original/file-20180727-106524-1ue8gpf.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=709&fit=crop&dpr=1 600w, https://images.theconversation.com/files/229570/original/file-20180727-106524-1ue8gpf.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=709&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/229570/original/file-20180727-106524-1ue8gpf.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=709&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/229570/original/file-20180727-106524-1ue8gpf.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=891&fit=crop&dpr=1 754w, https://images.theconversation.com/files/229570/original/file-20180727-106524-1ue8gpf.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=891&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/229570/original/file-20180727-106524-1ue8gpf.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=891&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="attribution"><span class="source">Based on Thaichon, P., Weaven, S., Quach, S., Bodey, K., Merrilees, B., & Frazer, L. (2018). Female franchisees; a lost opportunity for franchising sector growth?, Journal of Strategic Marketing, 1-16./The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<p>“Push” influences are external factors stemming from an individual’s lack of control in their working environment. “Pull” influences are internal motivations based on the need to take control of one’s working life. Other factors include work-family life balance, industry sector characteristics and capital availability. </p>
<p>The impacts of these factors on decision-making vary with the three risk categories. </p>
<p><strong>Low risk-taking propensity</strong></p>
<p>“Push” factors are more dominant among women with a low risk-taking propensity. Most of these women go into franchising because of a lack of employment choice and difficulties in finding work. </p>
<p>These women favour business options that reflect minimal risk. Work-family life balance is extremely important to them.</p>
<p>In addition, low-risk female franchisees prefer known industries and those that are less financially intensive. They tend to have difficulty in obtaining finance from third-party sources. Instead, they seek equity financing from family and friends. </p>
<p><strong>Medium risk-taking propensity</strong></p>
<p>Women in the medium-risk group tend to enter franchising in response to a combination of “push” and “pull” motivations. They appear to see becoming self-employed as a way to gain greater control in their working lives and bolster individual prosperity. </p>
<p>Work-life balance, while still important, is less of a concern for this group. </p>
<p>Despite many studies suggesting women select business opportunities to achieve greater work-life balance, our study suggests this may take a back seat as the demands of the business grow. By definition, most medium-sized franchise systems require substantially greater financial, physical and mental inputs from owners than those considered low risk. This further erodes work–life balance and has impacts on desired lifestyle and family outcomes. </p>
<p>Medium-risk-taking women generally sought a combination of private equity and debt or external financial sources to start their franchise.</p>
<p><strong>High risk-taking propensity</strong></p>
<p>Typically, internal motivations most strongly influence high-risk-taking women to go into the franchise business. This is markedly different from the other two groups. </p>
<p>An intrinsic desire to leverage their knowledge and skills to provide job certainty and grow personal wealth “pulls” high-risk-taking individuals towards franchising. Though not totally neglecting work-life balance, the external benefits from working hard likely compensate for reduced family contact or flexibility among these franchisees. </p>
<p>High-risk-taking women franchise owners tend to value innovation. They are willing to enter unfamiliar industries in which they have less direct experience.</p>
<p>These women, like the medium-risk cohort, were also proficient in financing operations from a combination of equity and debt sources as well as government grants and franchisor-provided assistance.</p>
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Read more:
<a href="https://theconversation.com/whats-going-wrong-with-australias-franchises-92916">What's going wrong with Australia's franchises?</a>
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<h2>So what does this mean for the sector?</h2>
<p>Individual characteristics as well as one’s willingness to take risks appear to influence a woman’s likelihood of engaging in self-employment. But understanding the risk-taking propensities of female franchisees may help franchisors recruit this valuable business segment. </p>
<p>Although entrepreneurship research has suggested women have lower self-confidence or self-efficacy and higher risk aversion than men, we found many women have a medium to high propensity to take risks in business operations. The high-risk group also embraced innovation, in contrast to traditional views of franchisees as “reproducers” not “innovators”. This represents a solid departure from limiting gender stereotypes.</p>
<p>A majority of female franchisees appear to know about the main benefits of franchising. These relate mainly to initial and ongoing training and support, prominent branding, and opportunities to work within a proven business system. </p>
<p>However, many remained unaware of key benefits such as assistance from governments and franchisors. In fact, many hadn’t known that franchisors provided investment and working capital support. This knowledge might have changed the size of their initial investment and encouraged them to enter franchising earlier. </p>
<p>This suggests franchisors need to overcome this lack of information. Marketing campaigns explaining relevant franchise opportunities may increase participation by women.</p>
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Read more:
<a href="https://theconversation.com/it-really-pays-for-franchisees-to-do-their-due-diligence-heres-how-49297">It really pays for franchisees to do their due diligence – here's how</a>
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<img src="https://counter.theconversation.com/content/100167/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Women are more willing to take risks and innovate than the stereotype suggests, but even more would likely go into business via franchising if they knew about all the start-up support they can get.
Park Thaichon, Lecturer and Cluster Leader, Relationship Marketing for Impact Research Cluster, Griffith University
Sara Quach, Lecturer, Griffith University
Scott Weaven, Professor and Head, Department of Marketing, Griffith University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/88954
2017-12-13T01:50:23Z
2017-12-13T01:50:23Z
What is going rotten in the franchise businesses plagued by scandals
<p>Judging by the scandals that have engulfed franchises in Australia including <a href="https://theconversation.com/au/topics/7-eleven-20033">7-Eleven</a>, <a href="http://www.smh.com.au/business/workplace-relations/caltex-warned-its-service-station-owners-of-regulator-raids-20161102-gsg8qn.html">Caltex</a>, <a href="http://www.smh.com.au/interactive/2017/the-dominos-effect/">Domino’s</a> and most recently <a href="http://www.smh.com.au/business/retail/cup-of-sorrow-the-brutal-reality-of-australias-franchise-king-20171207-h00lbl.html">Retail Food Group</a>, it seems like the very business model of franchising is flawed. But there are franchises that thrive without problems like wage theft and fraught business relationships.</p>
<p>These franchises have a committed franchisor, a proven and evolving brand, and franchisees that are well supported. When any of these components is missing franchisees can quickly become unprofitable and things can turn ugly. </p>
<p>There are some hallmark problems within franchising in Australia and internationally and not all are within the franchisor’s or franchisees’ control.</p>
<h2>No transparency in the model and problems in the supply chain</h2>
<p>The first issue is in the supply chain. A good franchisor will source quality products and services that both the franchisees and their customers want, and make them available to franchisees on terms that are more competitive than the franchisee could obtain as a sole trader. </p>
<p>They wouldn’t let something like a rebate from the supplier stop them from replacing a bad supplier. They will not do as <a href="http://www.smh.com.au/business/retail/cup-of-sorrow-the-brutal-reality-of-australias-franchise-king-20171207-h00lbl.html">Michel’s Patisserie reportedly did</a> and require franchisees to sell spoiled cakes. </p>
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Read more:
<a href="https://theconversation.com/franchisees-dont-do-their-homework-and-are-too-optimistic-about-risks-research-68333">Franchisees don't do their homework and are too optimistic about risks: research</a>
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<p>In a successful franchise, the franchisor’s own network of related entities and associates should be aligned with a franchisees’ success. But franchise operations have become attractive acquisition targets for venture capitalists. For example private equity firm <a href="http://www.afr.com/street-talk/permira-retreats-as-laser-clinics-sale-reaches-crunch-time-20170820-gy03tn">Permira</a> was considering buying the Laser Clinics Australia franchise. </p>
<p>Franchises are also commonly owned by public companies such as Godfreys, Acdent Group Limited and Yum! Brands. This gives rise to new problems for franchisees. </p>
<p>A franchisee might buy their business from one franchisor, but, following sale of the network, have to deal with a new franchisor with different motivations. Venture capitalists and public companies have shareholders <a href="http://www.smh.com.au/business/retail/retail-food-group-begs-shareholders-for-shortseller-mercy-20171130-gzwbms.html">who prioritise dividends and capital gain</a> ahead of ongoing success of franchisees’ businesses. </p>
<p>Under clause 17 of <a href="https://www.legislation.gov.au/Details/F2017C00182">Australia’s Franchising Code</a> a franchisor has to let franchisees know about any materially relevant changes, such as change of ownership. In reality, once a franchisee has signed the franchise agreement and the seven day cooling off period has passed, there is no backing out. A franchisee wanting to make a material change needs to obtain the consent of the franchisor, but the franchisor needs no such consent from franchisees.</p>
<p>The Australian franchisor may be a master franchisee, this means they are an independent operator with responsibility for developing the Australian market for a foreign based franchisor. </p>
<p>One example is of a master franchisee is 7-Eleven in Australia. In this case the franchisor is a Japanese company. It seems the same issues that arose with the brand in Australia also <a href="http://www.bluemaumau.org/sites/default/files/NCASEF%20Complaint.Final_.pdf">allegedly</a> arose in California. So the system needs overhauling globally. </p>
<h2>Lack of lobbying and professional support</h2>
<p>Another problem in franchising is the franchisor and franchisees are unlikely to seek professional advice from the same sources. Well-resourced franchisors and master franchisees have large legal and accounting firms advising them.</p>
<p>There are many big law firms whose names are on franchise agreements and who run law suits for franchisors. Franchisor’s advisers offer expert advice drawing on a deep understanding of the sector. </p>
<p>Whereas <a href="https://www.cpaaustralia.com.au/%7E/media/corporate/allfiles/document/professional-resources/education/due-diligence-full-report.pdf?la=en">research</a> shows that franchisees are more likely to seek advice, if at all, from suburban solicitors and accountants or even to decline to seek legal or financial advice before signing. They may fear the cost, or be so keen to get going they don’t want any reality checks. </p>
