Sunday, April 6, 2014

Franchising in Good Faith, Reforms and Disputes

Franchise reforms could reduce disputes between entrepreneurs and chains

Published 03 April 2014 11:16, Updated 06 April 2014 21:30
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Franchise reforms could reduce disputes between entrepreneurs and chains
Wendy’s ice creams Photo: John Woudstra
A former franchisee in a $1 million legal dispute with the Wendy's ice cream chain says the Abbott government’s new franchising code of conduct will help provide security to franchisees.
Former franchisee Peter Coventry has been in mediation with Wendy's this week over the closure of his two stores. He said good franchisors should not fear a new requirement for them and franchisees to act in “good faith”. “It sends the right message to big franchisors that there will be consequences for acting in bad faith and this has been sadly lacking in franchising over the past 15 years,” Coventry says.
But the sector’s industry body, the Franchise Council of Australia, which represents franchisors and franchisees in the $131 billion sector, has warned a new definition of “good faith” in proposed franchise laws could led to increased legal disputes.
Franchisor companies could be fined up to $51,000 for serious breaches of the new code and the new “good faith” clause has been included in the hope of ensuring both parties act honestly, co-operatively and not arbitrarily, Small Business Minister Bruce Billson announced on Wednesday.
The franchise system has had bad publicity recently, with franchisees in disputes with large chains such as Wendy's, Hungry Jack’s and Pie Face.
Wendy's chief executive Rob McKay welcomes the changes to the code.
“Anything that encourages and facilitates channels through which the franchisor and franchisees can work well together is good for business,” McKay says. “Wendy's has been through a detailed mediation process with Peter Coventry over an extended period and will continue to do whatever is required to protect our brand in the best interests of our network.”
This week the Country Court of Victoria has heard evidence in a long-running legal stoush between Hungry Jack’s and failed franchisee Toni Collins. The fast food chain is suing Collins for $721,000 but Collins has lodged a countersuit for $350,000 for “unconscionable and unfair conduct”.

Defining good faith

Franchise Council of Australia deputy chairman Stephen Giles says the council was happy with the government’s proposed changes but the issue of good faith was a problem.
He said consultation between government and the industry had agreed on a common law duty of good faith that parties act honestly but the exposure draft instead included a new statutory duty of good faith defined as acting “not arbitrarily” or against the “purposes of the franchise agreement”.
The FCA initially rejected recommendation to introduce an obligation to act in good faith because it could lead to uncertainty and extra costs, but eventually agreed to a common law definition of good faith in order to secure a nationally consistent approach to regulation of the franchise sector.
Giles says the civil penalties of up to $51,000 through the court, and up to $8500 for infringement notices without court action, were “sensible dollar amounts”, because “they are not in the millions for mostly small businesses”.
Giles says the FCA was persuaded by the ACCC’s assurance the penalties would be used to stop “fly by night” franchise operations and scammers. “We think its a pragmatic solution.”
Council of Small Business of Australia chief executive Peter Strong says the proposed changes were positive but “I would have liked to see the penalties to be higher”. “Some of the bigger franchisors could just cop a fine to get rid of problem franchisees but of course, it would have to go to court so everybody would find out about it.”
“There are good franchisors and bad franchisors, just like there are good and bad franchisees, and the good ones shouldn’t have anything to worry about.” Strong nominated McDonald’s as a good franchisor. “If you, as a McDonalds franchisee, don’t make at least $150,000 a year, they will send in a team to work out why.”

Do Franchisees Really Ouperform Corporate Stores?


Do Franchisees Really Outperform Corporate Stores?

Written by Ken Gaebler
Published: 4/3/2014
Recent study tests the belief that privately owned franchises are more successful than locations that are owned and operated by franchisors themselves.
If you set aside franchisors' need for royalties and franchisees' need to achieve personal business ownership goals, franchise operations often boil down to a simple, but common question: Are independently owned franchise locations more effective and profitable than company-owned stores?
Company-Owned Franchise Store Locations
The issue of company ownership has ramifications for both franchisors and franchisees.
For franchisors, it can mean the difference between a business model that is primarily based on franchising and one that leans toward multi-site, company-owned operations. For franchisees, on the other hand, company ownership often translates into reduced opportunities for business expansion--typically considered one of the benefits of owning a franchise.
Historically, conventional wisdom has dictated that independently owned franchises are more successful than company-owned stores because franchisees have more at stake. If the location fails the franchisee goes belly up, while the failure of company-owned locations has less impact on individual stakeholders. In effect, the theory goes, the franchisee is an entrepreneur who cannot afford to fail, whereas the franchisor's manager is a company man who will get paid no matter what happens.
A report in the Australian franchise journal recently discussed the results of a new study by the Franchise Relationship Institute, exploring the reality behind the longstanding notion that franchisees outperform company stores--a concept that many believe is perpetuated by franchisors to make opportunities more attractive to prospective franchisees.
"Most franchisors enthusiastically talk of stores achieving an immediate lift in sales of over 20 percent when they change from being managed by the company to being operated by a franchisee," said Greg Nathan, director of research at the Franchise Relationships Institute.
In a review of more than 19 established franchise networks controlling more than 3,000 franchised and company-owned stores, the study found that when locations converted from company ownership to franchisee ownership/operation, there actually were significant improvements in sales growth, cost management and other performance categories. When businesses converted from a franchisee operation to company management, performance decreased.
But the study also discovered that clusters of well-resourced businesses within the same franchise system experienced no measurable differences in performance between franchisee and company management.
"Where a franchisor is willing to invest in solid management support and incentive systems for company stores, and the locations of these stores are strong enough to generate the sales to support this type of investment, they can perform as well or better than franchised stores," added Nathan.
While the study suggests that good management skills, rather than ownership type, is the key driver of a given location's success, there is also the question as to who gets the best locations.
There's always been a rumor that some franchisors keep the best locations for themselves and give the worst locations, the "dogs," to franchisees. This particular study didn't comment on that topic.

Saturday, April 5, 2014

Beer Franchise Laws

Beer Franchise Laws

To the Editor:
Re “Free Craft Beer!,” by Steve Hindy (Sunday Review, March 30):
Beer franchise laws benefit consumers because the laws support an independent system that generates tremendous choice. Brewers benefit because they can partner with independent distributors who invest in new brands that they market and sell to retailers across the country.
And the public benefits because franchise laws support the system that regulates and safeguards a socially sensitive product.
In 2013, craft beer grew another 18 percent. That’s an American success story facilitated by an independent distribution system. Without an independent system and franchise laws, brewers would be able to penalize independent distributors for taking on new brands.
Franchise laws allow distributors to invest capital and labor in new brands, meeting the needs of today’s consumer. These laws support an open, accountable and transparent marketplace where brewers of all sizes can compete and gain access to retailers, large and small. And within the highly competitive beer market, these laws allow for distribution agreements to be terminated for cause.
America’s beer distributors are proud to be part of today’s effective system that helps America’s craft brewers continue to experience double-digit growth each year.
CRAIG A. PURSER
President and Chief Executive
National Beer Wholesalers Association
Alexandria, Va., March 31, 2014