When franchising giant 7-Eleven announced it had been sold for $1.7 billion late last week it marked the end of an era for two families who brought the franchise to Australia in the 1970s. They rolled out hundreds of stores, then found their franchisees embroiled in a wide-scale wage underpayment scandal that resulted in almost $200 million in back pay to vulnerable foreign workers.

The scandal, exposed by Four Corners, The Age and the Sydney Morning Herald in 2015, laid bare some glaring problems with franchising, including an entrenched power imbalance between the franchisor and franchisee which can and does get abused, the limited rights of franchisees, and little avenue for redress.

Eight years on, the watchdog tasked with regulating the $170 billion franchising sector is calling for a massive overhaul to better address the imbalance of power and systemic conflicts that have caused misery to gouged franchisees and many more ripped-off workers.

The Australian Competition and Consumer Commission deputy commissioner Mick Keogh told the ABC the current Franchising Code of Conduct, which is regulated by the ACCC, isn’t fit for purpose. He says adding more compliance clauses to the code won’t achieve a better outcome.

“We are the ambulance at the bottom of the cliff, the money has gone,” he says.

A better way of regulating would be a licensing system.

Mr Keogh was talking about a submission lodged by the ACCC in response to a review launched by Treasury in August, with a report due for completion in the next couple of weeks — which is a tight turnaround.

But this low-key review, which has attracted virtually no publicity, could end up being a watershed moment for an industry in dire need of reform.

A common theme: an imbalance of power

In Australia, franchising is big business. It represents almost 10 per cent of the country’s GDP, employs more than half a million workers and, according to the Franchise Council of Australia, has 1,200 franchisors and 94,000 franchise outlets, many of them hard-working Australians who have used their retirement savings to buy a ready-made business with a brand and systems in place.

Some franchises, such as McDonalds, work well — but others have devastated the lives of families.

Some of the more high-profile scandals in the past few years include Pizza Hut, where the franchisor ordered its franchisees to sell pizzas below cost which drove many to collapse; Retail Food Group, whose brands include Donut King, Brumby’s, Gloria Jean’s, Pizza Capers, Crust Gourmet Pizzas and Michel’s Patisserie, where franchisees were slugged with high fees, royalties, rebates and draconian refurbishment costs, which pushed hundreds to the wall; Laser Clinics; Chatime; Caltex; and Domino’s.

The various scandals have a common theme of power imbalance between franchisees and franchisors. This, coupled with soft regulation and a franchise code that isn’t working, has resulted in suicides, bankruptcies and marriage breakdowns.

Over the years, there have been a number of inquiries into the franchise sector, but besides a few tweaks, little has changed.

I continue to receive emails from franchisees that describe a system of bullying, intimidation, churning of franchisees for profit and price-gouging on the supply chain where the amount they are forced to pay for products such as Coke, milk and coffee beans is far greater than supermarkets charge. They say there is little anyone can do to help them.

Calls for a new system of regulation

The ACCC’s submission lays the problem on the line. It says the code that it regulates is not fit for purpose, the penalties “too low to motivate compliance” and that the protections do not meet the expectations of many franchisees and prospective franchisees.

“While franchising opportunities are regularly marketed to potential franchisees as a chance to ‘run your own business’ or ‘be your own boss’, a franchisee’s decision-making power is significantly constrained once they have entered into the agreement,” it says.

“In our experience, many franchisees and prospective franchisees think that they are purchasing a business that they can generate goodwill in and that will operate in a collaborative partnership, where the needs of both the franchisee and franchisor are appropriately considered.”

In practice, the submission says, “what prospective franchisees are purchasing when they enter a franchise agreement is merely a time-limited right to operate under a franchise brand in the manner dictated by the franchisor”.

It says under the current regulatory system, the ACCC can only take enforcement action after the damage is done and when it does it has limited powers to stop franchisors from continuing to promote problematic franchises to prospective franchisees.

It calls for a new system of regulation.

“After over 25 years of a mandatory industry code of conduct, the ACCC considers that even an amended code cannot address or prevent the persistent harms that arise in franchising,” it says.

It recommends adopting a licencing regime, which would allow for quicker action than the current clunky and slow system, including suspending a licence or imposing conditions on a licence.

“Such a regime could impose a range of prudential requirements on a franchisor both at the start of, and during the life of a franchise business and place certain conditions on the franchisor in seeking to, and continuing to, attract franchisees,” the submission says.

It says these obligations would better address the power imbalance.

“While the ACCC has undertaken an active franchise-related enforcement agenda, the outcomes in matters such as Retail Food Group, Megasave, Jump Loops and Ultra Tune illustrate that ex-post enforcement alone cannot rapidly prevent or limit harm to prospective or current franchisees when there is a problem.”

Where franchisors “continually fail” to comply with their Code or Australian Consumer Law obligations, the ACCC says in its submission it “has no ability to prevent or limit the franchisor from continuing to promote their system to unsuspecting prospective franchisees”.

The review needs to get it right

Another submission by University of NSW Emeritus Professor Jenny Buchan, an expert in franchising, says the code fails to regulate the conduct of franchisors who are not interested in being regulated. She says the code isn’t fit for purpose.

Professor Buchan’s submission says ideally franchising should be regulated under its own Franchising Act: “This would … enable the creation of a statute that could address a wider range of issues that cannot be addressed under a regulation of the CCA [Competition and Consumer Act]. This would include breach of contract.”

She says the review also needs to address the issue of insolvency when a franchisor collapses.

“Franchisees need recognition under insolvency law,” Professor Buchan tells the ABC. “The Code cannot provide this. As long as the Code and the ACCC are expected to do all the heavy lifting, franchisees continue to risk losing everything if their franchisor fails.”

But not everyone agrees. For instance, the Law Council of Australia’s small and medium enterprise committee argues in its submission that the code is fit for purpose and should be retained.

It says the ACCC’s level of enforcement of the code is below the level required to ensure compliance across the sector. It says the ACCC has taken 24 public enforcement actions in the last 15 years, which equates to less than two enforcement actions a year.

“The level of ACCC enforcement action appears particularly low when one considers that ensuring that small businesses receive the protections of the competition and consumer laws and small business industry codes of conduct has been an ACCC enforcement and compliance priority since 2019,” the submission says.

It cites a glaring example where the ACCC failed to step up:

“There has been one example of the ACCC refusing to act where as many as 90 franchisees were aggrieved in relation to alleged egregious breaches of the Code, and where private action was blocked by a successful application to the Federal Court for $2 million in security for costs. This was a serious failure of the Code and resulted in more than 60 franchisees going out of business.”

The franchising industry has been besieged by numerous scandals and many reviews, but little has changed. This review needs to get it right.

Extracted in full from:  https://www.abc.net.au/news/2023-12-03/australia-franchising-industry-scandals-new-treasury-review/103175984