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Read more:
<a href="https://theconversation.com/are-some-franchises-more-likely-to-exploit-their-workers-49444">Are some franchises more likely to exploit their workers?</a>
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<p>When it comes to making policy submissions, no sector representative body can fully represent both sides of franchising. Consequently, there is limited effective lobbying by the Franchise Council of Australia on franchisee issues where these conflict with franchisor preferences. </p>
<p>In a number of submissions to <a href="https://www.parliament.sa.gov.au/Committees/Pages/Committees.aspx?CTId=5&CId=173">state</a> and <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Education_and_Employment/VulnerableWorkers/Submissions">federal</a> inquiries the Franchise Council of Australia has blamed franchisees for problems in franchises.</p>
<p>The motor trades franchisees have a committed lobbyist in the <a href="https://www.mtaa.com.au/">Motor Trades Association of Australia,</a> but other franchisees do not have a well funded franchisee member organisation to represent them in Canberra. </p>
<h2>The law and regulators are not off the hook</h2>
<p>Two laws potentially even up the imbalance of rights and power between franchisors and franchisees. There’s the <a href="http://consumerlaw.gov.au/">Australian Consumer Law</a> and the <a href="https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct">Franchising Code of Conduct 2014</a>. </p>
<p>Consumer Law gives franchisees that have been misled, deceived or treated unconscionably, or whose contract terms are unfair, the right to ask a court to sort things out. But court actions are slow and expensive and can end in business failure. </p>
<p>For example Allphones was successfully sued by a franchisee, Hoy Mobile in <a href="https://jade.io/article/78386">2008</a>, but their dispute had been brewing since 2005. In 2009 the ACCC successfully mounted a class action against Allphones on behalf of other franchisees who had <a href="https://www.accc.gov.au/media-release/3-million-in-damages-to-small-businesses">been treated unconscionably</a>. </p>
<p>Franchisors have access to system-wide evidence to use to mount their cases whereas franchisees have great difficulty accessing data like the cost of sales of other franchisees. This data would help them discover whether they had been singled out for attention or whether all franchisees in the system were in the same boat. Of course, franchise agreements may have also expired by the time judgements are handed down. </p>
<p>The Franchising Code entrenches rights into all franchise agreements, such as the right to have a mediator appointed to resolve franchise disputes. Although mediation is quick and effective, it has flaws. </p>
<p>There is no public information available about concluded mediations, whereas enforceable undertakings that franchisors reach with regulators, and court decisions are on the public record.</p>
<p>Parties to mediation parties sign confidentiality agreements. So, if a potential franchisee wants to know about the potential pitfalls of the system no one involved can talk about any disputes. </p>
<p>The Australian Consumer and Competition Commission (ACCC) and the Australian Securities and Investments Commission (ASIC) are responsible for regulating different aspects of franchises. The ACCC administers Australian Consumer Law and the Franchising Code, whereas ASIC administers the Corporations Act. </p>
<p>Most franchisors and franchisees are corporations. When a franchisor <a href="http://www.austlii.edu.au/au/journals/AdelLawRw/2013/17.pdf">fails</a> the overlap between the regulators is murky. For example the Code applies to administrators and this binds them to mediate with franchisees, but administrators’ duties under the Corporations Act trump the Code. Here, the law fails franchisees.</p>
<h2>A wish list to restore confidence in franchising</h2>
<p>Franchise disclosure documents should contain an organisation chart with the franchisor’s entire network named so franchisees could better conduct their due diligence. </p>
<p>Franchisees could also unionise to strengthen their position in collectively bargaining as a sector of potentially <a href="https://www.franchise.edu.au/home/research/franchise-australia/2016-survey-shows-franchising-on-the-rise-in-australia">79,000 members</a>. This would put them in a strong bargaining position against the 1200 or so franchisors operating in Australia.</p>
<p>The professions could lift their game to help franchisees access competent advisers. Many of Australia’s state and territory law societies have accreditation programs for specialists to become accredited in a field of law. It could help franchisees’ confidence in their advisers if there was specialist accreditation for franchise lawyers and financial advisers.</p>
<p>One of the regulators should set up a public database of franchisors to enable franchisees and their advisers to compare offerings, without having to pay a deposit and enter a selection process before they really know what alternatives are available. There are already databases in the United States in California, Minnesota and Wisconsin funded by government. Australia could follow this lead and keep a database up to date with each franchisors disclosure document and standard form of franchise agreement. </p>
<p>Franchisees should also be given a right to sell their business back to the franchisor at a fair price if the franchisor sells to a venture capitalist or lists on a stock market. Only when all these changes are working together can we expect to see a proper end to rotten behaviour in some franchises.</p><img src="https://counter.theconversation.com/content/88954/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jenny Buchan receives funding from CPA Australia and Chartered Accountants ANZ. She is a member of the Small Business and Franchising Consultative Committee of the Australian Competition and Consumer Commission, ARITA and the Law Society of NSW. </span></em></p>
There are some hallmark problems within franchising in Australia and internationally and not all are within the franchisor’s or franchisees’ control to fix.
Jenny Buchan, Professor, Business School, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/81261
2017-07-21T04:07:38Z
2017-07-21T04:07:38Z
Both franchisees and franchisors benefit from company-owned stores
<figure><img src="https://images.theconversation.com/files/178967/original/file-20170720-23989-cm3qbu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Do company-owned stores really compete with franchisees?</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Some franchisees of hardware chain Mitre 10 are <a href="http://www.afr.com/business/retail/metcash-resisting-pressure-from-independents-to-sell-hardware-stores-20170713-gxaha8">calling for an end to “company-owned” stores</a>. These are stores owned and run by <a href="http://www.metcash.com/our-brands/">Metcash</a>, which owns the Mitre 10 brand and is a supplier to the franchisees. </p>
<p>But <a href="http://www.sciencedirect.com/science/article/pii/S0263237308001291">research shows</a> that brands with a mixture of franchised and company-owned stores are <a href="http://www.sciencedirect.com/science/article/pii/S0278431908000601">not only</a> more profitable but also more valuable than brands that are purely franchised. Company-owned stores are a win-win for franchisees and franchisors.</p>
<p>As we have seen with the likes of <a href="https://mcdonalds.com.au/about-maccas/maccas-story">McDonald’s</a> and <a href="https://www.bobjane.com.au/info/corporation/">Bob Jane T-Marts</a>, company-owned stores have <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1540-627X.2008.00244.x/full">various functions</a>. They may be “flagship” stores in prominent locations, making them a marketing tool. They can also be places for <a href="https://www.businessinsider.com.au/mcdonalds-test-restaurant-the-corner-2014-12#others">experimentation</a> with new products, technologies, store concepts, and prices. </p>
<p>Some franchisors have also used company-owned stores as mini-warehouses to supply other stores within a trade area. Finally, company-owned stores expand the network, lowering costs for the whole franchise and acting as a barrier to entry for competitors. </p>
<p>The benefits of all these measures are not always obvious or measurable by franchisees. For example, the average franchisee won’t appreciate the research and development costs incurred by a company store for a new training program or product. Franchisees only see the final result.</p>
<h2>Tensions between franchisees and franchisors</h2>
<p>There can be a legitimate tension between franchised and company-owned stores. For instance, company-owned stores may have greater access to resources such as local area advertising and staff training, preferential pricing and access to stock, and even favourable trading terms. </p>
<p>This can be unsettling for franchisees who feel they are not only competing against other brands but also their own. This is called “<a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1744-1714.2010.01094.x/full">encroachment</a>” and can damage the brand in the long run. </p>
<p>In a case between McDonald’s and a franchisee, the Victorian Supreme Court <a href="http://www.allens.com.au/pubs/comp/ccsep00a.htm">found</a> that McDonald’s could open new stores even if they potentially impact the existing franchisee. Opening new stores creates a barrier to entry for competitors, increases sales, and thereby lowers the costs of products for both franchisees and company-owned stores. This shows that even an action that may appear harmful can have wider benefits. </p>
<p>The huge difference in business models between franchisors and franchisees can also be a source of tension.</p>
<p>Franchisees are retailers. They need to buy the products they are selling as cheaply as possible while incurring the least amount of cost. In doing so they will maximise their retail profit. On the other hand, franchisors are like a wholesaler. They rely on the profit they make from selling products to franchisees. So franchisors can afford to lose money in company-owned stores, making up the difference by selling products wholesale to franchisees. </p>
<h2>A happy medium</h2>
<p>But as the <a href="http://www.sciencedirect.com/science/article/pii/S0263237308001291">research</a> clearly shows, for franchisees the benefit from company-owned stores - from marketing, research and development, and training - outweighs the negatives. Nevertheless, some things should change to keep the peace. </p>
<p>For starters, every company-owned store should operate like a franchise. Franchisees have been found to <a href="http://www.franchiserelationships.com/gregs-blog/are-company-stores-good-idea">perform better</a> than company-owned stores. Franchisees have skin in the game and are motivated by the bottom line of their stores.</p>
<p>What this means in practice is that all stores should make the same contributions to a marketing fund, buy products at the same price, and observe the same retail pricing structure. Company stores should have the same relative local advertising budget as franchisees, have the same stock-holding requirement (quantity and range), and company store managers should face the same performance criteria as franchisees. </p>
<p>Company stores might not perform as well at the bottom line, but overall they add value to both franchisors and franchisees.</p><img src="https://counter.theconversation.com/content/81261/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lorelle Frazer receives funding from the Franchise Council of Australia for the 'Franchising Australia' biennial surveys of the Australian franchise sector.</span></em></p><p class="fine-print"><em><span>Maurice Roussety does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Mitre 10 franchisees are calling for an end to company-owned stores, but they benefit from them too.
