Domino's, Retail Food Group accused as franchise inquiry gets under way, page-5

Every franchise model involes taking a cut of top line revenue. This means the franchisor is incentivised, first and foremost, to focus on volume and sales, not operating profits of stores in the network.

Yes, some people are not cut out for it, and maybe should mot be running a small business. However, franchisees pay a fortune in fees to be in the network and have no real discretion as to how to operate. For instance RFG charges 10k a year among many other operating subscription fees, plus they can wind you up at any time by asking for a store refurbishment you can't afford.

Or, maybe if you try to make your own sandwiches to sell in your Michel's cafe, because you can't make a profit on RFG supplied goods, they issue you with a breach to eventually take your store off you for virtually nothing

I think I am being extremely fair. A franchise network has the opportunity to be extremely profitable. The buying power to reduce supplier costs alone would give the stores a big competitive advantage, against independent stores.

And what about that 2 or 3 % of revenue for 'marketing funds'. That would give a network a big advantage over other food outlets. Pooling money from hundreds of stores to create scale in promotions is a huge competitive advantage.

So, we have to ask. Why are so many of these stores failing or barely profitable, despite franchisees working 6 or 7 days a week?

It's simple, the franchisor doesn't take a large cut of store EBIT, it takes a large cut of top line REVENUE.

Should we get supply and admin costs to the bone to maximise EBIT at store level? No, why bother we take top line revenue, in fact lets make those things profit drivers for ourselves.

Should we utilise to the marketing funds as effeciently as possible to drive store EBIT? No, let's make that another profit driver by taking large admin fees and when we do large promotions, have it focus on REVENUE driving intiatives that force franchisees to take losses.

Look at Pizza Hut's $8 pizza deals, drove sales which increases the revenue cut, but destroyed profitability. Same with dominos, and many other franchise promotions. Because it's all about revenue and sales, not store EBIT.

This is what has to change. In reality you don't need any regualtion, just the franchise pyrimid schemes moving from that model, to one that takes royalties from store EBIT. A model that is actually incentivised to drive the profitability of stores.

To many stores in an area, expensive goods, low quality goods, ineffecient marketing, unviable promotions, expensive fit outs, gouging for training, POS systems and admin gouging and the list goes on. All these issues will dissapear once the model changes.

This won't happen. So, as an investor you avoid broken business models.