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Blood in the water

Tuesday, 15 July 2008

By Jason Gehrke

Blood in the water? At least that’s one way to look at the developments of the last few weeks, in which the closure of the 165-store fashion accessory chain Kleins was announced, as well as the declaration of another inquiry (the third in nine months) into the franchise sector.

Combine that with calls from a lobby group in the Sydney Morning Herald this week for franchising to be regulated by the Australian Securities and Investments Commission (ASIC) rather than the Australian Competition and Consumer Commission (ACCC), and you would be forgiven for thinking that franchising was in for a bumpy ride.

The current combination of events may not be the most desirable for the sector, but a brief look at history will show that franchising is remarkably resilient.

A summary of the Franchising Australia Surveys since 1996 demonstrates that franchising continues to attract new franchisor entrants to the sector who are not dissuaded by the prospect of increased regulation. While the sector grew by just seven franchisors from 1998 (the year in which the Franchising Code of Conduct was introduced) to 2002, in the four years to 2006 the sector added another 260 systems – an increase of 37%. (See table below).

On closer examination, the increase in the number of franchisors over the period 1998-2006 is not matched by commensurate increases in the age of franchisor businesses and years in franchising. Over an eight-year period (1998-2006) the average number of years a franchisor had been in business increased only by four and a half years, while the average number of years in franchising increased only by three.

In other words, while the sector grew and “matured”, many of its participants in fact got younger, while other participants faded away.

The researchers noted that the net increase of 110 franchisors from the 2004 to 2006 surveys was obtained after identifying more than 200 new franchisors that had emerged during the two-year period, offset by the elimination of 100 franchisors from 2004 which could no longer be found. In other words, over the two year period, one franchisor ceased to franchise for every two new franchisors that commenced.

This indicates that despite its popularity as a method for business growth, franchising is not successful for all those “wannabe” franchisors who attempt it. This also begs the question: What then happens to their franchisees?

The terms of reference for the latest inquiry into franchising, to be conducted by a Parliamentary Joint Committee on Corporations and Financial Services and chaired by Queensland-based member for Oxley Bernie Ripoll, make no specific mention of sustainability or barriers to entry for franchisors that would have obvious implications for this influx of new franchisors.

The inquiry’s terms of reference are: “To inquire and report on the operation of the Franchising Code of Conduct, and to identify, where justified, improvements to the Code, with particular reference to:

• The nature of the franchising industry, including the rights of both franchisors and franchisees.
• Whether an obligation for franchisors, franchisees and prospective franchisees to act in good faith should be explicitly incorporated into the code (having regard to its presence as an element in paragraph 51AC(4)(k) of the Trade Practices Act 1974).
• Interaction between the code and Part IVA and Part V Division 1 of the Trade Practices Act 1974, particularly with regard to the obligations in section 51AC of the Act.
• The operation of the dispute resolution provisions under Part 4 of the code; and any other related matters.”

These broad terms of reference will likely see many of the submissions presented to the recent South Australian and Western Australian inquiries dusted-off and resubmitted (with any necessary changes). However what’s missing from this process is a Government-sponsored study of the sector to officially establish the size and extent of franchising in Australia for itself, rather than relying on public submissions alone as the source of information about the sector.

The Australian Bureau of Statistics (ABS) surveyed the characteristics of small business in Australia in 2005-2006, including a tiny handful of questions about franchising. In April this year the ABS released its report from this survey, which found that franchising represents less than 7.5% of the entire small business population, and less than 10% of retail businesses. Beyond these two pieces of information, the survey’s references to franchising were limited.

With the researchers from Griffith University again conducting the Franchising Australia survey this year, there is little doubt that this survey’s results will be included in various submissions to the current inquiry. But without a Government-endorsed survey considering issues relevant to the inquiry’s terms of reference, many of the submissions are bound to represent subjective points of view or encapsulate individual experiences in franchising, rather than paint the broader picture.

Finally, it must be considered why such an inquiry has been instigated by a Parliamentary Committee and not the office of Craig Emerson, the Minister for Small Business? In a meeting with the Franchise Advisory Centre just the day before the announcement of the latest inquiry, Emerson reiterated that he had no special interest in further regulation of the franchise sector.

Only time will tell whether the “blood in the water” analogy has any real teeth (pardon the pun). What is certain is that there are interesting days ahead for the sector, and neither franchisors nor franchisees should take the status quo for granted.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

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Comments

Sue Brown writes: While statistical information is often reported about franchisors, Jason’s comment “what then happens to the franchisee” in relation to collapsed franchise systems should sound alarm bells. Not only is there no information on franchisees of collapsed systems there is no statistical data on franchisees in general.

There are no responsibilities placed on franchisors to report to a statutory body when businesses within their systems are sold, terminated, “abandoned” or otherwise. Yes, they are listed by category in the disclosure document but are they categorised correctly? Who is checking the legitimacy of the disclosure document?

Franchisors and their advisers have cried that additional reporting responsibilities will have a cost attached to them. In this case, the alternative then would be to have the exiting franchisee complete a mandatory report to the relevant statutory body on exiting the franchised business. Information could be entered on a database with statistical data and trends extrapolated annually, or as required, and reported to Government. It could identify particular trends in franchising in general and system specific conduct and behaviour. The information could also assist those contemplating buying a franchised business and form part of the due diligence process. No cost to the franchisor – but would the franchisor want franchisees doing such reporting? Highly unlikely.

Franchising is reported as a $116 billion+ industry sector, but there is no reliable identifiable data on the “foot soldiers” who generate the income stream for their franchisors. What has actually happened to the thousands of franchisees over the years? It’s an interesting question.