Scandal ridden franchisor Retail Food Group (RFG) believes the level of disclosure it provides to prospective franchisees is adequate and does not need to be expanded, despite former franchisees claiming they were misled about the profitability of RFG-owned outlets.
RFG said it has “significantly” reduced its franchise fees and spent $1.5 million implementing new field service support to improve conditions for those in its network but maintained that franchise recruitment processes were “rigorous”.
“Ultimately, it is RFG’s view that the information required to be disclosed is adequate to enable a prospective franchisee to make a reasonably informed decision about the business opportunity,” the franchisor said in its submission to a senate inquiry into the franchising sector.
The Senate inquiry, which was set up in March following a string of high profile media reports about alleged unscrupulous behavior in the franchise sector, including within RFG’s own network, will examine the effectiveness of the current Franchising Code in regulating the sector.
Whether the code provides for adequate disclosure to prospective franchisees has been a big talking point in submissions to the inquiry, with RFG coming up repeatedly. One former Brumby’s Bakery franchisee claimed that he was oversold on the prospects of a franchise operation in Maroochydore, being led to believe that it was performing better than other stores in the network.
“At no point were the realistic views of the worse-case scenarios ever discussed with us, we were told it was positive GOLD mine [sic] all the way,” he said.
In a separate submission a former Gloria Jeans franchisee said that she believed she had carried out due diligence before purchasing a franchise, having attained advice from a solicitor and accountant, but that the facts provided to her were misleading.
“We discovered after only a few months of working in the stores, that the P and L’s we were provided with were not a true reflection of the costs of running the two kiosks and the Gloria Jeans model we had to work with was well and truly broken,” she said.
RFG did not respond to a request to comment about submissions claiming it had misled franchisees but did say that there is scope for the code to mandate independent legal and financial advice in relation to a proposed franchise opportunities, preferably from accredited professionals. This is a view shared by several academics who have made submissions to the inquiry.
However the company, whose network contains some 2,400 outlets around the world, said it would not provide individual store performance estimates and said it is of the broad view that the current regulatory regime is appropriate.
“Care needs to be taken to ensure that the Code appropriately regulates, but does not inhibit, franchising as a business model, RFG said. The current regulatory regime provides significant protection for franchisees and prospective franchisees and imposes substantial obligations on franchisors.
“In RFG’s view, it strikes an appropriate balance between the rights and responsibilities of franchisors and franchisees, albeit the Company has made proposals that it considers would better assure prospective franchisees are better informed prior to embarking on a franchise relationship,” it said.
Addressing franchisees going bust within its network, RFG said there are inherent risks to operating a small business and that the current retail trading environment was making things difficult for its partners. It blamed competitive pressures, evolving retail trends, high utility costs and rising landlord rents for many of the ongoing challenges to franchisees in its networks.
RFG said in March that it will close 160-200 outlets across its network after reporting a $87.8 million first-half loss. Homing in on shopping centre landlords, it claimed that occupancy costs among its shopping centre-based outlets are generally 70 per cent higher than occupancy costs for non-centre outlets.
“High shopping centre occupancy costs to be a key contributor to reduced outlet operating performance,” RFG said.