Lorelle Frazer, Professor and Director, Franchising Centre, Griffith University
Maurice Roussety, Lecturer- Franchising and Marketing, Griffith University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/73445
2017-03-02T19:07:49Z
2017-03-02T19:07:49Z
The government needs to better enforce the laws it creates, to protect franchise workers
<p>The government’s <a href="http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r5826">recent proposal to amend the Fair Work Act</a> makes it clear franchisors will be punishable for breaches of industrial law, the like of which we’ve seen in scandals surrounding retail franchises. But there will still be problems in enforcing this law. This is because of the obstacles workers face in successfully pursuing their entitlements and the inadequacy of our current penalties to deter these sorts of practices. </p>
<p>We’ve seen various scandals surrounding retail franchises, including 7-Eleven and Caltex stores, and takeaway food businesses such as KFC, McDonald’s and Hungry Jacks. The wages theft has taken several forms, with some franchisees paying workers far less than the minimum wage or modern award entitlements, failing to pay penalty rates and superannuation, and falsifying pay records. </p>
<p>A significant proportion of Australia’s labour force works in franchise organisations. <a href="http://www.franchise.org.au/franchising--an-introduction.html">According to the Franchise Council of Australia</a>, while franchising accounts for only 4% of businesses, this includes about 1,200 franchising brands. Among these, there are approximately 79,000 operating franchisees which together employ more than 470,000 direct employees. </p>
<p>In the “commercial marriage” of franchisor and franchisee, the franchise agreement defines the rights and obligations of both parties. The franchisor is the senior partner in this relationship, and charges the franchisee an upfront fee, an ongoing fee (such as a percentage of revenue), or a combination of the two. Given this continuing financial bond, holding franchisors, as well as franchisees responsible for wage compliance, is crucial.</p>
<h2>If employees have been underpaid</h2>
<p>Under the Fair Work Act, employees of a franchise can pursue recovery of underpaid wages through the Federal Magistrates Court or Federal Court of Australia. The Fair Work Ombudsman can also investigate claims of underpayment by franchise operators. Following findings of noncompliance, the Ombudsman can issue compliance notices, infringement notices and engage employers in enforceable undertakings to remedy infringements.</p>
<p>However, in practice for individual workers, numerous obstacles exist to recovering stolen wages. Many workers simply do not know their wage entitlements or how to identify them.</p>
<p>Also, proceedings in the Fair Work Commission <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Education_and_Employment/temporary_work_visa/Report">take time, and are costly</a>, unless a worker belongs to a union or represents him or herself.</p>
<p>Self-representation is often infeasible, particularly for workers with English as a second language. Then, documentary records, such as payslips, time sheets and rosters are often missing in action or deliberately falsified. This was the case <a href="http://www.fairwork.gov.au/ArticleDocuments/.../7-eleven-inquiry-report.docx.aspx">with those 7-Eleven franchises</a> which recorded only half the hours worked, so that workers appeared to be earning the correct wage instead of only half that amount.</p>
<p>Migrant workers and international students may face the threat of deportation. As well, pursing the claim may prove fruitless if the franchisee lacks the financial resources to reimburse the wages.</p>
<p>The Ombudsman will be responsible for enforcing the proposed legal provisions, including the ones in the government’s latest proposal, but in reality this will require a substantial increase in resources.</p>
<p>While the Ombudsman has engaged vigorously in action against a number of franchise operators for significant breaches, its investigative capacity is <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Education_and_Employment/temporary_work_visa/Report">constrained by inadequate resources</a>, a limited power to compel employer cooperation and assistance, and companies liquidating after the Ombudsman files a matter in court. </p>
<h2>The penalties and sanctions for franchises</h2>
<p>The penalties and sanctions for punishing misbehaving franchises, available under industrial law, are also limited. </p>
<p>The financial <a href="http://workplaceinfo.com.au/resources/employment-topics-a-z/penalties-breach-of-fair-work-act">weight of sanctions is low</a> - the maximum fine is A$10,800 for individuals and A$54,000 for a corporation. This is unlike in other areas of law such as occupational health and safety, migration and consumer law, where criminal penalties apply, there are no criminal penalties for recalcitrant franchises.</p>
<p>The current system in Australia with these sanctions is that punishments for transgression become increasingly severe with repeated non-compliance. But the law currently steers clear of using the highest fines and other penalties, to avoid upsetting franchises that might be doing the right thing. </p>
<p>However, this relies on most employers being ethical, following the rules, and the availability of measures sufficient to encourage compliance and deter non-compliance. The existing sanctions for employer failing to pay award wages are unlikely to be sufficient to deter wage theft among either franchisees or franchisors. </p>
<p>Even under the proposed legal protections to cover franchises, including increased powers and resources for the Ombudsman, it will remain difficult to hold franchisors accountable for wage underpayments. This is because of <a href="http://www.fairwork.gov.au/about-us/news-media-releases/newsletter/august-2016/what-is-accessorial-liability">the need to prove that</a> the franchisor had actual knowledge of the franchisee’s contravention and intentionally participated. </p>
<h2>What needs to change</h2>
<p>The extensive public shaming of some franchise operators in recent months may have encouraged a return to compliance for those acting illegally. However, for the longer term, legislative changes are required both to make it easier for individuals to recover wages and to deter franchise operators more strongly from engaging in unlawful wage practices. </p>
<p>Individual workers need stronger protections to prevent retributive actions from employers towards whistleblowers. Workers must also be better informed about their wage entitlements and employers need to know that this information is easily accessible to workers. </p>
<p>Sanctions <a href="http://www.teacho.com.au/images/TEACHO_Final_Report.pdf">in recent legislation</a> on workplace health and safety (2011), and in the heavy vehicle road transport sector (2012), provide an example to follow appropriately penalising and preventing misbehaviour in franchises. These new measures have included increased financial penalties, the disqualification of company directors from managing companies and criminal sanctions for serious and repeat offenders. </p>
<hr>
<p><em>This article has been corrected since publication to acknowledge that underpaid workers can pursue underpaid wages through certain courts.</em></p><img src="https://counter.theconversation.com/content/73445/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Louise Thornthwaite does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
The obstacles workers face in successfully pursuing their entitlements and the inadequacy of our current penalties to deter underpayments means problems with franchises will remain.
Louise Thornthwaite, Senior Lecturer, Department of Marketing and Management, Macquarie University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/70149
2016-12-13T14:03:16Z
2016-12-13T14:03:16Z
Rogue One: a new front in long battle over the Star Wars brand
<figure><img src="https://images.theconversation.com/files/149283/original/image-20161208-31352-1o52c7k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">© 2016 Lucasfilm Ltd</span></span></figcaption></figure><p>It was hoped that the release of Rogue One, the current offshoot from the <a href="https://theconversation.com/star-wars-escapist-fantasy-or-dream-of-the-future-46350">Star Wars</a> series, would cement the Star Wars franchise as being at the cutting edge of modern cinema. Promising a markedly different tone from the previous films, the production has sparked debate over how far the content of Star Wars can be pushed while still maintaining its core values.</p>
<p>Conflicts over the nature of the Star Wars brand date back to 1978, when a bizarre US television variety show was screened set in the same universe. Featuring Imperial Stormtroopers listening to Jefferson Starship and original cast members juggling high adventure with comedy skits, the <a href="http://www.imdb.com/title/tt0193524/">Star Wars Holiday Special</a> was a catastrophic collision of tones. </p>
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<p>So much so that, dismayed by the negative audience reaction, George Lucas instigated a policy of quality control eventually christened the “<a href="http://www.starwars.com/news/what-is-the-holocron">Holocron</a>”. An all-encompassing database delineating what actually constitutes “Star Wars”, the series canon was an attempt by Lucas to negotiate the many spin offs which were contradicting the filmmaker’s own grand plan for his still developing saga.</p>
<p>Media theorists <a href="https://www.youtube.com/watch?v=ZCKoLB1kUsY">Henry Jenkins</a> and Jonathan Gray cite Star Wars as an example of “spreadable media” – the series lending itself well to formats extending beyond the initial work, such as animated series or videogames. A great property to have, but the resultant “constellation of content” can be prone to instability if the centre of gravity is not fixed.</p>
<p>For example, the first Star Wars sequel novel, <a href="http://starwars.wikia.com/wiki/Splinter_of_the_Mind's_Eye">Splinter of the Mind’s Eye</a>, suggested a developing romance between Luke and Leia. And the 1979 Star Wars Annual featured Obi Wan, Darth Vader and Anakin Skywalker crash landing on a planet together. This created a melange of competing narratives so disordered that Starburst magazine, with great foresight, commented:</p>
<blockquote>
<p>It would be a sin for Star Wars to lose its credulity because no-one cared that say Darth Vader was proven to be Luke’s father on film but when unmasked in a novel he is found to be a complete stranger.</p>
</blockquote>
<h2>Learning from Marvel</h2>
<p>In 2012, following the general fan derision afforded Lucas’s own prequel trilogy, brand credulity became a priority for new Star Wars producer Kathleen Kennedy when planning the latest phase of the franchise.</p>
