'They live like kings, we work like slaves': Is franchising at a turning point?

Mr Hong called on the government to bring in laws to stop franchisors exploiting their store owners.

“For me it’s too late. We’re already dead and all our money is thrown away, but I don’t want other people to face the same experience as us.”

Mr Hong said the company’s behaviour now threatened to destroy the franchising industry in Australia, which was a major part of the economy.

“Me, my wife will lose my job, all of my staff will lose their job - so who’s going to buy another franchise?”

Mr Hong bought his store in 2009 for $450,000, but had already decided to close in June this year because he could not afford another $200,000 in franchise fees and refurbishment costs.

The Australian Competition and Consumer Commission has been reviewing the franchise sector in recent years, targeting various group’s use of marketing funds contributed by franchisees.

Meanwhile Nationals Senator John Williams has called for a parliamentary inquiry into the sector.

As concerns about the franchise industry and some of its listed proponents abound some defenders of the sector say it is still in good nick.

Franchise Advisory Centre director Jason Gehrke says that despite the recent spate of major failures within franchise networks across Australia the industry is still resilient.

“The franchise model is not broken,” Mr Gehrke, the current director of home improvement chain Inspirations Paint and irrigation group Thinkwater, told Fairfax Media.

“We do franchise in Australia arguably better than other countries, even the US; we have more franchises per capita than the US,” Mr Gerkhe said.

Retail Food Group this week had its shares suspended by the Australian Securities Exchange after it failed to release its first half accounts for 2018 by the cut-off date of February 28.

When it released its results on Friday it was a bloodbath. Writedowns of $138 million on its domestic operations including on its Michel’s Patisserie brand led the company to a net loss after tax for the half of $87.8 million.

The earnings dive, which included a earnings before interest tax loss of $106.9 million, followed RFG issuing a profit warning in early January.

The company will now close as many as 200 non-performing stores and introduce support for franchisees including reducing fitout costs.

The changes followed reports from Fairfax Media the group was using a brutal business model that had sent hundreds of franchisees within its network to the wall financially. The investigation also uncovered rampant underpayment of staff by store owners.

RFG, which also owns the Donut King and Crust chains, has brought in Deloitte to conduct a business-wide review.

The profit split between Domino's franchisees and head office has been in the spotlight.

UBS analyst Jordan Rogers has for the past 12 months been putting the pressure on RFG to increase its disclosure on the amount of head leases held by RFG and make provisions for onerous leases or other specific support for affected franchisees.

“We note Metcash took a $100m-plus onerous lease provision following the 2012 Franklins acquisition to ensure customer/store owner health and manage uneconomic leases,” Mr Rogers wrote in December to his clients.

RFG itself has warned on the impact that uncommercial leases in shopping centres is having on its business.

Meanwhile, Caltex this week pulled the pin on the franchised model all together.

The oil giant will bring all 810 of its Australian petrol stations under company control by 2020, drawing a line under a wage scandal that has dogged the company over the past 15 months despite the company insisting the move has little to do its franchisees breaching agreements.

It plans to spend up to $120 million bringing the remaining 433 franchise stores – run by 237 franchisees – back within the organisation, however, there remains the potential for some franchisees to resist the buyout if their agreement runs beyond 2020.

Of the remaining stores, 352 are already owned by Caltex while 25 are subleased to third parties.

"Deciding to take over the operations into Caltex has nothing to do with the underpayment issues, but with our strategy, as we didn't want to have a Kodak moment or a Nokia moment or a Blackberry moment," Caltex Australia chief executive Julian Segal said.

It is understood Caltex began its internal strategic review in 2015, a move which later saw the business split into two streams, comprising lubricants and oil, and its retail convenience arm.

"Franchising has been an integral part of growing the retail business," the company said on Tuesday.

"Caltex appreciates that this is a significant decision and it will affect many of our franchisees. Caltex will work with our franchisees to manage the impact of this change, including by offering franchisees transition support and offering employment to all franchisee employees."

Domino’s half-year result further raised concerns in the investment community about how much profit share head office took from its Australian franchisee stores.

Franchisees struggling to turn a profit was one of the factors driving widespread wage fraud in the company's network, uncovered by Fairfax Media last year.

Deutsche Bank analysts Michael Simotas, noting head office increased its margins even as sales were falling, said the profit split was “unsustainable”, especially given Domino’s needed franchisees to earning enough to open new stores to grow the business.

“We continue to see long-term risks around Domino’s increasing share of system profits,” he said.

Franchisees’ share of the profit pool has fallen from 71 per cent in 2004 to 47 per cent in 2017 and further to 46 per cent in the most recent half, according to Deutsche Bank.

At Harvey Norman, the level of “tactical support” to prop-up loss making franchisees increased by $2.8 million to $31.6 million for the most recent half.

The Australian Securities and Investments Commission picked through Harvey Norman’s account last year to examine whether its franchisees were truly independent of head office.

The investigation concluded in November, with no action taken.

Citibank retail analyst Bryan Raymond said investors were attracted to franchising companies by the belief a store owner would be more motivated to run a tight ship than a salaried store manager.But the model had downsides, including that it was harder to achieve consistency or implement change in response to market volatility through a franchised network, he said.Building an e-commerce offering was also challenging, as doing so could potentially cannibalise store owner's sales.“In any market when it gets more challenging from issues outside of your control - if it's the macro-economic environment, if its a tougher trading environment - it would result in those risks being relatively heightened," Mr Raymond said.“I don’t see it as a challenged model necessarily, but there has to be enough profitability in the system, there has to incentives structured in the right way."“It’s really got to be a company-by-company approach.”