The Franchise Council of Australia and the future of franchising

According to the Franchise Council of Australia , many years ago Kerry Packer was asked to respond to a proud claim by Kim Beazley that he had introduced more bills into Federal Parliament than any other politician. He stridently commented that Beazley should be ashamed of himself. He also suggested a law that politicians could only introduce a new law if they got rid of an old one. Although journalists appeared surprised by Packer’s comments, I thought at the time they were very insightful, and I suspect many in the business community would still very much endorse them.

Governments the world over continue to view the enactment of legislation as a solution to all ills. Australia is no exception, and in many areas Australia leads the way not just in the volume of new laws, but their complexity. For some reason politicians seem to think that if they have introduced a law to ban a particular activity, their job is done.

Rarely is that the case. As a consequence, when laws are introduced there is often a substantial amount of additional work that needs to be done if the purpose of the legislation is to be fulfilled.

I have said previously that in my opinion Australian franchising is world’s best practice in many areas. In fact I think that pound for pound, Australian franchise systems are the best franchise systems in the world, and indeed better than franchise systems in the United States. This is not an egotistical boast, and is in fact validated by the significant success Australian franchise systems are now having in the US market.

I believe there are good reasons why Australian franchising has had to become world’s best practice. Australian franchising certainly has not always been at the cutting edge. Indeed at the commencement of my legal career, franchising in Australia was a bit like the Wild West, and those that practised in franchising were considered to be involved in a somewhat dubious form of commercial activity. Franchising is, however, now a very credible means of business development and management in Australia.

The main reasons for this current level of credibility, in my opinion, are:

1. Strong competencies of Australian franchise sector management. This in turn is driven by market challenges – if you can successfully establish a national network across the breadth of Australia, notwithstanding the lack of population density, you can succeed anywhere in the world.

2. Concepts of fair play, mateship and teamwork are inherent in Australian culture. The franchisor/franchisee relationship is therefore less likely to be adversarial.

3. Australia has a regulatory framework that provides strong protections to franchisees. The Franchising Code of Conduct and Trade Practices Act prohibitions on misleading or deceptive conduct and unconscionable conduct are overseen by an active and informed regulator.

Importantly, the regulatory regime does

not unduly interfere with the freedom of the parties to contract. Franchising is essentially a contractual relationship, and in business-to-business transactions it is inappropriate to unduly fetter the freedom of the parties.

4. Australia has a strong and effective industry body that works closely and proactively with government, regulatory bodies and the media. In my opinion there is a strong link between the prosperity of the industry body and the successful development of franchising in a particular country. That has certainly been the Australian experience.

The Australian regulatory environment is to be contrasted with the US. As a result of having a reasonably level playing field, the level of substantial disputes in Australia is approximately one percent. In the US the figure is closer to six percent, with many of those disputes finding their way to the courts. These costs are largely avoided in the Australian context, with franchise litigation extremely rare and most matters proceeding to negotiated settlement either directly or through mediation pursuant to the mandatory mediation process contained in the Code. The fact that 70 percent of disputes are resolved through mediation is a very significant and beneficial outcome for the sector.

From my own studies I have also observed that by comparison to the US market Australian franchisors are typically more profitable at lower numbers of outlets, and Australian franchisees have higher average sales and higher levels of single unit profitability. In the US there is a substantial focus on franchisee recruitment, with less emphasis on supporting and developing franchisees.

There also appears to be more of a culture of ‘squeezing the last amount of juice from the lemon’, leaving the franchisee with minimal returns.

Perhaps also as a result of cultural factors, but definitely as a result of regulatory arrangements, the Australian franchise relationship is, in my opinion, in the correct balance. This has enabled Australian franchise systems to develop substantial brands and to deliver long-term competitive advantage to franchisees by achieving critical mass quickly.

I am pleased with what we have achieved as an industry body in recent years. The Franchise Council of Australia has been deliberately repositioned in the last few years to be more effective, and we have focused on establishing a framework for the future success of franchising in Australia. In 1998 we established the four foundation pillars of Australian franchising that have provided the framework and focus for our activities – representation, education, fellowship and goods and services – and restructured the organisation to deliver against these core pillars. More recently we deliberately established representation as our highest priority, as we saw this as the area where we as an organisation could add the greatest value to the sector as a whole. All participants in the franchise sector benefit from improvements to the franchising environment.

Our efforts in creating the right environment for franchising are ongoing. There is still much to be done. In the last edition I outlined our proposed Member Standards of Conduct, which have been refined by our extensive member consultation process and will be formally introduced from 1 July 2005. In October 2005 new standards of conduct will be put to the AGM of the FCA for adoption by the membership. It has been pleasing that we have not received a single complaint about the introduction of the standards, and indeed many members have taken the trouble to indicate that they are extremely supportive of the board’s initiative in this area.

We are also continuing the fight for a better deal in the retail tenancies area, and hope to be able to negotiate with shopping centre owners a Code of Conduct to moderate the extreme behaviour occasionally observed. We are also about to mount an assault on state stamp duty, particularly the iniquitous charging of duty on sale of business agreements. We have had some success in clarifying the position of franchise agreements in the context of state payroll tax laws, and in ensuring that the NSW Government was not persuaded to introduce state franchise conduct legislation. But as I said, there is still mush to be done. Given the existence of lobby groups and the propensity for politicians to seek to introduce new laws, the price of an effective regulatory structure is eternal vigilance.