<p>New owner Disney had, with another brand – Marvel – successfully transitioned popular comic book properties from page to screen by placing the superhero characters within contexts from a variety of different genres. The Western trappings of <a href="http://www.imdb.com/title/tt2015381/">Guardians of the Galaxy</a>, the fish out of water aspects of <a href="http://www.imdb.com/title/tt0800369/?ref_=fn_al_tt_1">Thor</a> and the political thriller beats of <a href="http://www.imdb.com/title/tt1843866/?ref_=fn_al_tt_1">Captain America: the Winter Soldier</a> all delivered the same zippy comic teamwork and fantastical exploits which made Marvel’s name as a publisher, but within constantly changing cinematic frameworks. This allowed the audience’s experience to remain fresh.</p>
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<p>Creating a release pattern in which a main series episode such as <a href="https://theconversation.com/the-force-awakens-a-sugar-high-but-not-a-great-movie-49543">The Force Awakens</a> alternated with an “anthology” work, the new approach to Star Wars mirrors the Marvel method by creating multiple timelines and genres simultaneously across the franchise. </p>
<h2>Going rogue</h2>
<p>Rogue One – detailing the rebels’ attempts to steal the Death Star plans – appeared at first to correlate with this pattern. Rogue One was pitched by Godzilla director Gareth Edwards as a war film set within the Star Wars universe, and inspired by Gillo Pontecorvo’s coruscating 1966 documentary style <a href="http://www.imdb.com/title/tt0058946/">The Battle of Algiers</a>. The idea was for the series to explore a more serious theme and engage with the wider franchise in a sophisticated manner.</p>
<p>It <a href="http://www.avclub.com/article/its-rumor-time-rogue-one-might-be-trouble-237549">has been reported</a> that Disney’s top brass became troubled by the notion of this darker Star Wars. Although it is hard to ascertain at this stage how accurate the reports are (<a href="http://www.independent.co.uk/arts-entertainment/films/news/star-wars-rogue-one-reshoots-40-of-the-film-being-redone-a7063076.html">some suggest 40%</a> of the film’s content was re-shot at the eleventh hour by a different director) the controversy suggests a sea change in how Lucasfilm sees the anthology films. No longer opportunities for experimentation and world building, the works now seem to be zero risk brand ambassadors.</p>
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<p>To a certain extent this should come as no surprise. A mainstream franchise entry needs to be tailored for disparate tastes, carrying the PG13/12A certificate and appealing to small children as well as adults. But curtailing innovation is also a dangerous move. The Star Wars franchise should also be attempting to prevent box office fatigue by embracing diverse directorial viewpoints and original storylines. Otherwise, Star Wars may face the brand implosion <a href="http://www.vox.com/2016/8/10/12389740/suicide-squad-dc-movie-universe-problems">currently threatening the Warner Bros. franchise</a> of DC comic book characters.</p>
<p>Due to the large financial risk involved in producing a one-off theatrical release, within the next ten to 15 years all large scale mainstream films may be part of an extended constellation of content. And as demonstrated by the estate of John Le Carré, this is not limited to solely blockbuster fare. Recent adaptations of <a href="http://www.imdb.com/title/tt1399664/">The Night Manager</a>, <a href="http://www.imdb.com/title/tt1340800/?ref_=fn_al_tt_1">Tinker Tailor Soldier Spy</a> and <a href="https://theconversation.com/our-kind-of-traitor-financial-crime-experts-review-le-carre-adaptation-58914">Our Kind of Traitor</a> all portray the same vision of Le Carré’s “circus” across multiple media.</p>
<p>We are at a unique point in the history of cinema, one which challenges the notion of what actually constitutes a “film”. Although early reviews have been <a href="http://movieweb.com/star-wars-rogue-one-early-reviews-positive/">positive</a> if, on December 15, Lucasfilm does not hold true to the initial promise of Rogue One – to devise a new approach to Star Wars – the company could soon find its work as outmoded as the Star Wars Holiday Special.</p><img src="https://counter.theconversation.com/content/70149/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Ross does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Star Wars offshoot Rogue One was originally intended to be darker – but it looks like it might be rather vanilla.
Andrew Ross, Graduate Tutor and Lecturer in Film, Northumbria University, Newcastle
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/68333
2016-11-13T19:06:15Z
2016-11-13T19:06:15Z
Franchisees don’t do their homework and are too optimistic about risks: research
<p>Franchisees are unrealistically optimistic about risks of setting up their business, even after those risks have been disclosed to them, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2805844">our research shows</a>. </p>
<p>We tested this unrealistic optimism by surveying 205 current US franchisees from 26 brands. We chose the US because there is publicly accessible data about the identity of franchisees there (in Australia this does not exist). It’s this information US franchisors are required to provide that should alert intending franchisees to the risks of their agreement being terminated. </p>
<p>We asked individual US franchisees to answer the degree to which they are more or less likely to experience a certain risk than the “average” person operating a franchise in the same brand. This focused on the risk of the franchisor terminating their franchise agreement in two scenarios:</p>
<ol>
<li>Solely so the franchisor could sell their business to a new franchisee for higher franchise fees.</li>
<li>So the franchisor could operate the successful unit themselves.</li>
</ol>
<p>Our data revealed that for both scenarios, more than 80% of franchisees believed they weren’t likely to be affected, which is concerning considering the serious consequences to a franchisee of either event occurring. </p>
<p>Policy makers assume that the presence of disclosure laws mean franchisees will do their homework before committing to a particular franchise. Our research shows that these assumptions are wrong.</p>
<h2>The risks of early termination of a franchise agreement</h2>
<p>A franchise is a complex, expensive, purchase that will commit the franchisor and franchisee to a business relationship with each other for several years. The franchsior has usually sold many franchises, and signed many franchise agreements but buying a franchise is something a franchisee may do only once in their life. </p>
<p>To help franchisees avoid making such a significant decision on impulse, the law requires that franchisors provide a disclosure document replete with information. Although the contents vary from country to country, the disclosure requirement is widespread. </p>
<p>Disclosure laws are based on an assumption that franchisees are rational. They will read and understand the disclosed material, take professional advice on anything they do not understand and will not commit until they understand the risks and satisfy themselves as to how they will manage them. </p>
<p>US franchisees are alerted to the possibility that their franchisor might terminate their agreement in one of four ways. The franchisor has to summarise how it could terminate the agreement in a <a href="https://www.law.cornell.edu/cfr/text/16/436.5">disclosure document</a> by law. </p>
<p>This includes stating whether the franchisor has the right to terminate “at will”; meaning that the franchisor is not required to give the franchisee any opportunity to remedy defaults. The franchisor must disclose the annual number of franchisees terminated to date without compensation and must include the names and contact details of former franchisees whose agreements have been terminated by the franchisor. </p>
<p>Surely, equipped with all of this information, a prospective franchisee would realise that they too, could find their newly minted franchise agreement opportunistically terminated by their franchisor. Our research shows that most do not. </p>
<h2>Optimism of franchisees</h2>
<p>Franchisors do sometimes terminate franchisees’ agreements “at will”. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2777813">A statistical analysis by Emerson</a> of 342 US cases involving a franchise agreement terminated by the franchisor, shows in 49 cases the cause of termination is listed as being “at will”. Of these 49 cases, only 11 found in favour of the franchisee. </p>
<p>These results indicate that there is a real risk faced by franchisees that a franchisor will opportunistically terminate the franchise agreement. This information about US franchisees makes us wonder about Australian franchisees. </p>
<p>Franchisors in Australia <a href="https://www.legislation.gov.au/Details/F2014L01472">provide pre-contract disclosure</a> prescribed under the Competition and Consumer (Industry Codes—Franchising) Regulation of 2014. This includes information such as the identity and business experience of the franchisor. </p>
<p>It also discloses any litigation the franchisor is involved in, who the franchisor pays to introduce franchisees to the system, the number and business address details of up to 50 existing franchisees and key details of relevant master franchise agreements. It explains the status of intellectual property like registered trademarks that the franchisee will be allowed to use. </p>
<p>Under headings related to supply of goods or services to a franchisee, there is financial and logistical information that covers aspects like online sales. The franchsior’s policy and practice about sites or territories is explained. </p>
<p>Financial issues are disclosed, as are arrangements that will apply at the end of the term. The franchisor must provide a signed statement that it is solvent, although research shows that a small number of franchisors sign the disclosure statement confirming they are <a href="http://www.tandfonline.com/doi/full/10.1080/1046669X.2015.1113487">solvent</a> when they are not. </p>
<p>All this information makes franchisees think the disclosure documents tell them all they need to. But, because there is no public database of franchise disclosure in Australia, franchisees can not compare their chosen franchisor with other brands. </p>
<p>And, as our US-based research shows, even a detailed pre-contract disclosure document that clearly outlines real risks may not convince franchisees that franchising can be risky.</p><img src="https://counter.theconversation.com/content/68333/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jenny Buchan receives funding from CPA Australia. She is a member of the Australian Competition and Consumer Commission's Small Business and Franchising Consultative Committee.</span></em></p>
The law assumes franchisees do their financial and legal homework when it comes to signing up to a chain, but research shows franchisees are often overconfident and ignorant of the risks.
