Australia's ACCC and Franchising Have a Problem
Victims of Australia's franchising farce are in a much better position than similar victims from the US and other countries. We have a small market in comparison.
Australian franchisees have virtually shut down 3 majors; Midas Car Care, Lenards Chicken and Bakers Delight. They stagnate without growth as costs increase and where any level of due diligence exposes the truth of their scam and their behaviour. We were told we could not effect them and that we could not get an Inquiry into Franchising.
We now have our inquiry and while most are not optomistic that it will produce effective protection; the industry, the government and the regulator should start to use their imagination. Franchisees thus far have turned on specific rogue franchisors. The age of the Internet offers a wonderful opportunity within a small market such as Australia to seriously damage, at least, this industry's reputation if the needs of franchising are subjected to more ineffectual compromise.
My husband and I operated a Midas Car Care franchise for 7 years. My husband has worked in franchising for 20 years and in the automotive industry for 32 years.
His submission to the inquiry contains the names of 169 franchisees that were mostly turned over in 84 months in a network that went from 109 shops to 129 shops to less than 50 franchisees where most of those are in trouble. The ACCC did nothing and 32 years of Australian inquiries allowed this and thousands of similar disasters to happen while government looked the other way.
There is a line in the sand. The FCA and the ACCC complain that we are adversarial and confrontational. I wonder why?
accc
Heads will roll in Australia. 32 years and it is only now that there is an inquiry. It is, however, a high level inquiry and worthy of being watched. The senate standing committee for corporations and financial services is an interesting starting point for change. I hope they use all their powers and soepena the main players like Roger Gillespie, lenard Poulter and Mr Bonnie because these crims are currently hiding behind their financial controllers. let them face those they robbed of their assetts. Franchisees have become confrontational, because of 32 years of innaction from bodys like the ACCC. I wonder if it is possible that they are in fact an accessorie to the churn and therefor we would have legal recourse.
Adversarial
"The ACCC complain that we are adversarial and confrontational. I wonder why?"
That's too bad. One would think that the Australian Competition and Consumer Division would be used to adversarial interests and conflicts. Conflict is what shapes the democratic process and the marketplace. Who needs an ACCC if the waters are still?
Auto Care Sales Plummeting?
There's an 800 pound gorilla in the room that no one is talking about.
Our own Department of Transportation is saying that the high cost of gas (that's petro to our Aussie guests) have seen historic drops in traffic. Some of our States are actually now concerned about how they are going to get enough revenue to pay for road maintenance since state road revenues come from retail gas taxes at the pump.
Of course, miles traveled really plunged since March with crude oil costs soaring to US$150 per barrel. The last few days have seen a slide in costs - thank heavens!
A historic drop in car mileage should also mean a historic drop in auto maintenance. Auto care franchisee profits should be plunging. Franchisees that have been around for years should be experiencing the macro-economic trend of squeezed profits.
Any auto-related franchisees care to comment?
Words of Wisdom
I had an excellent college finance professor who gave some excellent advice 20+ years ago.
I remember many of his axioms. One was - in a credit tight/rising unemployment environment, always buy the third party auto supply/repair/replacement parts verticals. People do not have the upfront cash to buy extended warranties, will not pay dealership prices for repairs, and hold onto their cars longer.
High Oil Price With a Slow Economy
Here's evidence that in a soft economy that your professor is right in that consumers stick to their old cars.
The article shows that GE and Chrysler are close to a 30% drop in purchases. Incredible!
Of course, public transportation figures are now way up. Wonder what your prof would say about how those third-party parts dealers would make out if everyone cut their driving by 20%?
Even Warren Buffett can be wrong...
A look at the recent share prices of the major autoparts/repair chains does not support the axiom of this professor -yet. I think it has more to do with the leverage these chains have in real estate today versus the '70's and '90's - and the generally increased reliability of autos may be a factor.
However, the brakes/tires/belts that you noted are where the $$$ are at. We'll see if the old professor's theory of history repeating is accurate. There are certainly 20% more cars on the road since the 80's and the overall number of auto repair centers has shrunk substantially since then. How many gas stations also have repair bays in your town?
I think the 20% YOY drop in miles driven being reported is being over-stated by the media - no surprise there!
The NDI estimated it at more like 5%. This is all moot since, IMHO, I see gas prices for the next 5-10 years staying in the $2-3 range, barring a real regional conflict that truly impacts supply. Before all of the manipulation and hedging began, fuel prices adjusted for proper inflation should have been in the $2-$3 range since 1990. We were all living in lala land at $1-2 while the rest of the world adjusted around us for the last 20 years. This is just a way for the economy gods to get things back in balance. I see the road traffic being back to "normal" in 6 or so months.
View everything in economics as a big pendulum. This latest extreme swing is already moving back toward center. It just amazes me as to what these high-priced economists at the big auto makers really do for a living. Drive by a GM dealer lot and you will see what I mean.
The legacy damage to our economy will be in the knee-jerk reactions of the lawmakers in terms of PC subsidies and funding, ie ethanol - and don't look for the transportation oligpolies to lower their prices and eliminate things like $2 sodas on flights once some of their base costs return to pre-2006 levels. Deflation outside commodities is just a term.
