ACCC review slams food franchisors for failing franchisees

Written on the 27 August 2019 by Business News Australia

ACCC review slams food franchisors for failing franchisees

Food franchisors are yet again in the spotlight for their failings as the Australia Competition and Consumer Commission (ACCC) releases its latest review into the sector.

The watchdog found that franchisors in the food services sector are providing inadequate information to potential franchisees.

The report, Disclosure practices in food franchising, details how one in three franchisors are failing to consistently disclose useful contact details of former franchisees.

"One of the key steps in buying a franchise is to talk to someone who has been there before," says ACCC Deputy Chair Mick Keogh.

"Our compliance review identified that some franchisors are making it difficult to contact former franchisees by failing to disclose basic information such as email addresses or mobile phone numbers."

"Our message to someone thinking about buying a franchise is to walk away if you can't easily contact former franchisees. You won't get a realistic picture of the business without talking to them."

Additionally, the ACCC found that nearly half of prospective franchisees did not get independent professional advice before buying the franchise. Keogh says this sets prospective franchisees up on the back foot from the get-go.

"The message for prospective franchisees is that the costs of setting up and running a food services franchise can amount to hundreds of thousands or even millions of dollars," says Keogh.

"If you aren't setting aside the time and money to do proper due diligence, then you should reconsider franchising altogether, as you risk investing in failure."

The review also uncovered how many franchisors did not clearly disclose what essential goods were subject to supply restrictions. While supply restrictions are a necessary component of most food franchise agreements, Keogh says clarity is necessary to enable the franchisor/franchisee relationship to operate.

"To comply with the Code, franchisors need to explain the detail of any supply restrictions. This ensures someone buying a franchised café, for example, knows whether they can shop around for coffee beans," says Keogh.

Other findings from the review include that one third of the franchisors did not adequately disclose key unavoidable ongoing costs, such as wages, rent or inventory.

"The poor disclosure by some franchisors of wages, rent and inventory costs is particularly concerning given how essential these are to running most businesses," Mr Keogh said.
The ACCC has taken a microscope to the operations of food franchisors specifically following its in-depth report into the industry released in March this year.

The Fairness in Franchising report detailed the failures of major Australian food franchisors, but paid particular attention to Brumby's, Donut King and Michel's Patisserie parent Retail Food Group.

The committee devoted a chapter in their Fairness in Franchising report released today to Retail Food Group (ASX: RFG) as an example of a franchisor who is taking advantage of an insufficient regulatory framework the report recommended serious consequences for RFG.

Just two months after the Fairness in Franchising report was released, RFG was exposed by the Sydney Morning Herald for extending the use-by dates on its food products.

As reported by The SMH Retail Food Group (ASX: RFG) instructed Michel's franchisees to ignore expiry dates on packaging and adopt new shelf-life dates, ranging from two and six months.

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