In its purest form, a franchise is the duplication of a specific business model by ‘licencing’ the use of that model to other businesses.
By franchising its operations, the franchisor is typically able to expand its market reach quickly and effectively without depleting its own capital.
Franchising a business operation also provides a level of market flexibility by providing an agile business model that is capable of being tweaked to the specific character of the local market in which the franchise operates.
But franchising, like any business model, is not without its risks. Some of these risks – impacting both franchisors and franchisees – have been highlighted in a series of major news stories in recent years (Note that when we refer to ‘fuel franchise’ businesses, we are referring to the 16% of the nation’s 6700 sites operated under the Commission Agent model, as opposed to the more than 27% of sites that operate under the Dealership model – that is, ‘Dealerships’ are not Franchisees).
In the fuel industry, the franchise issue first gained prominence on the back of wage underpayment revelations within some of the nation’s fuel franchise networks
More recently, Caltex Australia announced that it had made a strategic decision to pull back from fuel franchising in Australia by 2020 as it sought to reposition its network for a future in which ‘convenience’ is likely to have increased prominence within the petrol and convenience industry.
At a more general level, the recent announcement by Retail Food Group (RFG) of its decision to close as many as 200 franchise stores on financial grounds provides a strong pointer to the challenge now being faced in respect of the continued operation of the franchise model in Australia.
Following the announcement by RFG last month, a long-time Franchise Consultant (Mr Howard Bellin of IF International) suggested that as many as two-thirds of Australia’s current franchise businesses were unlikely to exist in 10 years time (see https://www.smartcompany.com.au/business-advice/franchising/retail-food-group-numbers-spell-hundreds-of-store-closures-is-the-reputation-of-franchising-dead/)
And the reason…?
Put simply, Bellin suggested that many of the existing franchise models in Australia are unsustainable due to a disproportionate sharing of commercial risk – both upside and downside – between the franchisor and the franchisee.
Bellin went on to question the effectiveness of the current Australian Legislative framework for franchises suggesting that, by comparison with other international models like the one in the USA, the odds are essentially stacked against franchisees with ‘very little disincentive’ for franchisors to avoid treating franchisees unfairly.
Given some of the recent revelations about franchising practices in a number of industries, it is hard to argue that there are not significant issues with the current model.
But is the franchise model ‘dead and buried’?
“The most disappointing aspect about the current national discussion is that there are hardworking franchisees who are being unfairly portrayed as being a bunch of crooks who blatantly disobey Australian workplace laws”, said ACAPMA CEO Mark McKenzie.
“Similarly, all franchisors are being painted as ruthless businesses who are squeezing smaller businesses to the point of financial ruin”, continued Mark
“Clearly, there are issues but such portrayals are not accurate of the industry as a whole – nor are they helpful in resolving the issues at hand”, added Mark.
“Issues have come to light that require comprehensive consideration in an objective environment that is devoid of the frenzied national media discussion that now exists”, said Mark.
“It is for this reason that ACAPMA welcomes the Australian Government’s announcement of a Senate Inquiry into the operation and effectiveness into the Franchising Code of Conduct – noting that the Inquiry will include an examination of the Oil Code Regulation”, said Mark.
Derek Sutherland (Special Counsel at HWL Ebsworth) has recently published an excellent article on the Senate Franchising Inquiry that discusses the strategic context, scope of review and overall timing.
A copy of this article can be found here: https://acapmag.com.au/home/2018/04/2018-senate-inquiry-franchising-code-conduct-oil-code/.
Given the Retail fuel industry’s significant stake in the national franchising agenda, ACAPMA will be making a formal submission to the Inquiry.
“One area that ACAPMA will identify relates to the apparent inconsistency that has arisen between the operation of the new Oil Code Regulation (2017) and the passing of the Protecting Vulnerable Workers Bill (2017) in August 2017, largely because the latter was passed well after finalisation of the new Oil Code Regulation”, said Mark.
ACAPMA is very interested in receiving input from members on other areas of concern in respect of the current operation of franchising in the fuel retail industry. These comments will be considered together with ACAPMA’s own analysis with a view to submitting a consolidated submission by the deadline of 4 May 2018.
Members wishing to provide comment for possible inclusion in ACAPMA’s consolidated industry submission should email their comments to email@example.com by COB on Wednesday 18 April 2018.