My mechanic is also a
My mechanic is also a franchisee, while waiting for the car we normally go over franchise opportunities and the like as he is a 3 time franchisee of different concepts and is always looking.
He says business has never been better and he sees it improving. For one many customers parked their SUVs and bought used older small cars that they are bringing in for repairs. Two, many have talked about buying new hybrids but are afraid the technology will be costly, so their plan is simply to wait it out and hope the technology proves itself reliable, they are talking of buy 2-6 years out. In the meantime they will hold onto what they have, seek used smaller cars and apparently visit his shop a lot.
He also said the average ticket is up significantly, but overall volume has dropped, so he is making more.
Midas SeesTough Market
Now the argument against the conventional wisdom above is that there is indeed a mass migration off of car travel.
What is reality though? How are the car care companies doing? Well, this is how Midas corporate is doing as it receives royalties from its franchises.
News Show Says Better to Put Money in Bank Than Midas
Australia's Current Affairs t.v. news program above reports that Midas Australia's own figures shows their average franchise owner making just A$5,000 profit a year on a quarter of a million dollar investment. "Now for that, you'd do far better to put the money in a bank and go to the beach," the newsman says as he stands in front of a beach.
The t.v. newsman continues with even grimmer facts. "In New South Wales the figures are even worse than that. The average Midas franchisee is losing A$22,000 a year."
Midas Mole? Employee Leaks May Help Shed Light
How did the Australian television show know the average profits of a Midas franchise owner? Disclosure document? Doubtful.
There must be an employee of Midas secretly feeding the news show such information.
I sincerely doubt if Midas Australia has been sharing such numbers with franchise owners and prospective buyers.
NOTE: There is something missing though. We need to know the average salary of the owners. This is deducted as an expense in the SG&A of the profit and loss statement. More salary means less profits. Having said this, it is doubtful that owners will give themselves a hefty salary for many reasons (think taxes), but we need to know that figure nonetheless to give the earnings statement some background.
Midas aren't that bright
Midas did actually supply the national figures to a franchisee. The NSW figures were a fax sent to a wrong address.
Midas also unwittingly provided the numbers of franchisees turned over from comparisons of national franchisee contact sheets that were produced, on average, every 6 months. Look at these figures and consider that the franchisor started with 109 shops took it maxed at 129.
From 2001 to October 2007
2 Midas shops changed hands 5 times (10)
8 Midas shops changed hands 4 times (32)
21 Midas shops changed hands 3 times (63)
43 Midas shops changed hands twice (86)
Most of the rest changed hands once. Only 5 original franchisees are still there and they are doing it real tough. But you could have guessed that.
Midas franchisees thought that Midas International, Alan Feldman, would help. In fact he said they would but then he simply told the Australian franchisor he was too busy to deal with him so he should not to be so obvious. But Bonney isn't that bright.
What You Will Lose By Buying an Australian Midas Shop
Thank goodness for corporate faxes sent accidentally to franchisees.
Let's say there are roughly 119 Australian franchises in the system for the six year period. Counting only the 191 franchises sold multiple times, that's 160% turnover of units in a six-year period.
We know there is more. 45 franchises left minus the five that have managed to buck the trend means that 40 franchises have been sold once. That brings store turnover close to 200% turnover of Midas repair shops in the last 6 years.
Australian Midas Shows High Risk: From what has been provided in the previous post, an average investor of an Australian Midas shop has a 200% chance that they will need to sell their shop within 6 years.
What is the return on investment for a Midas shop?
- $250,000 initial investment
Yields $5,000 average profits a year. That's 2% return on investment per year. (Certificates of deposit pay more.) Let's estimate cash flow at +A$15,000.
Resale value of a slightly profitable auto care center = +A$150,000??
That yields a Net Present Value (a calculation of return on investment considering today's dollars) @ 9% interest is a loss in present day terms for the six years of your investment of only -A$72,628.
Scenario 2: On a really positive note, if an investor somehow managed to sell his store at the initial price of a new franchise, they would only lose -A$13,002 of their original A$250,000 investment.
Scenario 3: Worst. If no one bought the slightly profitable store, the investor would have a huge loss at the end. Much of their initial investment amount would be lost. At a human level, the franchisee will have to go through the shame in the community of closing the store. That probably means any moochers and fair-weather friends will go off to mooch elsewhere. A home may be lost in order to pay the bills. At worst, a family unit could disolve from the economic stress.
But who ever said that buying a business, especially that really cool looking auto repair shop, wasn't without risk?
Now go buy one because you know you want it.
Bottom-line on Aussie Midas
Based on the numbers given, in my opinion . . .
Price: A total investment cost of A$120,000 (that's US$110,000) in a Midas repair shop that has a history of A$5,000 profit begins to look financially of interest - assuming that the financials show a reasonable salary for the owner, the shop continues at that level of profitability and that the marginally profitable shop can be sold at the cost of the investment (A$120,000).
Risk Factor: The risk factor of this investment is VERY high. The good news is that this would be a cheap time to buy. Bad press may push the purchase price down a little more in the short-term but fundamentals will keep this investment depressed for a while.
Bottom Line: If it were me, I'd say a total investment cost in the mid-sixty thousand range would catch my attention.