Have governments gone made or have retailers started to panic as the economy moves towards a recession?
In fact, without the mining boom in Western Australia, the Australian economy would already be in a recession and retailers are feeling some chilly winds this winter.
The Australian Retailers Association (ARA) has hit out at the Federal Parliament’s decision to mount yet another inquiry into the Franchising Code of Conduct. The Franchise Council of Australia (FCA) was oddly mute. There was no comment at all from the industry body that pumps up the tyres for franchising.
Perhaps the FCA was exhausted after two recent inquiries by the West Australian and South Australian state governments.
Perhaps Steve Wright, the new director appointed last December, is still finding his feet at the FCA but it does seem odd that there has been not a media release from the industry body since the December announcement of that the former PR consultant was at the helm.
In any event, the new inquiry into franchising should not have surprised anyone.
For starters, the new Federal Government has shown a considerable appetite for reviews and inquiries since it took office last November and, then of course, the Federal MPs felt the niggle of those two state forays into their jurisdiction with the franchising industry overseen by the Australian Competition and Consumer Commission.
But more significantly, MPs and government agencies are receiving an increasing number of complaints from franchisees who are finding it increasingly difficult to make ends meet in the retail industry if not other franchise segments.
The collapse of the Kleins jewellery group has sent a shockwave through the industry even though most franchisors knew the business was not travelling well.
Mind you, Kleins was a pretty good franchise to buy into as a franchisee because they provided income guarantees and rental subsidies - unsustainable but with a touch of generosity not available from other franchisors.
There are at least two other significant sized franchise chains on the brink with massive reshuffles in their head offices trying to stave off collapse.
In one case, a procession of franchisees in a high profile retail chain are closing or being placed in receivership.
Most other franchise systems are starting to see more tension in their ranks and it is hardly surprising given the retail market.
The reality of franchising is that a franchisee has to outperform other independent businesses by a significant margin to have an equal return to their pockets, let alone a better result.
Most retail franchise systems charge levies and advertising contributions of around 10% of gross sales. Franchisees don’t get cheaper rents, cheaper employees or cheaper government taxes and charges.
The biggest promise of the franchising is brand awareness.
Some franchises also obtain access to somewhat exclusive merchandise – there is not much in retail that is truly exclusive – and some buying advantages on stock and advertising over other independent retail stores.
When consumer spending falls, that 10% bite on gross sales translates to a very onerous commitment for franchisees and can leave them with little on the bottom line or, increasingly, with other costs such as rent, wages and energy costs rising, in the red.
Consumer confidence has plunged and there is little good news at the start of a new financial year.
The United States is in recession, even though George Bush can’t bring himself to say it, and the impact of the credit squeeze from dodgy lending, unsustainable corporate gamesmanship and effectively negative interest rates is seriously hurting the Australian economy.
Consumers used to wince at the Reserve Bank interest rate pronouncements but now they face maverick calls by the banks who are exposed because they lend long and borrow short, borrow short in the panic-stricken credit markets.
What spooks consumers most is not so much high interest rates but volatile interest rates - the fear of not knowing what is coming next.
Add the hardly uplifting news that their superannuation nest egg has been battered and that, according to at least one national survey, the value of their house has slipped along with any share portfolios in which they may have invested.
Don’t expect a consumer-led recovery any time soon, not even with a few extra bob in the pocket from tax cuts, a largesse that has been spent before it arrived in higher interest rates and petrol.
Franchises are not alone in feeling the pinch, of course, and Fair Margin would like at this point to extend thanks to Mr Myer for some fine new footwear obtained at very deep discounts last week.
But franchising has political currency and the inquiry established by the Parliamentary Corporations and Financial Services Committee does not come as a major surprise even though it does follow hot on the heels of a Federal Government review and the two state inquiries.
The new inquiry, due to report to the Federal Parliament by December 1, is to examine and report on the operation of the Franchising Code of Conduct, and to identify, where justified, improvements to the Code.
The brief includes an examination of the nature of the franchising industry, including the rights of both franchisors and franchisees and whether an obligation for franchisors, franchisees and prospective franchisees to act in good faith should be explicitly incorporated into the code of conduct.
The inquiry will also look at the operation of the dispute resolution provisions under the code of conduct - and here’s the foot in the door: any other related matters.
Richard Evans, who joined the ARA from the FCA, is bemused by the government’s decision to hold the inquiry.
“How many inquiries will it take for uninformed politicians to realise Australia is a world leader when it comes to franchising regulation and practice?” Evans questions.
“Since the introduction of the Franchising Code of Conduct we have been in constant review and perhaps it’s time the sector gained respect from legislators more attuned to a bad story as opposed to the many successes Australian franchising brings.”
Evans claims that the Australian Code was a benchmark with many other countries following our lead.
“With 52% of all franchising systems sitting in the retail market - the franchising sector is an important player already suffering a crisis of confidence with rising interest rates and petrol prices,” he said.
“Australia’s $128 billion franchising sector is world’s best practice - with a Code of Conduct that is the envy of the franchising world.
The Australian model has been adapted by other countries in the development of their legislation. With extremely low levels of disputes; why listen to the political posturing of the minority and spend thousands of taxpayers dollars to dissect an industry already punching above its weight?” Evans says in full flight.
“Too many politicians this year have used “coward’s castle” to make unsubstantiated claims about leading, highly regarded franchise brands in a sector employing over 600,000 Australians and offering them chance to build and own their own business with tried and tested models.
“Let this inquiry be the last inquiry for the franchise sector for some time and allow a sense of certainty to develop within the sector.
“Businesses fail, that is true, but it is not the Franchising Code of Conduct that let’s them down. Let all people with any gripes against the franchise sector submit to yet another inquiry and allow this report to consider the strength of the franchise sector,” Evans said.
Fair Margin agrees with Evans that franchising has come a long way in Australia and constant reviews are not in the best interests of the sector.
However, franchising will no doubt continue to suffer more government and media scrutiny than other areas of retailing because it actually courts and craves the attention.
Like a celebrity who jumps in front of every camera, franchising is out there in your face with continual self-promotion and hype about the relative security it offers over other business models.
If you over-hype, it is inevitable that the failures will attract a fair measure of attention too, just like the misdeeds of the celebrities so quick with their smiles and pouts.
