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Franchising pioneer Michael Sherlock has blamed big corporations and private equity for the worst abuses in the $170 billion franchise system. Jason South
by Sue Mitchell
Franchising pioneer Michael Sherlock has pointed the finger at listed corporations and private equity investors for the worst abuses in the $170 billion franchise sector.
The founder of Brumby's Bakeries says the industry is inherently balanced in favour of franchisors but when major corporations and private equity get involved and put the interests of shareholders ahead of franchisees abuses occur.
"If you have a benevolent franchisor they won't abuse the system but it leaves itself open to abuse – that happens when you get corporates or venture capitalists or listed companies in and they put their stakeholders or shareholders ahead of franchisee profitability," Mr Sherlock told The Australian Financial Review.
"That's the common thing that you see in all this gouging that's been going on. The franchise agreement is so inequitable and when it's in the hands of big corporates they abuse it."
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Donut King owner Retail Food Group has seen profits smashed. Jessica Shapiro
"I contend that I used to put franchisees first," said Mr Sherlock, who has been involved in franchising for 45 years, as both a franchisor and a franchisee, including seven years as chief executive of Brumby's until it was taken over by Retail Food Group in 2007.
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"If Retail Food Group had continued to [put franchisees first] I reckon their share price would be $10 now.
"It's just greed ... they're all fee gouging and it's all about reporting great half-year results."
Mr Sherlock has called for more transparency rather than more regulation to fix the sector, which has been described by franchisees as "sick".
In a submission to the Senate inquiry into the Franchising Code of Conduct, Mr Sherlock has proposed four simple changes to existing regulations to improve transparency for franchisees and expose franchisors who choose to operate unethically.
Mr Sherlock said franchisors should be forced to disclose supplier rebates, how much advertising levy money is actually spent on advertising rather than pocketed as a revenue stream and to summarise all fees and levies, including the cost of compulsory new equipment, store refits and training.
"In Retail Food Group's case I've seen examples where franchisees pay more for their goods than they would if they were a sole trader," Mr Sherlock said.
Franchisors should also be forced to register with the competition regulator searchable documents and disclosure agreements. Franchisors who fail to register with the Australian Competition and Consumer Commission should face heavy fines and franchise agreements should be made invalid. Overcharging
In submissions to the inquiry, several franchisees accused franchisors of overcharging for goods and forcing them to buy from certain suppliers at inflated prices while the franchisor pocketed generous rebates.
One Retail Food Group franchisee, for example, said coffee beans, Tim Tams and Oreo biscuits, which were used in cold drink recipes, could be purchased at Woolworths for half the price the franchisor was charging.
"RFG has used our franchisee fees, kickbacks from suppliers, training monies, franchise renewal fees etc to pump up an extremely poor business model," the franchisee said.
The Franchisee Association of Craveable Brands, which is owned by private equity firm Archer Capital, said the cost of goods for Red Rooster, Oporto and Chicken Treat franchisees was "unreasonably high" compared with other systems.
For example, franchisees paid Craveable's suppliers $18 for a carton of Mt Franklin bottled water, which costs $11 a carton at IGA stores, while 4000 plastic forks cost $70.92 when sourced from Craveable supplier PFD but $40 on the open market.
Mr Sherlock admitted he was disappointed at the state of the sector and urged franchisees to make their voices heard by making public or confidential submissions to the inquiry.
"Evil prospers while good people don't speak up against it," he told the Financial Review.
"I've been in it for 40 years and it really saddens me to see it exploited in such a way.
"Done well it's a great system, but people have exploited it."
Retail Food Group could not be contacted for comment, but Domino's said it had made a submission to the inquiry and welcomed the opportunity to respond to and assist the inquiry.
"The franchising sector makes a significant contribution to the Australian economy and it is important to examine whether the structure and regulation of the industry has kept pace with external market developments, ensure a fair and balanced consideration of the strengths and weaknesses of franchise systems and consider any opportunities for improving regulation of the industry," a Domino's spokeswoman said.
A couple of public submissions have been received from franchisors.
MPower Franchising said the code of conduct was ineffective, cumbersome and needed to be overhauled, including replacing 130-page disclosure documents and franchise agreements with short-form versions for low-value franchises.
"A lot has been written about the inequality of power within the franchise relationship, with the majority of the belief it is stacked against the franchisee," MPower said.
'While this might be arguable in the case of the better known high street brands, it certainly doesn't apply to the mobile services sector, where a franchisee can simply strip the branding off their vehicle and carry on operating."
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