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  • Alex Gough

Are all franchises evil?

May 2018

Fifteen years ago, the only coffee vans around were franchises. Cafe2U was impressing factory workers and sporting parents with mobile coffee vans that showed up and made them espresso coffee. This was the start of the "mobile coffee" industry in Australia, and laid the foundations for the industry many of us know and love today.

After a few more franchises joined the fold, and more people wanted to leave their jobs to run an exciting small business in the coffee industry, the demand for coffee vans rose. For many, the franchise option was, and still is, an attractive offering. The traditional franchise was (and still is) expensive, but it usually offers you a guaranteed income, full training, ongoing support and an exclusive territory. Given how competitive the coffee industry has become, it may be a relief to many new owners to have their income guaranteed, and their training provided in full.

Fast forward to 2018, and the franchises have taken a steep dive in popularity, replaced by independent coffee vans. The huge price tags on the traditional franchises has been a major factor. More companies exist now that supply fully fitted out mobile coffee vans for independent operators at a much lower price than a franchise, and given the price of commercial real estate, many aspiring cafe owners are now opting to run a van instead.

Some of the big franchises have also taken a hit due to the recent media backlash against the franchise industry as a whole. The practice of some franchisors of squeezing their franchisees has resulted in many going broke, and the rest of the hospitality industry revolting against the franchise sector. Late last year we saw a strong media attack on the Retail Food Group, owners of Cafe2U, and other brands such as Donut King, Crust Pizza, Brumbies Bakeries and Gloria Jeans. What went on here? Essentially, this is a company owned by shareholders. Where a franchise model is a listed company owned by shareholders, there is a conflict of interest present. It is near impossible to allow a franchisee to grow and profit if the directors of the company are accountable to shareholders. The majority of the profits will always flow to the shareholders, and we have heard many stories in the news of the devastating effect this has on the franchisee.

And RFG wasn't alone. 7-Eleven kicked off the "franchise scandal" with their "cash-back" scheme a couple of years ago, whereby franchisees were so financially stressed, many were caught out paying their staff on the books, and then demanding those same employees withdraw money from the ATM in store to give back to the franchise owner. Whilst we are more convinced that the Franchisor (head office), rather than the franchisee (the store owner) was to blame, the result here was that the franchise sector took a large hit in the public image stakes. Caltex wasn't far behind, with a similar wage fraud scandal taking place there. And just a few weeks ago, we've heard in the media about Oporto, Red Rooster and Chicken Treat, all franchised businesses, being on the brink of collapse due to the franchise contract being heavily skewed towards the franchisor, all for the benefit of the shareholder. The Royal commission into the banking industry is currently scrutinising the franchise sector as a whole, finding that Westpac, amongst other banks, lent money to franchisees even when the business model was doomed from the start.​

What's the lesson here? Stay away from the franchises?? Perhaps! But surely not all are bad. Of course they aren't. We run a franchise business ourselves, Van Wild Coffee. Sometimes people forget that the point of the franchise is to provide a model that allows the operator peace of mind, knowing they have a reputable brand behind them, they will get full and ongoing training, and knowing that they will succeed if they follow the "recipe" laid out for them. The key to a successful franchise is one that is fair to both parties. And lets be clear who those parties should be. If you are looking at a franchise that is owned by public company that is listed on a stock exchange (the Retail Food Groups of the world), stay away. You won't be working in partnership with the nice chap who signs you up. You will be working to pay the thousands of investors who want growth and dividends. They won't care about your sick child or the wetter-than-usual summer!

If, on the other hand, the franchisor is a small business based on honest values and hard work, you might be in luck. The next step is to check the franchise agreement thoroughly. Are you paying them commission or royalties? This is the common model, but what for? Assuming you are purchasing your coffee products from them, you are already providing them with a 20-40% profit on those. If you are giving them something else for nothing, you are giving them too much. You should also look closely at what the up front fee is, and what you get for it. If its a basic coffee van for over $100,000, walk away. Your research should tell you it is far cheaper than that to get a van. If you pay them a large up front fee, where's their incentive to keep helping you? You've made them their money before you even started. You should get an itemised account of everything you get for your up front fee, and if it smells fishy - it probably is.

Finding a good franchise is rare these days. But if you do find one where the agreement is clearly aimed at making you succeed, you might be in the right place. It may be the easiest way for you to get into an increasingly competitive industry and not just survive, but succeed. After all, they do have a lot more experience than most of your competitors. The best advice, as always, is do your research.

Alex

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