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Battery World Seeks Third Line Forcing Approval

Australias' Battery World Franchise lodges contentious Third Line Forcing Notification with the ACCC.

Third Line Forcing describes a situation where a supply of goods or services is made on the condition that the purchaser buys goods or services from a third party or a refusal to supply because the purchaser will not accept those conditions.

In the area of franchising, this is most easily explained as the right to operate the franchise, use of trademarks and other services on the condition that franchisees buy their goods or services from nominated or authorised suppliers.

Third line forcing is prohibited unless a notification has been lodged with the ACCC and the ACCC is satisfied that the likely Public benefit will outweigh the Public detriment.

Typically, franchisors argue that the conduct will promote brand consistency and increase buying power and this is certainly the argument put forward in the Battery World Notifcation N94446 (pdf).

However, these arrangements are never as innocent as they might seem, nor as beneficial as they are claimed to be.

Let's look at the first argument:

Support of Battery world network, as part of deciding on which suppliers are approved suppliers, BWA is likely to be able to negotiate for approved suppliers to provide benefits to the battery world network (for example, contributions to annual Franchisee conferences)

The example given should ring alarm bells for franchisees.  In a number of Australian franchises, “benefits” typically translates to “rebates for the franchisor” often in the form of ad fund levies and this is nearly always to the detriment of the franchisees buy price.

Another outcome of this kind of strategy is that network support is diminished once suppliers do not have to compete with other suppliers for the franchisees’ business.

If a franchisee has two suppliers for the same or similar products and goes to one of those suppliers with a faulty product then the supplier will be more likely to rectify the problem, knowing that if they don’t the franchisee is likely to purchase from their competitor.

If you only have one approved supplier for that product well then, you may as well get used to poor service from that supplier in the future. The supplier no longer needs to work to get the franchisees business it just has to offer a sufficient enough rebate that the franchisor will overlook any poor service to its franchisees.

Consistency

This is a typical argument from a franchisor that can have merit in some cases but is detrimental in others.   What seems to happen an awful lot is that consistency of a type of good or service is confused with consistency of the supplier of those goods.

Using the BWA example, the argument is that certain items need to be stocked so that a customer can buy the item in any of the battery world stores. But, and this is a big but, it simply cannot be argued that it is important to the consumer which supplier provides those goods except maybe in extreme and unusual circumstances.

If an identical item can be purchased from a variety of suppliers, how does limiting the supply of same goods from one supplier over another enhance brand consistency? It is the goods or services that may be important to brand consistency not from whom the franchisee obtains those goods that is important here.

The other problem that comes with this kind of strategy is that franchisees can be forced to purchase particular items or goods that they know full well they will never be able to sell. This often occurs where there are regional differences for product demand.

For example, if you run your BBQ and outdoor retail business in tropical Queensland you will probably have little market for wood fire heaters. If in the name of “brand consistency” the franchisor insists that franchisees carry wood fire heaters anyway, just in case someone comes in and wants support or service for that product the likely result for the franchisee is that you will have an awful lot of left over heaters and a reduced profit margin.

 If the BWA franchisor is actually getting rebates from the supplier on those goods, which is a fairly typical occurrence, they get that rebate whether you end up selling the item or not. The franchisor makes money, the supplier makes money but the franchisee incurs a loss. Not just a loss on the cost of goods but a loss on the stock and purchasing paperwork and the floor space that could be being utilised by more appropriate products but also tying up cash flow and operating funds.

Buying Power

Most people understand the concept of buying power in general but many blindly accept it when their franchisor claims that being part of that particular network will entitle them to buy prices not enjoyed by non network (independent or competing franchise) members where far too often, the proclaimed benefit does not exist.

Indeed, this is often what attracts independent businesses to become part of a franchise. The problem comes when a franchisor uses that buying power to benefit themselves and does not pass on the price benefit to franchisees. They have the buying power that comes from the size of the network but instead of using that to ensure best buy price they use it to fill the marketing coffers or to fund an extravagant conference at 5 star facilities or the rebate can simply disappear into franchisor pockets.

If BWA operates a rebate system then BWA franchisees can probably kiss their buying power good bye if this notification is allowed to get through.

See what is happening here? The franchisor is using the buying power to increase their income at the expense of the franchisees and at the expense of the consumer.

The franchisee ends up passing on the higher cost to the public or has to accept the reduction in profit margin to remain competitive.

The ACCC tend to overlook the fact that, where rebate systems exist, the franchisor consumes any cost benefit to the detriment of the public consumer which is all they care about when it comes to third line forcing notifications. Unless franchisees point it out to them.

So what can BWA franchisees or any franchisee do when faced with this kind of situation?

As interested parties, franchisees can make submissions to the ACCC regarding Third Line Forcing notifications and outline their concerns including any discrepancies between the information given in the notification and reality and request that the ACCC investigate further or hold conferences between the interested parties.

Confidentiality

The ACCC will publish submissions relating to the notification for others to read but does have a process for keeping franchisees submissions confidential. This is obviously very important if franchisees feel they will be targeted or bullied by the franchisor for speaking against them.

There is a publication; Guidelines for excluding Information from the public register produced by the ACCC which gives instructions as to how a franchisee can have their name and any other identifying information withheld from publication.

Be careful to indicate that you wish not to be identified to your franchisor and the reasons and that you don’t include anything too specific in your submission that could inadvertently identify you.

While a Third Line Forcing notification can be revoked at a later date should circumstances change, it is best to contact the ACCC and let them know you intend to make a submission as soon as you can after the notification is lodged.

Contact details can be obtained by calling the ACCC hotline, 1300 302 502 or by email to [email protected]  who will likely provide you with a contact from the adjudication office responsible for assessing the notification.

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Related Reading:

AttachmentSize
Battery World Notification of Exclusive Dealing N94446.pdf123.49 KB
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