The current state of franchising in Oz.

If you are like me, you've been reading and hearing a lot about the issues with the current franchising system in Australia. What has gone wrong? Why are they calling for a royal commission?

 

Lets start with the question 'Is the franchising system still fit for its purpose?' Or is the mounting exploitation of the model bringing the industry to the end of an era? It seems that lately the waters in the Australian franchising environment are becoming increasingly muddied, in the wake of a number of scandals facing leading franchising groups across the industry.

 

Earlier this year, in the biggest shake up of the franchising industry in decades, major fuel retailer Caltex announced their move to completely phase out the franchising business model. Within two years the corporation intends to bring all of its petrol stations back under company control, after coming to the realisation that the franchising business model was no longer sustainable. In justifying what they believe is a strategic business move,

Caltex has come up with three basic reasons, all of which seem to undermine the view that the franchising model is the textbook approach for entrepreneurs seeking rapid growth.

1.      The need to ensure the same quality of service across all stores

2.      The ability to quickly change and implement an up-to-date retail strategy

3.      The simplification of the supply chain

 

With just these three simple points, Caltex has sent a message that they believe the way to stay progressive in an ever-changing business environment is through single company ownership.

 

The petrol giant is yet to prove the benefits of their transition away from franchising and many are questioning whether this is evidence of a failing franchise model, or simply just an inability to implement and manage the it correctly. 

 

Meanwhile, the Retail Food Group umbrella – with its chain of popular retail stores including Gloria Jeans, Crust Pizza & Donut King – has been brought into the spotlight, after it was revealed that many of their franchisees were struggling to stay afloat. The closing of another financial year highlighted lackluster business results, with the Group quick to blame a number of non-conducive business conditions, including high rent, utility and labour costs, as well as intensive competition. Retail Food Group, amongst other franchise industry players, has also come under investigation for reports of exploitation and underpayment of its workers.  In response to the inquiry, RFG has been making a concerted effort to work alongside its franchisees, increasing the level of support provided to assist them in maximizing performance. In comparison to Caltex, the Retail Food Group has remained an advocate for the strength and effectiveness of the franchising model arguing that “the benefits provided by an established brand, proven systems and ongoing support enhances the opportunity for small business owners to achieve success”.

 

One of the biggest reasons contributing to the increased scrutiny surrounding the franchising industry is the number of uninformed and misguided operators entering into firm franchise agreements with major corporations. With all of the dirty laundry being aired in the banking industry with the Royal Commission this year, it is surprising that the commission has failed to shed light on the ramifications of banks accrediting franchisors and the lack of due diligence being undertaken to determine a persons suitability to becoming a new franchisee. Chairman of the Franchise Council of Australia describes franchising as a “mutually beneficial partnership between franchisor and franchisee, where one brings a proven tool kit, the other brings their entrepreneurial flair and field intelligence”. But reality is that more often than not the partnership involves a naive franchisee up against a major corporation and the chance to ‘buy the dream’ of running your own business often lacks the guidance to produce a successful venture. It has become clear that for the franchising industry to flourish, it needs a stronger support network in all aspects of business, including financing, operations and supply chain management.

 

If there is one corporation in Australia that is flying the franchising flag high it’s McDonalds. Operating on what they call the three-legged stool, the fast food giant is the textbook example of the success of the franchising model. “McDonald’s is one leg, the suppliers and franchisees are the other legs. If one leg of the stool is not strong or not growing at the same pace or breaking, then of course the stool falls over and fails”, argues chief executive Andrew Gregory. The difference in the way McDonalds utilises it’s franchising system is that it focuses entirely on the growth of it’s franchisees, ensuring they are well informed and well support throughout the life of the business.

 

With more than 460,000 people in Australia employed directly into franchising, it is imperative to the industry’s survival that the factors driving the current conditions of the market are recognised and steered in the right direction, in hope of repairing and retaining the dynamic and progressive business model that made its mark on business 50 years ago. 

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