Jenny Buchan, Associate Professor in business law, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/48970
2015-10-28T19:29:54Z
2015-10-28T19:29:54Z
Franchising – all care and no responsibility
<figure><img src="https://images.theconversation.com/files/99134/original/image-20151021-15426-1vqwa80.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Who's watching?</span> <span class="attribution"><span class="source">Richy!/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>When a number of senior managers of the <a href="http://www.abc.net.au/4corners/stories/2015/08/30/4301164.htm">beleaguered</a> 7-Eleven franchise chain appeared before a Senate committee last month, they blamed the Franchising Code of Conduct for their apparent lack of action in response to the unlawful behaviour of franchisee operators. </p>
<p>According to Natalie Dalbo, the former General Manager of Operations of 7-Eleven Stores Pty Ltd, the Franchising Code would make it <a href="http://www.smh.com.au/business/workplace-relations/7eleven-begins-terminating-franchises-for-underpayment-20151009-gk5g45.html">“nearly impossible”</a> for head office to terminate the relevant franchise agreement, even where franchisees had knowingly underpaid workers and deliberately falsified employment records. </p>
<p>While these assertions are somewhat debatable, it’s generally true that, under the Franchising Code, head franchisors may only terminate the franchise agreement without notice in so-called “special circumstances”. </p>
<p>Such circumstances do not currently include contraventions of workplace laws. Indeed, Professor Allan Fels – the former head of the Australian Competition and Consumer Commission (ACCC) and the chair of the independent panel established by 7-Eleven to process claims of underpayment – has argued that there may be a need to <a href="http://www.smh.com.au/business/workplace-relations/7eleven-in-accc-sights-20150925-gjuwfz.html">tighten up provisions</a> of the Franchising Code to better address the types of illegal behaviour identified in the 7-Eleven case. </p>
<h2>How it works now</h2>
<p>Under the typical franchise arrangement, the head franchisor – the company which holds the brand name and sits at the apex of the franchise structure – is not normally responsible for employment-related entitlements and liabilities. </p>
<p>While the franchisor and franchisee share a common brand, it is generally the independent franchisee business which directly employs individual store workers. </p>
<p>The contractual disconnect between the head franchisor and the employees working within the franchise network is often perceived as a significant advantage of the dominant franchising model. This model enables the head franchisor to expand the franchise business and grow the brand while remaining largely insulated from legal risks and liabilities incurred by its franchisees under workplace laws.</p>
<p>Another important aspect of the hierarchical franchising model is that the head franchisor continues to assume a relatively commanding position vis-à-vis their franchisees. The strategic position of head franchisors means they often exercise varying degrees of formal and informal control over the business practices of their franchisees. </p>
<p>The federal Competition and Consumer Act recognises that head franchisors are in a uniquely powerful market position. In a bid to curb potential abuses of this power, the dealings between franchisors and franchisees are subject to the Franchising Code -– a mandatory industry code administered by the ACCC. As noted above, the Franchising Code restricts the circumstances in which a franchise agreement may be terminated. It also requires franchisors to deal with franchisees in good faith. More generally, the franchisor is prohibited from engaging in unconscionable conduct towards its franchisees under the Australian Consumer Law.</p>
<p>But this is where things start to get complicated: where the worlds of workplace and competition regulation begin to collide. On the one hand, a clear way to protect workers from exploitation is to allow head franchisors to terminate the franchise agreement where serious contraventions of workplace laws have occurred or are likely. Indeed, we have recently seen the head office of 7-Eleven <a href="http://www.smh.com.au/business/workplace-relations/7eleven-begins-terminating-franchises-for-underpayment-20151009-gk5g45.html">do just that</a>, albeit on a somewhat belated basis. These types of commercial sanctions are often far more powerful than legal penalties in terms of driving long-term behavioural change among potentially wayward franchisees. </p>
<p>On the other hand, and from a competition perspective, it is critical to ensure that head franchisors do not wield their termination powers unfairly - particularly where it is the franchisor’s business model which may have contributed to the franchisees’ concerning compliance behaviour in the first place. </p>
<h2>How can it work better?</h2>
<p>Strengthening the termination rights of franchisors by amending the Franchising Code is one way to ensure that franchisors can promptly halt franchisee misconduct and prevent further worker harm. But with greater power must come greater responsibility. Indeed, another, more controversial way to address some of the issues outlined above is to make head franchisors <a href="http://www.smh.com.au/business/workplace-relations/7eleven-scandal-greens-introduce-franchise-wages-bill-20151011-gk6mdr.html">more accountable</a> for workplace contraventions that take place on their watch. </p>
<p>But rather than simply absolving the legal responsibility of franchisees in favour of franchisors, we need to ensure any extension of liability has the effect of changing the <a href="https://www.dol.gov/whd/resources/strategicEnforcement.pdf">“compliance calculus”</a> of all entities throughout the franchise network. In other words, both franchisors and franchisees need to believe that it is in their respective commercial interests to comply with employment laws and work together to put positive and proactive measures in place to achieve this. </p>
<p>Preventative measures – such as more rigorous monitoring of the workplace practices of franchisees and greater employment-related support and assistance for franchisees and workers – may serve to ensure businesses in the franchise network not only survive, but thrive. And perhaps more importantly, the workplace rights of franchise workers are respected and protected – regardless of which entity actually employs them.</p>
<p><em>This is part of a series on franchising. Read more <a href="https://theconversation.com/au/topics/franchising">here</a>.</em></p><img src="https://counter.theconversation.com/content/48970/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tess Hardy has previously received funding from the Australian Research Council (LP099990298) to conduct research on the enforcement of employment standards. </span></em></p>
Franchisors exercise a lot of control over their franchisees, but it’s a different story when it comes to store workers.
Tess Hardy, Law Lecturer, The University of Melbourne
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/49297
2015-10-27T19:19:40Z
2015-10-27T19:19:40Z
It really pays for franchisees to do their due diligence – here’s how
<blockquote>
<p>We love the brand and we are willing to invest our life savings in it. After all, this is a well known franchise with hundreds of stores so it must be good. The franchisor says it is offering a proven business. It has given us a disclosure document containing many pages of information and we have tried to read the franchise agreement. There is also a lease. To be honest, we can’t really understand all the legal jargon. We just want to get started on running the business. Besides, won’t the <a href="https://www.comlaw.gov.au/Details/F2014L01472">Franchising Code of Conduct</a> protect us? </p>
</blockquote>
<h2>Why the need for due diligence?</h2>
<p>These are the views of many naive investors. Potential franchisees need to know what they are committing to before they decide to buy a franchise. This homework is known as due diligence. It is the process of ensuring that investors get what they think they are buying - and that what they buy is actually worth what they pay. You wouldn’t buy a car before taking it for a test drive, having it checked by a mechanic and making sure there was no money owing on it. </p>
<p>Franchisees should take a franchise purchase even more seriously, for two reasons. First, a franchised business is likely to cost much more than a car. Second, unlike when you buy a car, there are no consumer warranties when you buy a franchise. Franchisees must take responsibility for their own investment decisions. </p>
<p>The Disclosure Document will tell a prospective franchisee about who the franchisor is and will provide copious information about the actual business the franchisee will be running. Most franchisors operate within a group of companies. The Disclosure Document will not provide information about most others in the group. Who owns them? Have the directors and all of the companies in the group got a good credit rating? Do they own the companies that the franchisee will have to rely on? Might this influence them?</p>
<p>It’s OK to rely on friends and family to tell you your new haircut looks great, but buying a franchise is a big step. When you are considering such an expensive commitment it is time to visit a lawyer and an accountant who really understand franchising. As franchisees and franchisors have very different interests you’ll need to make sure your advisers have experience in advising franchisees. </p>
<h2>Time spent in reconnaissance is seldom wasted</h2>
<p>You can do a lot of homework yourself by googling the brand, the industry (to study trends), and the franchisor themselves. You should check out regulators’ websites. You can find out from the <a href="http://registers.accc.gov.au/content/index.phtml/itemId/3673">ACCC’s</a> site whether the franchisor has the regulator’s permission to require you to buy from specific suppliers. </p>
<p>The ACCC investigates breaches of the Franchising Code of Conduct and <a href="https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct/franchising-investigations#breaches-of-the-franchising-code">publishes</a> information about these investigations. The ACCC does not investigate breaches of franchise agreements so you could search on <a href="http://www.austlii.edu.au/">austlii</a> to find out whether the franchisor has had any court battles. Disputes that are still in progress may not appear in austlii so it pays to also dig around in blogs or online media. And, remember that most Australian franchise disputes are resolved through confidential mediation so you will not find anything published about them.</p>
<p>You can find out a lot about the trade marks and patents the franchisor will require you to use by searching <a href="http://www.ipaustralia.gov.au/">IPAustralia</a>.</p>
<p>By entering the name of the franchisor and each of its directors on the <a href="http://asic.gov.au/">ASIC</a> website you can find out about their corporate activities. Even though it costs a bit you should also do a credit check on the franchisor. A credit check will give you a very good picture of your franchisor’s and their directors’ attitude to paying bills on time.</p>
<p>There are blogs such as <a href="http://www.bluemaumau.org">bluemaumau</a> where you can ask questions and, of course, you should visit existing franchisees. Don’t just call them - actually visit them at work to see what the vibe is in their business. Remember an existing franchisee might be bound not to say anything about a dispute they have had with the franchisor. They might have signed a confidentiality agreement at the end of a mediation. Don’t just passively accept everything you are told. </p>
<p>You can educate yourself by visiting the <a href="http://www.accc.gov.au/search/accc-funnelback/franchise">ACCC’s</a> site and searching under ‘franchise’. The ACCC has funded an online pre-entry franchise <a href="https://www.franchise.edu.au/home/education/for-franchisees/pre-entry-franchise-education#Register_now">education</a> program run by Griffith University. This will help you decide whether franchising is for you.</p>
<p>Don’t rely totally on any one source of information. Remember, there is always going to be another franchise opportunity so if you are not completely happy, do not rush into buying. Franchisors want satisfied and successful franchisees just as much as you want to be happy and run a profitable franchise. </p>
<h2>Demonstrate dispassionate interest</h2>
<p><a href="http://www.pc.gov.au/__data/assets/pdf_file/0020/191117/subdr071-business-attachment.pdf">Research</a> has revealed that potential franchisees are often complacent about conducting proper due diligence. Many do not devote enough time or are unwilling to pay for expert advice. Their emotional attachment to the brand often overrides objective information. To undertake effective due diligence a prospective franchisee needs to keep an open mind and to seek out and dispassionately question all information.</p>
<p><em>This is part of a series on franchising. Read more <a href="https://theconversation.com/au/topics/franchising">here</a>.</em></p><img src="https://counter.theconversation.com/content/49297/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lorelle Frazer receives funding from CPA Australia. </span></em></p><p class="fine-print"><em><span>Jenny Buchan receives funding from CPA Australia.</span></em></p>
Potential franchisees need to know what they are committing to before they decide to buy a franchise.
