Jack Cowin and Frank Romano should have a lot in common – they are two of the largest players in Australia’s fast-food franchise industry – yet they sit on opposite sides of a debate that has split the sector.
JACK Cowin has a unique perspective on franchising. His Competitive Foods group has about 350 Hungry Jack’s stores across Australia, including 70 that are franchised. He also has 49 KFC franchises, so he is both a franchisor and a franchisee.
Mr Cowin used to have 50 KFC stores but three years ago Yum Foods International did not renew the franchise for his Rockingham store.
He reckons too many franchisees cop the same kind of treatment, and wants the law changed to protect them.
Southern River MLA Peter Abetz has taken up the cause, putting a private members’ bill before state parliament that seeks to ensure the parties to a franchise agreement “adhere to generally acceptable standards of behaviour”.
Mr Cowin told WA Business News he is “very supportive of what is proposed”, describing the bill as a good moderate step.
The Franchise Council of Australia sees it very differently, stating the Franchising Bill 2010 “seeks to impose a draconian set of new franchising rules”.
Frank Romano’s company Quick Service Restaurant Holdings agrees, saying the bill will have “potentially disastrous consequences for both franchisors and franchisees alike”.
QSR, with 3,800 staff in WA and 5,500 nationally, says the bill “will likely make WA an unattractive and uncompetitive proposition as a centre for franchising”.
Working out whether the bill will become law is complicated because it is highly unusual for an MP from the governing party – Mr Abetz is a Liberal – to propose a private members’ bill.
Labor and some of the minor parties have signalled their support for the bill, so its fate rests with Mr Abetz’s Liberal colleagues, from Premier Colin Barnett down. So far, they have been silent.
The stakes are high – WA is home to 12,000 franchise operators and about 40 per cent of the state’s retail businesses are franchises.
Mr Abetz said the provisions of his bill mirrored the findings of several parliamentary enquiries, which concluded there was a disparity of power in franchisor-franchisee relationships.
The bill amends the Franchising Code so that all parties are required to act in ‘good faith’ during contract negotiations.
It also seeks to codify the common law understanding of good faith, which it says means to act “fairly, honestly, reasonably and cooperatively”.
The bill provides for fines to be imposed for breaches of the code, and gives the Commissioner for Consumer Protection the power to prosecute parties who fail to adhere to the code.
Jim Penman, founder of the Jim’s franchise network, said he was totally in favour of the changes.
“People have raised a finger to the code and just laugh at it,” Mr Penman told WA Business News.
Mr Penman is also critical of the Franchise Council, which purports to represent the whole industry.
“I have nothing to do with them frankly,” he said.
Mr Cowin, whose business employs 15,000 people nationally and 6,000 in WA, has a similar perspective.
He also insists his view is not driven by his dispute with Yum Foods, which he said “was a case in point where the franchisor wanted to close (my) store so they could open next door”.
“It’s not a matter of being on the other side,” Mr Cowin said.
“It’s how do you administer a relationship? We think this (bill) is a good moderate step”.
He believes the US and Canada have more appropriate laws, including putting the onus on franchisors to show good cause why a franchise agreement should not be renewed.
Reform advocates such as Mr Cowin have failed to sway the federal government, which considered implementing changes similar to those in Mr Abetz’s bill but decided earlier this year not to proceed.
It has instead gone ahead with a series of amendments to the Franchise Code, which it believes deliver franchisees more protection and greater certainty in their dealings with franchisors.
Announcing the changes in June, then Small Business Minister Craig Emerson said franchisors would be required to disclose more information.
Dr Emerson said too many franchisees didn’t realise their agreements weren’t necessarily ongoing.
“The amendments will require franchisors to give six months’ notice if they are not going to renew a franchise agreement,” he said.
Further amendments were designed to empower prospective franchisees when negotiating with franchisors.
“Franchisors will be required to disclose to prospective franchisees more information on unilateral contract variations or confidentiality obligations,” Dr Emerson said.
“They will also have to make clear what kind of obligations the franchisee has in terms of future capital expenditure or whether there are any requirements to pay a franchisor’s legal costs.
“By requiring disclosure upfront, potential franchisees have the information they need to decide whether the franchise is the right business for them.”
In addition to the amendments, the Australian Competition and Consumer Commission has been given new powers to conduct random audits of franchisors.
Canberra has decided there will be no further changes for a period of three years, so it has an opportunity to evaluate the latest reforms.
The Franchise Council agrees with Canberra’s stance, and believes it is inappropriate for state legislation to be introduced to a federally regulated sector.
Mr Abetz’s private members’ bill will upend franchising principles that have prevailed worldwide for more than 30 years, according to the council.
Specifically, it argues the bill destroys the right of a franchisor to choose whether or not to extend a contract with franchisees.
It also argues the definition of good faith in the bill is “arbitrary, extraordinarily broad and totally subjective”.
“Good faith already exists in the Trade Practices Act and is being effectively policed,” the council said.
“A new definition will simply raise uncertainty and encourage opportunistic legal action.
“That is why disputes brought by franchisors or franchisees, will rise under this bill.”
The FCA is also concerned that a single commissioner could levy fines of up to $100,000 “with authority way beyond the reach of any similar appointment anywhere else in the country”.
Balcatta-based QSR believes the bill places businesses based in WA at a disadvantage, as it has the potential to affect franchise agreements across the country.
It said the commissioner appointed to oversee enforcement would have the ability to over-ride the terms of an existing franchise agreement.
“With no provision for mediation and an increased likelihood of litigation, lenders may raise the risk profile meaning it will be more difficult for small business owners to obtain funding,” QSR said.
It also noted that the commissioner or any individual could apply for ‘redress orders’ if they were likely to suffer loss or damage.
“This may force the continuation of an old agreement after expiration for whatever period and on whatever terms the Court deems fit,” QSR said.
“This is in direct opposition to the spirit of franchise agreements which are intended to be conditional and for a limited time.”
In contrast, the Retail Traders’ Association of WA is a vigorous supporter of the bill, with director Wayne Spencer having worked on the issue for about four years.
“The new laws will help prevent WA’s 12,000 franchise operators from being sold into bankruptcy by some rogue franchisors that frequent the otherwise dedicated industry,” Mr Spencer said.
He has no time for critics of the bill.
“If you act honestly and fairly and in good faith, there is absolutely nothing that can happen to you,” Mr Spencer said.
He is keen to clear the industry of rogues who ‘churn and burn’ franchisees by refusing to renew franchise agreement so they can sell the business to a new operator.
“I’ve seen so many disgusting things done, these people just do what they want to do.”
Mr Spencer believes the current Franchising Code is flawed because it doesn’t offer any mechanism for aggrieved franchisees to take action.
