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The consumer and competition watchdog has called on the government to adopt new franchise laws that would permit the regulator to suspend badly behaving chains and stop small business operators from suffering ongoing harm.
ACCC deputy chair Mick Keogh signalled a crackdown on franchisors failing their transparency and disclosure obligations and urged the Albanese government to give “deep consideration” to a licensing regime.
“Because of the limitations that we find in relation to the [franchising] code, we feel a bit like an ambulance at the bottom of a cliff,” Keogh told this masthead. “We can only take action when harm has occurred.”
The ACCC is ramping up monitoring of the information that franchises submit to the franchise disclosure register, a public database of chains operating in Australia to help prospective franchisees and advisors access basic information, after responsibility for the register recently transferred from Treasury to the watchdog.
More than 522,000 people are employed by Australia’s franchising industry, which has more than 1100 chains and 70,000 franchisees. Collectively, the sector turns over an estimated $135 billion annually, according to a 2023 review into the franchising code of conduct.
“We’ve already started the administrative actions to highlight where businesses are not meeting their obligations and [they] now face the risk of penalties if they don’t,” said Keogh. Cash Converters, Mobile Travel Agents and a Harvey Norman franchisor were each hit with $16,500 fines last year for this reason.
In 2021, the ACCC won a Federal Court case that it brought against Megasave Couriers, which was found to have misled customers by telling prospective franchisees they would receive guaranteed weekly payments of $2000, but weren’t actually paying the promised sum.
“All we could do was initiate an investigation. We didn’t actually have powers to stop [the company director],” Keogh said. “One of the potential advantages of a licensing arrangement is that that license could potentially be suspended where there’s sufficient evidence to suggest that harm’s occurring.”
Keogh’s warning comes after this masthead last year revealed allegations of exploitative practices by bubble tea chain Chatime Australia. Current and former franchisees alleged the company was profiting by charging royalties to franchisees that were losing money and struggling to make sales. Chatime Australia has denied the claims.
Dr Michael Schaper, who authored the 2023 review of the franchising code, said current legislation only permits the ACCC to pursue issues against a franchisor if there is sufficient evidence that the law has been broken, leaving few options to address legitimate grievances other than mediation, which is voluntary.
“When relationships break down, often they break down over many dimensions, and often many of them can’t be litigated because they’re not technically written in the law,” Schaper said.
“Someone might be … treated like trash, or a franchisor might be going, ‘these people don’t respond to anything we’re asking them to do’. It can be all those personal dynamics that are much harder, and the law has never been designed for, nor is good at [that],” he said.
The ACCC is constrained by finite resources and funding for court cases across an extensive remit that includes mergers and acquisitions, misleading and deceptive conduct, consumer protection, telecommunications, scams, and much more, Schaper added.
“Franchisees go, ‘I complained, but no one did anything’. Unfortunately, they just don’t have the wherewithal,” he said of the ACCC.
In March last year, the federal government announced a further $7.1 million in funding for the ACCC to beef up compliance and enforcement in the sector. “Hard-working franchisees shouldn’t be taken for a ride,” said assistant treasurer and assistant minister for productivity and competition Andrew Leigh.
Law firm Legalite managing principal Marianne Marchesi called for stronger action from the ACCC and said red tape and compliance had become too burdensome to allow for effective oversight of a sector that contributes positively to the economy.
“I’d love to see the code stripped back and simplified – I think this would really highlight the real bad eggs because there wouldn’t be all this red tape to hide behind. In my experience, the unethical franchisors I’ve seen are blatantly disregarding the law irrespective of how complex the code is,” said Marchesi.“But where is the ACCC?”
Keogh confirmed that the regulator currently has a “number of active investigations” underway into franchising matters.
“What stood out is a pattern we have seen elsewhere where there is a focus on, it seems, selling more outlets rather than necessarily focusing on the profitability of the existing outlets,” he said, referencing a 2017 investigation by this masthead that found widespread underpayments and a brutal business model that squeezed fees, royalties and high food charges out of desperate Donut King, Brumby’s and Michel’s Patisserie operators in a quest to grow profits.
The investigations led to a parliamentary inquiry that called for a total overhaul of Australia’s franchising system.
“It typically involves the franchisee with a lot of upfront costs, royalties and payments that don’t seem to be related to profitability, they’re more related to turnover. And that … really puts the squeeze on the franchisee.”
However, he also warned franchisees to do their due diligence as franchisees are bound by contracts that disproportionately favour the franchisor, pointing to the volume of new resources published on the ACCC.
Once contracts are signed, it is “quite difficult” for franchisees to extricate themselves, Keogh admitted.
“The franchise agreement is very much one-sided and can be very unfair,” he said.
“We certainly have a long list of matters we’ve pursued to try and address that, but we do encourage franchisees to exercise due care when they’re thinking about entering into one of these agreements.”
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