Lorelle Frazer, Professor and Director, Franchising Centre, Griffith University
Jenny Buchan, Associate Professor in business law, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/47197
2015-09-09T21:23:05Z
2015-09-09T21:23:05Z
7-Eleven fallout: what are the moral obligations on franchisors?
<p>Franchisors have black and white legal requirements to their franchisees - but do they have a wider moral obligation to them and their staff? </p>
<p><a href="http://www.abc.net.au/4corners/stories/2015/08/30/4301164.htm">Revelations by Fairfax Media and the ABC’s Four Corners program</a> of 7-Eleven franchisees manipulating employment records and underpaying staff are now being investigated by the Fair Work Ombudsman. The 7-Eleven franchisor has also announced its own independent review headed by former ACCC chairman Allen Fels, to examine the claims, but <a href="preparations%20for%20a%20class%20action">further media reports</a> have detailed “town hall style” meetings of franchisees and plans of a potential class action.</p>
<p>This case has put the franchising model under the public spotlight, particularly the perceived unfair financial pressures placed on franchisees and, in turn, their staff, to ensure profitable and viable businesses.</p>
<p>Australia has one of the most regulated franchising sectors in the world. The mandatory Franchising Code of Conduct aims to provide a level playing field among franchisees and franchisors. When disputes occur, the Office of the Franchising Mediation Advisor may assist with dispute resolution. But beyond this legal framework how does a franchisor’s moral compass guide their behaviour? </p>
<p>The common defence of franchisors facing such criticism is that the franchisees carry their brand but are independent businesses, and therefore the franchisor is not to blame. Franchisors can claim that they were at all times acting within the <a href="https://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct">Franchising Code of Conduct</a> and in line with their Franchise Agreements and disclosures. How franchisees have acted in their role as businesses and employers is really a matter for them.</p>
<p>While this is true to the letter of the law, will it be enough when a brand is in crisis? Are there wider moral obligations incumbent upon franchisors? Should they go beyond the minimum legal requirements to show leadership in setting the direction and culture for those who are now ambassadors for their brand?</p>
<p>Many franchisors do take this role very seriously and while providing “above and beyond” assistance to franchisees may not be a legal obligation, it does make good business sense. These franchisors pro-actively support all aspects of their franchisees’ operations, not just the core components of their “franchise system” but also the wide range of associated business tasks that a franchisee must manage. </p>
<p>Franchise agreements are, by necessity, “incomplete” contracts to allow maximum flexibility in a dynamic business environment. Whilst franchise agreements specify the legal obligations between franchisors and franchisees and their staff of minimum workplace terms and conditions required under the Fair Work Act, the “big picture” moral obligations are harder to define and measure. But this does not mean that moral responsibility is any less important or integral to long-term sustainable success in franchising.</p>
<p>When things go wrong at the franchisee level, it is easy for the franchisor to say that legally “it’s not my problem”. But it IS most definitely their problem in terms of public perception of their business and brand, and also on franchisee and staff recruitment and retention.</p>
<p>By continually monitoring, encouraging and supporting franchisees, from start-up to exit, franchisors are investing in the future health and sustainability of their brand, which is their business equity. By promoting and achieving best practice at every level, they are leading with strength, integrity and transparency and creating the governance standards to ensure a robust and sustainable franchise brand. After all, franchisees place a great deal of trust in their franchisor, sometimes investing their life savings in the franchise, and so they deserve the franchisor’s respect.</p>
<p>This commitment to ongoing leadership and education by franchisors is even more crucial in a franchise network where a large number of franchisees and their staff may come from culturally diverse backgrounds and may not be familiar with the concept of statutorily legislated minimum wages and conditions and structured workplace agreements.</p>
<p>The question of the moral obligation exhibited by franchisors stems back to how they view their corporate responsibility, and if the core values of their business extends beyond profits to care for the workplace and personal well-being of everyone involved with the organisation.</p>
<p>The Fair Work Ombudsman has said it expects franchisors to take more responsibility and pay greater attention to workplace compliance by their franchisees.</p>
<p>It is also worth noting that the Fair Work Ombudsman encourages Proactive Compliance Deeds for businesses to better understand and comply with workplace laws, and to avoid more adversarial measures such as litigation. There is no legal requirement to undertake these deeds, but businesses benefit from improved training, systems, communication, self-auditing and self-resolution and set the standards of best practice for their franchisees and their staff to observe and follow.</p>
<p>A number of franchise groups - including Retail Zoo, Dominos, McDonald’s and Red Rooster - have signed up to this program, showing there is scope in franchising to go beyond what is legally required by demonstrating a moral obligation to promoting ethical corporate behaviour and being an employer of choice.</p><img src="https://counter.theconversation.com/content/47197/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lorelle Frazer receives funding from CPA Australia. </span></em></p>
In the wake of disturbing allegations of exploitation and underpayment of 7-Eleven workers by franchisee owners, what moral obligations does the parent franchisor have?
Lorelle Frazer, Professor and Director, Franchising Centre, Griffith University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/46948
2015-09-03T20:06:25Z
2015-09-03T20:06:25Z
Why franchises care more about their coffee than their people
<p>The systematic exploitation and non-compliance with legal obligations highlighted by this week’s <a href="http://www.abc.net.au/4corners/stories/2015/08/30/4301164.htm">Four Corners program</a> is not typical across all franchises. </p>
<p>While a <a href="http://www.fairwork.gov.au/about-us/news-and-media-releases/2015-media-releases/september-2015/20150901-psp-7-eleven-eu-presser">recent enforcement campaign</a> by the Fair Work Ombudsman suggested 60% of 7-Eleven outlets engaged in non-compliant practices such as staff underpayment, its campaigns in other heavily franchised industries such as hospitality typically report non-compliance by around <a href="http://www.fairwork.gov.au/ArticleDocuments/714/National-hospitality-campaign-report.pdf.aspx">30%</a> of employers. </p>
<p>Still, even that is a worrying level of non-compliance. There is a structural aspect of the franchise model that encourages this.</p>
<p>The 7-Eleven <a href="http://www.abc.net.au/news/2015-08-31/7-eleven-business-model-ripping-off-workers-allan-fels/6733658">business model</a> in Australia requires 57% of gross profit to be returned to the franchisor head office. This week’s report argued this makes doing business legally <a href="http://www.abc.net.au/news/2015-08-31/7-eleven-business-model-ripping-off-workers-allan-fels/6733658">almost impossible</a>. </p>
<p>International students bear the consequences. Many are trapped by practices such as the “<a href="http://www.theage.com.au/business/workplace-relations/7eleven-investigation-exposes-shocking-exploitation-of-convenience-store-workers-20150828-gja276.html">half-pay scam</a>” where employees are paid for only half the number of hours worked each week (in effect, working for only half the hourly award rate), under threat of having their visa cancelled if they disclose.</p>
<h2>A matter of accountability</h2>
<p>We <a href="https://www.researchgate.net/publication/281440973_Kellner_A_Peetz_D_Townsend_K__Wilkinson_A_We_are_very_focused_on_the_muffins_Regulation_of_and_compliance_with_industrial_relations_in_franchises_Journal_of_Industrial_Relations._2015._DOI_10.11770022185615598186">recently studied</a> the limited existing research on management of industrial relations (IR) in franchises. We found that diverse accountability of franchisors (head offices) and franchisees (outlets) explained differences between franchisor control over products and their control over labour processes. </p>
<p>On one hand, the franchisor is accountable to the customer for ensuring quality of the product. If the customer is unhappy with the product (say, a coffee) from any individual outlet, they may stop buying from that or any other outlet in that franchise. So typically, franchisors tightly direct and audit product-related processes, such as those applying to suppliers and health regulations. </p>
<p>On the other hand, the franchisor is not accountable to outlet employees. It’s the franchisee who is accountable for ensuring compliance with legal obligations. So the outlet owners, not head office, are investigated and fined for indiscretions. </p>
<p>This suits the franchisors quite well. They can mix the benefits of large businesses’ access to markets, marketing, pricing and control, with the low labour costs (not always legitimately) of small businesses. If breaches are found, they can say “<a href="http://twitdoc.com/view.asp?id=219088&sid=4P1S&ext=PDF&lcl=7Eleven-Four-Corners-statement.pdf&usr=4corners&doc=277344189&key=key-u38Qo0x31DnbaWUDAbEZ">it is extremely disappointing that franchisees have chosen to not meet their employer obligations</a>”. It provides <a href="https://en.wikipedia.org/wiki/Plausible_deniability">plausible deniability</a>.</p>
<p>This is not to deny that franchisors often support franchisees. Some audit behaviour, provide seminars and workshops, develop wage determination tools and respond to queries from franchisees and their employees. But their involvement varies, partly because franchisors may fear misinformation about pay or penalty rates could shift liability onto themselves. </p>
<h2>Who doesn’t comply with their obligations?</h2>
<p>Generally, we know that small businesses are more likely than large businesses to breach labour standards, pay lower wages and to have no human resource management or union presence. </p>
<p>While most franchise outlets can be classified as a small business, they do not operate independently. They are influenced and controlled by a larger head office organisation. </p>
<p>A <a href="http://www.russellsage.org/sites/all/files/Weil.Final%20Report%202012.pdf">US report by David Weil</a> conducted from 2012 suggested franchised businesses had better industrial relations compliance rates than comparable independent small businesses. Yes, support from franchisors makes a difference.</p>
<p>While Australia doesn’t have research of the same standard, a <a href="http://www.fairwork.gov.au/ArticleDocuments/714/sa-fast-food-report-2010.pdf.aspx">2010 report</a> by the Fair Work Ombudsman found employers that received industrial relations support from their franchisor were more likely to abide by the law than other employers. Large and small franchises offered different levels of support. As franchises mature, franchisor control over key processes in outlets tends to increase. But this doesn’t always extend to IR.</p>
<h2>Franchisor involvement</h2>
<p>Just as large, well-established organisations normally show high franchisor control, so did 7-Eleven. It reportedly even centrally maintained the temperature of individual outlets. The company’s <a href="http://twitdoc.com/view.asp?id=219088&sid=4P1S&ext=PDF&lcl=7Eleven-Four-Corners-statement.pdf&usr=4corners&doc=277344189&key=key-u38Qo0x31DnbaWUDAbEZ">statement of August 13</a> said it conducted audits of outlets. However, the high rates of franchisee non-compliance reported by the Fair Work Ombudsman raises doubts about how deeply these audits dug into employment practices. </p>
<p>The 7-Eleven statement said if employees contacted head office with concerns of non-compliance, they were advised to speak to their employer or the Fair Work Ombudsman. For vulnerable international students, caught in the trap of working more than their maximum allowable hours but not being adequately paid for them, that’s not very helpful. </p>
<p>The scale of the breaches, a recording of a franchise agent saying “<a href="http://www.abc.net.au/4corners/stories/2015/08/30/4301164.htm">nobody pays their staff full wage, man</a>”, and revelations from within, all make plausible deniability implausible. </p>
<p>The response by 7-Eleven to the unfolding saga among franchisees is also unlikely to be helpful for the company’s reputation, which could well suffer lasting damage. </p>
<p>Other franchisors are likely to ask themselves, “are we vulnerable, too?” A business model based on diverse accountabilities and plausible deniability may not be sustainable. This is particularly so if the firms do not give the same attention to ensuring compliance with awards and legal agreements as they give to making sure the coffee machines and muffins are up to scratch.</p><img src="https://counter.theconversation.com/content/46948/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adrian Wilkinson receives funding from the ARC </span></em></p><p class="fine-print"><em><span>As a university employee, David Peetz has undertaken research over many years with occasional financial support from the Australian Research Council, governments or government organisations organisations from both sides of politics in Australia and overseas, employers and unions for specific projects. Those funded projects do not concern the subject matter of this article.</span></em></p><p class="fine-print"><em><span>Keith Townsend receives funding from the Australian Reseach Council and various state government departments throughout Australia. </span></em></p><p class="fine-print"><em><span>Ashlea Kellner does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>
Employers that receive industrial relations support from their franchisor are more likely to abide by the law than other employers.
