The 230-odd franchisees who run 433 Caltex service station/convenience stores have a big decision to make over the coming weeks.
Do they terminate their agreements with Caltex now and receive some compensation, or wait until their franchise agreements expire and get paid only for what’s on the shelves and any equipment?
How smooth this transition will be and the extent to which it will be met with blowback from the franchisees will depend, in part, on how much Caltex will pay them to terminate their franchise contracts. Presumably this will depend on how long the contracts have left to run.
The usual length of a franchise agreement is five years, with an option to renew for another five.
But Caltex is being coy about any payments for early exit – saying only that it will cost $100 million to $120 million in total over three years.
The franchisees will be offered a job by Caltex as an employee.
“Franchising has been an integral part of growing the retail business. Caltex appreciates that this is a significant decision and will affect many of our franchisees,” the company said on Tuesday.
Caltex seems well within its legal rights to take these franchised sites back under its company-run umbrella and it is able to do so without any goodwill payment to the franchisee – given that is the nature of the original contract signed by both parties.
For Caltex, the decision to extinguish these partnerships is about control. And the company insists the decision was not in response to the 2016 revelations of wage underpayment by a number of its franchisees.
However, it is hard to believe that brand damage Caltex sustained didn’t factor at all into its thinking. It took back 175 franchise sites in 2017 because of these underpayment issues and this may have cemented the view that it may as well run the lot.
The recent introduction of laws that make some franchise or holding companies responsible for the infractions of the franchisee also may have factored into Caltex’s decision.
Caltex says that it can make better returns by developing these retail businesses, by imposing better IT, supply chain management and a better labour model. Plus it gives it the ability to develop and expand its new retail concepts.
Even after accounting for the removal of franchise royalties, Caltex is betting it can capture a sales and profit uplift when franchise stores are converted to company sites.
It’s targeting a sustainable increase in earnings before interest and tax of $120 million to $150 million within five years from the convenience store network.
Standardisation, consistency and simplification is the aim of the exercise, according to Caltex.
It clearly believes that it can leverage the 810 sites in the network to roll out different types of consumer convenience brands – some with fuel offerings and others without.
For Caltex, the decision to extinguish these partnerships is about control.
“Fuel is convenient but in time it is going,” says Caltex chief executive Julian Segal in a comment that was presumably recognition of the rise in electric vehicles.
The strategy will take the company far deeper into the retail territory that is currently dominated by Coles and Woolworths, although Caltex contends its newer brands like Foodary are not direct competitors.
Segal says Caltex has scoured international markets and taken learnings from the UK market where the average spend in convenience stores is five to six times bigger.
“At the start of our journey [of reviewing convenience stores] we asked [ourselves] the question – what could a convenience store be instead of what it is?” he says.
He has been no stranger to evolving the company’s structure and operations – its closed its Kurnell Refinery a few years ago.
Changing the old model of convenience stores from a few fuel pumps with a basic outlet for groceries and cigarettes into one that is about time convenience is clearly one he wants to further embrace.
Extracted from Sydney Morning Herald.