The number of franchise
systems in Australia has
nearly doubled in the past
15 years, and despite the
prevalence of McDonalds, Subway,
Pizza Hut and other overseas operators,
nine out of 10 of them are home-grown.
These nationwide and regional
chains offer convenient access to goods
and services that are supposed to meet
certain standards - a plus for those who
take comfort in the predictable and
familiar. For consumers, they can be
a dependable port of call in a crowded
marketplace. But many Australians
have paid dearly for signing on the
dotted line to run their own franchise
outlet, generally because working for
a franchisor turned out to be quite different from what they were led to believe.
This will come as no surprise to
those who’ve been keeping track of the
industry, which has been the subject
of at least four major government
investigations since the 1970s.
Some say the issue of franchisee failure
has reached crisis proportions. With
about 1137 different types of franchises
employing upwards of 400,000 people at
last count, franchising generated some
$131 billion in revenue last year. It’s a big part
of the economy, but the biggest problem
for franchisors is finding franchisees.
In 2010-11, Australia’s larger franchises
spent an average of $75,000 in advertising
to get more franchisees on board.
Franchising certainly hasn’t been
a success story for the embittered
franchisees who’ve contacted CHOICE
in the course of this investigation. The
franchisee may run the shop, they say,
but franchisors can impose unforeseen
costs, force the franchisee to buy
overpriced supplies, and fail to provide crucial support.
In 2010, the ACCC received more than
600 franchise-related complaints, many of
which had to do with misleading claims
about franchisees' potential earnings.
The root problem, according to the
industry experts and former franchisees
we’ve spoken with, is that franchisors
write up agreements that are weighted
heavily in their favour. Some go as far
as requiring the franchisee to cover the
costs of the franchisor in the case of legal
action, or prohibiting joint legal action by
The agreements may also
promise that the franchisor will help the
franchisee get the shop up and running,
but be vague on the details.
With little or no business experience,
mum-and-dad outfits often sign up on
blind trust. But when the costs of
meeting the franchisor’s demands are
more than the franchisee bargained for - and the promised support doesn’t
come through - franchise outlets can
fall over. The franchisee can then lose
their $300,000-500,000 investment, and
the franchisor is free to flip the business
to a new franchisee.
Even if the franchisee can present an
open-and-shut case that the franchisor
has breached the industry’s code of conduct, they can rarely afford the legal
costs of bringing the case to court. As
one ex-franchisee put it, franchisees
“can’t afford the cost of justice”.