Ashlea Kellner, Research Fellow, Griffith University
Adrian Wilkinson, Professor of Employment Relations, Griffith University
David Peetz, Professor of Employment Relations, Griffith University
Keith Townsend, Associate Professor, Centre for Work, Organisation and Wellbeing, Griffith University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/47033
2015-09-03T05:54:26Z
2015-09-03T05:54:26Z
If there’s so little profit, why do people buy 7-Eleven franchises?
<figure><img src="https://images.theconversation.com/files/93735/original/image-20150903-24496-1x1y2w6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Falling for the halo effect?</span> <span class="attribution"><span class="source">Mike Mozart/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Convenience store chain 7-Eleven has been in Australia <a href="http://www.7eleven.com.au/about-us">since 1977</a>. It has twice been Australia’s “Franchisor of the Year”. If the franchisees really can’t make a buck <a href="http://www.abc.net.au/news/2015-08-31/7-eleven-business-model-ripping-off-workers-allan-fels/6733658">without underpaying</a> their employees why do they buy a 7-Eleven franchise?</p>
<p>Franchises are regulated under the Competition and Consumer Act, and the mandatory Franchising Code of Conduct. The Code has undergone multiple reviews since it first appeared as a voluntary code of practice in 1993. Regulators still struggle to achieve a balance between encouraging entrepreneurial franchisors and providing some safeguards for franchisees. </p>
<p>Franchisees cannot sign a franchise agreement until they have had the franchisor’s disclosure document for 14 days. After signing, they have a 7-day cooling off period during which they can terminate the agreement and walk away. This adds up to a 21-day window for franchisees to conduct due diligence.</p>
<p>Did the prospective franchisees do due diligence before they signed their 10-year licences to operate a 7-Eleven store? If so, why didn’t they figure out within the 21 days that joining the system could require them to be complicit in wage fraud? Why not choose another brand?</p>
<h2>Due diligence</h2>
<p>A <a href="http://www.pc.gov.au/__data/assets/pdf_file/0020/191117/subdr071-business-attachment.pdf">pilot study</a> comparing franchisees with independent small businesses found that most franchisees do some pre-purchase due diligence. </p>
<p>The disclosure document contains current information about the franchisor, the system and the specific franchised business. Because it is provided to comply with the law, it can give franchisees a false sense of security. In reality, it is only a starting point.</p>
<p>Conducting due diligence is not as easy as it sounds. Franchisees need to ignore the <a href="https://en.wikipedia.org/wiki/Halo_effect">halo effect</a> of a well-known brand, like 7-Eleven and be objective. Family, friends and the internet can only take due diligence so far. Advice should come from lawyers and accountants who understand franchising very well and access alternative sources of information to provide context for what is in the disclosure document, both of which require money and time.</p>
<p>Finding specialist advisers is not easy, especially if you live in regional Australia. All franchise systems are a complex mix of relational contracts, absence of corporate governance, and massive asymmetry. Every aspect of every franchisor’s business can be structured slightly differently.</p>
<p>Having read a disclosure document a franchisee should visit the workplace of current franchisees. Over half in our pilot study did consult existing franchisees, but these franchisees may not tell the truth. They may fear retribution from the franchisor, may be trying to protect the value of their own business by not admitting how bad it is, or may be “gagged” by a confidentiality agreement following a mediated settlement.</p>
<h2>Limitations of due diligence</h2>
<p>Lawyers, accountants, and information from ASIC cost money. No franchise documents need to be filed in Australia so advisers can’t contextualise, and even if franchisees don’t like the proposed agreement, most franchisors won’t amend it. </p>
<p>Very few franchisees (1/30 in our pilot) do due diligence on the franchisor. Sometimes they can’t learn more than the franchisor wants them to know. For example, the company behind 7-Eleven in Australia is a large proprietary company that has been exempt from lodging accounts with ASIC since 1994. </p>
<p>Many franchisors operate through private trusts. Where a business is operated through a trust it is virtually impossible to research who the true owner is. If you don’t know that then it is hard to get information beyond what is in the disclosure document.</p>
<p>Court cases can be a source of information but franchise disputes are mainly resolved by mediation. This is a private process so it is impossible to find out about disputes in a system, if there are any. Franchisors can change the system at will, so even if a franchisee does thorough due diligence this might not help them during the relationship. </p>
<h2>A skewed power relationship</h2>
<p>Franchisors and franchisees sign a relational contract – that is a contract that should provide sufficient flexibility for the relationship to evolve as the needs of the business alter, but always respecting the underlying business relationship.</p>
<p>The franchise is created by the franchisor, for its benefit. Franchisors can outsource risk and responsibility to franchisees while retaining the rewards. All the <strong>legal power</strong> in the relationship is held by the franchisor. The franchisor drafts the agreement, sets the tone of the relationship, approves suppliers, and can change the operations manual. Even the Code (<a href="https://www.comlaw.gov.au/Details/F2014L01472/Html/Text#_Toc401585913">Division 5</a>) favours franchisors by giving them rights to terminate that are not mirrored for franchisees. If a franchisor commits a crime, fails to pay franchisees money owed, goes broke, risks all on a doomed expansion, franchisees have no right to terminate the relationship.</p>
<p>The <strong>financial power</strong> is held by the franchisor. Franchisees are likely to have invested every last cent into the business. The sunk costs can only be recovered if the franchisee manages to sell the business. </p>
<p>Franchisors also hold a lot of <strong>psychological power</strong>. From the moment a prospective franchisee falls in love with the franchisor’s brand it is difficult to dissuade them from proceeding.</p>
<p>Franchisors hold all of the information about franchisees’ businesses so can see each franchisee in context of the whole system. This absence of context disadvantages franchisees in all franchisor-franchisee negotiations.
Every aspect of a franchise relationship is profoundly asymmetrical. It can work superbly when a franchisor and its franchisees share common motivations, otherwise it can be a nightmare.</p>
<p>Franchisees buy into 7-Eleven because franchising offers standing in a community, work and the opportunity to hire family members. Unfortunately in many cases they buy in because they were never able to access information that would alert them to any flaws in the system.</p><img src="https://counter.theconversation.com/content/47033/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jenny Buchan receives funding from CPA Australia.</span></em></p>
Given franchisors often hold all the legal, financial and psychological power, it’s little wonder franchisees get burnt.
