In the past few days the scandal-ridden franchise operator Retail Food Group (RFG) appointed a new chief executive to try and put a lid on the overflowing discontent among many of its Gloria Jeans, Michel’s Patisserie, Brumby’s Donut King and Crust Pizza franchisees.

The change in leadership came as a joint parliamentary inquiry into the $170 billion franchise industry kicks off the first of a series of hearings on June 8 in Brisbane, RFG’s home town.

Day one of the hearings is expected to be explosive with testimony revealing franchisees across the sector are suffering from financial devastation and mental health issues after watching their dream to own a small business turn into a personal and financial nightmare.

Over the course of the hearings, the regulation and the Franchising Code of Conduct will be scrutinised to identify why so many franchisees have been left high and forced to take short-cuts such as underpaying workers to stay afloat.

It is a sector that has attracted huge negative attention after a series of scandals and collapses. In the past few months franchise group Aussie Farmers collapsed, RFG announced an $88 million loss and flagged up to 200 franchise-run stores would close, Domino’s reported disappointing results and Caltex announced it was ditching its franchise model.

Even the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry touched on franchising as part of its scrutiny of small business banking.

What it revealed is banks have been accrediting franchise operators, who then steer newbie franchisees to borrow the money for the franchise from the accredited bank.

It goes a long way to explaining the rapid growth of the franchise sector and the havoc it has wreaked on some lives.

Flawed model

Westpac accredited Pie Face, which later collapsed after losing money for a decade. To this end it signed up franchisees including Marion Messih in Melbourne in 2013 with her brother and sister-in-law. Soon after borrowing $360,000 from Westpac to buy the store Messih realised the previous owner had “exaggerated” the financial figures.

Eighteen months after investing in the store, Messih and her family called it quits. Soon after the entire Pie Face network went belly up.

The royal commission failed to go into the ramifications of banks accrediting franchisors, particularly the extent of the due diligence being undertaken and the level of comfort a bank giving accreditation gives to franchisees signing up for life-changing business loans.

Since the royal commission failed to take a more overarching look at banking and franchising, it is something the parliamentary inquiry should look into. After all, if a franchise model is flawed, what are the banks actually accrediting?

The franchise landscape is littered with controversy, no more so than RFG’s latest revolving door with the sudden departure of Andre Nell, and the ascension of Richard Hinson, who joined the company this year.

After an initial boost to the share price, the shares slid back to close the week at 80 cents a share, well below the $4.40 price it was trading at in early December when the Fairfax Media investigation exposed a business model that was pushing hundreds of franchisees to the wall.

Hinson’s promotion registered little joy in the RFG franchise network as a number of franchisees felt it was more of the same, pointing to his “Richard’s Wrap” newsletters.

A recent newsletter promised to reduce the cost of goods sold to franchisees, saving them $3.6 million a year.

Given so many are “facing oblivion” this amount, spread throughout the network, won’t save them. Indeed, given RFG is believed to make tens of millions of dollars a year in rebates from suppliers, the expectation was that a lot more should be divvied up. One franchisee responded: “Most franchisees will be left speechless by what is too little, too late for so many.”

RFG is one in a long line of struggling franchise operations.

It is why the parliamentary inquiry into the $170 billion franchise sector is long overdue. Scandals, collapses and an outpouring of misery in parliamentary submissions paint a picture of failed regulation and legislation.

The ACCC has done a good job in many areas, but in franchising it has dropped the ball. Over the years a number of franchisees from a number of franchise chains have contacted the ACCC requesting help, only to have it fall on deaf ears. The Franchising Code also needs to be re-thought.

It is why RFG’s submission to the parliamentary inquiry is so breathtaking: “Care needs to be taken to ensure that the [Franchising] Code appropriately regulates, but does not inhibit, franchising as a business model,” RFG said. “The current regulatory regime provides significant protection for franchisees and prospective franchisees and imposes substantial obligations on franchisors.”

Fee gouging, excessive rebates, imbalance of power, opaque marketing funds and unconscionable contracts are a constant refrain among franchisees across many franchise networks. This isn’t a case of a few bad franchise models. The problem is insidious. For the good ones, who do the right thing, an overhaul of the code shouldn’t worry them.

More than 80 submissions have been uploaded to the parliamentary website and it is understood another 200 are waiting in the queue. Some are confidential. Some will outline franchise operators that have caused bankruptcies, depression, marriage breakups, loss of the family home, misleading financial accounts, wage fraud and other types of fraud.

Free labour assumed

In one submission, Faheem Mirza, a former Foodco franchisee, who owned two Muffin Break stores at Burwood and Rhodes in NSW, said after he bought the stores he was told Foodco assumes all franchisees work for free. “They stated that this is their assumption for their entire network,” he said.

“I have been sent multiple rosters officially where myself and my wife have been rostered to work anywhere from 50 to 83 hours per week each, for zero pay, if I ever want to see any ‘profit’.”

He said Foodco was annoyed that his wife couldn’t do more free hours than 5:30am to 2:30pm seven days a week and that he couldn’t arrange any other free labour. “They told me to consider underpaying staff that I can trust. The key message was that as migrants, I must be aware of other migrants or students, who would gladly accept underpayments in lure of their ‘first’ job and hence not report or complain. So, if I were able to exploit my employees, I could generate a ‘profit’ otherwise there is no other cost that can be managed enough to reverse this loss-making scenario.”

Another submission, from a group of franchisees involved in private equity-owned Craveable Brand, which operates 570 restaurants across three brands, Red Rooster, Oporto and Chicken Treats, discusses financial hardship. “Many franchisees are in distress due to the poor business model of Craveable,” a submission believed to have been lodged by up to 100 franchisees claims.

The submission referred to the conflicts of interest of having two similar brands, Red Rooster and Oporto. “The common complaint for Red Rooster chicken has been ‘it is the same chicken, which is available at the local supermarket for half the price’,” the franchisees say. “A simple move like adding flavours and sauces cannot be done because that competes directly with Oporto, Red Rooster’s sister brand.”

Franchisors have lodged submissions, so too the Franchise Council of Australia, making the point about the importance of franchising in this country and how the Franchising Code of Conduct works a treat with the regulator actively enforcing it.

They are right, franchising is important but it needs to be cleaned up and to do that requires a more effective code and a better equipped and resourced regulator.

Extracted from AFR