Jenny Buchan, Associate Professor in business law, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/34656
2014-11-25T19:22:41Z
2014-11-25T19:22:41Z
Pie Face collapse a lesson in biting off more than you can chew
<figure><img src="https://images.theconversation.com/files/65415/original/image-20141125-8666-9cu9e1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">One pie too many?</span> <span class="attribution"><span class="source">hey skinny/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span></figcaption></figure><p>Tolstoy’s opening line in Anna Karenina was: “Happy families are all alike; every unhappy family is unhappy in its own way.” The same can be said of most businesses – the recipe for success is simple, but there are an unlimited number of ways to stuff things up.</p>
<p>Pie Face, the Australian fast-food chain, was notable for the quizzical, yet unfailingly jolly, face drawings on its pies. By most reports, its products were good. This week, to the chagrin of its loyal customers and investors, the firm has <a href="http://www.smh.com.au/business/retail/pie-face-goes-into-administration-20141124-11suzv.html">appointed administrators</a>. Most likely, the smiling pies are no more.</p>
<p>The collapse of the Australian chain comes at the end of a difficult couple of years for the franchise. In 2013, a trio of franchisees <a href="http://www.crikey.com.au/2013/01/08/slap-in-the-pie-face-tough-market-separates-men-from-boys/">launched legal action</a> against the parent for misleading representations about potential sales and profitability. Last month the majority of Pie Face’s New York stores <a href="http://www.smh.com.au/business/retail/pie-face-pulls-the-shutters-in-new-york--report-20141017-117utp.html">closed without warning</a>.</p>
<p>Pie Face’s plans for global expansion are thus in serious doubt. Its ebullient founders, Wayne Homschek and Betty Fong, are seeking to <a href="http://www.theage.com.au/business/retail/pie-face-goes-into-administration-20141124-11suzv.html">salvage some value from the business</a>. Time will tell if there is anything to save.</p>
<p>There are a few lessons to be drawn from the Pie Face story.</p>
<p>First, ambitious business growth most commonly precedes sudden business collapse. Pie Face signalled plans to take its business to global markets including South Korea, the UAE, Singapore and New Zealand, but any such growth would place significant strain on the organisation’s financial and managerial resources.</p>
<p>Further, global expansion assumes global product acceptance of the product. While Australians have grown up with meat pies – with all of their diversity and ingredient vagaries - growing a business while also growing a brand and growing acceptance for something so foreign is an expensive and innately risky process in new markets.</p>
<p>Second, industries with limited entry barriers tend to be relatively unprofitable – and the fast-food industry is an exemplar of a tough and competitive industry. Generally, fast food is a mature and stable sector, with limited opportunity to grow sales, margins and thus profits. Indeed, sales growth for firms like Pie Face must come at the expense of established competitors. This is especially the case in the hyper-competitive US economy, where customer choice in fast food is practically unlimited and established competitors have deep pockets.</p>
<h2>Franchise problems</h2>
<p>As this is the case, overlaying an expensive franchise model over a relatively simple business tends to layer high costs on businesses with limited capacity to generate the required sales and margins to meet those costs.</p>
<p>Multinational chains like Starbucks learnt this lesson the hard way. Once competitors saw the profits to be had from selling coffee-derived drinks, they piled in to the business. Were Americans to somehow acquire a taste for pies, the same trend was likely.</p>
<p>Third, franchise operations, while having many operational and strategic benefits, also have a fundamental problem. Structurally, franchisees operate in competition both with other firms and with the franchisor. The profit pool must be shared among the franchisees and the franchisor.</p>
<p>As is often the case among franchisors, Pie Face had both company-run and franchisee-run stores. This tends to add more tension to an already fraught situation – as the legal action between Pie Face and some of its franchisees in 2013 illustrated.</p>
<p>Patience is said to be a virtue – it also tends to be good business practice. Pie Face has tried to grow quickly and globally, tackling tough and well-established competitors while trying to create market acceptance for a novel and idiosyncratic product among global markets with diverse tastes.</p>
<p>In hindsight, the events of this week are no surprise. There are lessons to be learned for the future about how to take great Australian products to world markets, but perhaps the most prosaic and important lesson of all is to take the time to grow a business with care.</p><img src="https://counter.theconversation.com/content/34656/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rice is a member of the ALP and NTEU</span></em></p>
Tolstoy’s opening line in Anna Karenina was: “Happy families are all alike; every unhappy family is unhappy in its own way.” The same can be said of most businesses – the recipe for success is simple…
John Rice, Associate Professor in Strategic Management, Griffith University
Licensed as Creative Commons – attribution, no derivatives.
tag:theconversation.com,2011:article/25154
2014-04-08T05:45:48Z
2014-04-08T05:45:48Z
New franchising law no code for fairness
<p>The government is moving to introduce a new Franchising Code of Conduct as part of wide ranging reforms to how franchising arrangements are regulated, <a href="http://www.treasury.gov.au/Policy-Topics/Business/Small-Business/Codes-of-conduct/%7E/media/Treasury/Policy%20Topics/Business/Small%20Business/Codes%20of%20Conduct/Franchising/downloads/PDF/Future%20of%20Franchising.ashx">claiming it will be fairer for small operators and cut red tape</a>. Whether that will happen is far from certain. </p>
<p>The proposed changes will only apply to franchise agreements signed from the start of 2015. The biggest changes are the introduction of a specific duty of “good faith”, and the requirement for franchisors to give prospective franchisees an “information statement”. </p>
<p>These changes are accompanied by legislation that will give the regulator, the ACCC, the ability to impose financial penalties on franchisors that breach the code, whereas <a href="http://www.brisbanetimes.com.au/small-business/franchising/franchisors-beware-potential-new-penalties-20140405-364wu.html">it wasn’t able to before</a>. </p>
<p>But the changes would leave some of the fundamental problems affecting the relationship between franchisors and franchisees – namely knowledge and power imbalances – unfixed.</p>
<h2>A question of imbalance</h2>
<p>Knowledge and power imbalances are the Achilles heel of franchise relationships. A franchisor builds a business, creates a blueprint of it, and licences franchisees to replicate it using the blueprint. With power over the content of the agreements comes scope for abuse. Franchisees sign the agreements with little ability to negotiate changes. </p>
<p>The first Franchising Code of Conduct in 1998 attempted to bring balance to franchise relationships. It mandated pre-contract disclosure, specific rights such as a cooling off period for franchisees and established a dispute-resolution system based on mediation. </p>
<p>However, eight more franchising reviews have been conducted since the code was introduced, suggesting it has not achieved its objective of raising standards of conduct in franchising.</p>
<p>The current proposals have come out of <a href="http://www.innovation.gov.au/smallbusiness/codesofconduct/pages/2013-review-of-the-franchising-code-of-conduct.aspx">the 2013 Wein Review</a>. It made recommendations in eight broad areas: disclosure, franchisor failure, transparency of financial information, good faith, the end of a franchise agreement, dispute resolution, enforcement and “other matters”. </p>
<p>Most recommendations weathered the subsequent change of government.</p>
<p>The most significant change, Wein’s recommendation for a “good faith” clause, has been adopted. But a party to a franchise agreement does not have to act in good faith if this would get in the way of their legitimate commercial interests. </p>
<p>This means, for instance, that if a franchisor’s duty to its own shareholders is best met by selling the franchisor’s business to a property developer who wants the franchisor’s sites (even though this would mean the franchisees lose their businesses), the franchisees’ rights become secondary. This will only create a false sense of security for franchisees.</p>
<h2>One size doesn’t fit all</h2>
<p>Another major change, the proposed information statement, is intended to address knowledge imbalances by providing franchisees with more information. But the change will only require a generic information statement, which assumes all franchise networks are the same, and that franchisees can already conduct adequate due diligence. </p>
<p>This overlooks the fact that every franchise is structured differently. Even within the same network different franchisees can be exposed to different risks.</p>
<p>A prospective franchisee, attempting to conduct due diligence, will still meet numerous impediments. Neither a franchisor’s disclosure documents nor its franchise agreements are on a public data base. This means potential franchisees cannot compare the offering before them with what is usually offered for franchisees in the same network, or with the franchise agreements of comparable businesses. </p>
<p>This is even worse if a franchisor operates through a trust, because the franchisee cannot discover who is behind the trust. And because dispute resolution processes are confidential, it is difficult to identify problems in the network.</p>
<p>Franchising has changed since 1998. Franchisors used to establish a successful business before franchising it. Now, according to the <a href="http://www.australianfranchising.com.au/downloads/FranchisingAustraliaSurvey-2012.pdf">Franchising Australia Survey 2012</a>, a third of franchisors have operated their business for less than 12 months when they start selling franchises. </p>
<p>How can a business operating for less than 12 months be described as successful? And franchisors now exist within networks of, say, 40 related entities. Any due diligence on the franchisor is not indicative of how sound the franchisor’s related entities are.</p>
<p>The franchisor may itself be a “$2” company. If it is not performing well it can be placed in administration and restructured by shedding franchisees. The code should require disclosure of a full organisation chart showing how the franchisor fits into the group.</p>
<p>Perhaps the worst of the overlooked opportunities for reform is that of franchise failure. The franchisor retains the right to terminate the franchise agreement if the franchisee enters administration, but no reciprocal right exists for the more vulnerable party – the franchisees. </p>
<p>The government has returned the complex challenges that franchisor failure presents to the “too hard” basket. This is a missed opportunity to alleviate the knowledge and power imbalances that make life for franchisees that much more difficult.</p><img src="https://counter.theconversation.com/content/25154/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jenny Buchan receives funding from Institute of Chartered Accountants Australia. She is affiliated with the University of New South Wales, the Law Society of NSW, the Law Council of Australia, Australian Restructuring, Insolvency and Turnaround Association (ARITA) and is an appointed member of the Franchising Consultative Committee of the Australian Competition and Consumer Commission (ACCC).
</span></em></p>
The government is moving to introduce a new Franchising Code of Conduct as part of wide ranging reforms to how franchising arrangements are regulated, claiming it will be fairer for small operators and…
Jenny Buchan, Associate Professor in business law, UNSW Sydney
Licensed as Creative Commons – attribution, no derivatives.