Is Franchising Flawed?

In Australia we have a white-goods salesman by the name of Gerry Harvey who moved into franchising many years ago.  He doesn’t like Australia’s franchising watchdog [ACCC] and from what we read he has little time for franchising law, or politicians, or lawyers or “theory” people. 

You see; Gerry designed a franchise model that is a benchmark for any system anywhere in the world.  It doesn’t matter how much money you have you cannot buy a franchise.  Harvey Norman cultivates the attributes needed to be successful and from the best of the best franchisees are selected and given a shot to pay him lots of money while they make lots of money.  Compliance to confidentiality and systems are absolute and balanced with immediate in-your-face support and training when the minutest aspect of the financial business model deviates by a hair.  Gerry is a likable character and while I’m not suggesting he is an absolute angel [he likes fun], his system works.

Pure franchising offers a win/win/win relationship where consumers receive consistency in quality and value.  Franchisors make lots of money from royalties and the franchisor investment value grows as the network of franchises grow in size, and royalty payments, on the back of a reputation of producing successful franchisees.  Franchisees see their investment grow in value on the back of consumer brand awareness [mostly advertising], group purchasing benefits, strategic market, operational and IT development, support and training.   Many will tell you pure franchising doesn’t exist.

The firm of G&J [the father and the son and the silent partner for my slow friends] noted that man was essentially weak so they put forth 10 rules and called them Commandments.   Franchising was not specifically mentioned and that was seen as an opportunity. 

When judging the behaviours of others, humans inherently see all in black and white however, when judging self-behaviour there is only white and an enormous amount of grey justification.  Laws are introduced to curb greed because humans can justify anything they do.  In franchising rogues will attempt to legitimatise opportunism under the banner of entrepreneurialism.  When laws are ineffective greed thrives and in franchising it is at many stages of disease.

At the top end of franchising there are few like Gerry but there are many success stories.  But do hundreds of thousands, millions, of franchise success stories really support any argument that franchising isn’t flawed?   In the extreme, a franchisee may be making oodles of money but does that necessarily mean he/she isn’t still potentially being ripped-off to at least to some degree?  

Thankfully at the bottom end of franchising there are proportionally few true corporate psychopaths running franchises - the worst of the worst.  But these are the headline grabbers because they tend to be large networks.  The fact is it is easier to rip-off worthwhile chunks from large networks so the temptation is immense. 

The rest, not good but not the extreme, blatant shams, offer up many shades of grey and these need to be broken down into a few groups but that is the substance of a much larger offering so I won’t.

Major brands where franchising opportunism occurs often take the limelight but the much greater damage is caused by the dominant numbers of small and relatively small franchise networks where the franchisor just doesn’t receive the revenue needed to deliver on the cornerstones of franchising i.e. investment growth, effective advertising, group purchasing benefits, strategic market, operational or IT development, support or training.  Here failure rates are enormous and mostly hidden.

People that buy into any of these “golden opportunities” do so because the business was tagged “franchise” and the uneducated do equate franchise with guaranteed success and the delivery of those cornerstones of franchising.   No one appears to have much interest in the franchise of 15, 10 or 8 franchisees that are turned over every 2 or 3 years and regulators do not monitor.  These franchisee voices are simply not loud enough.

Obviously not all franchisors cheat their franchisees and many only rip-off little bits; some just don’t get the opportunity to rip-off more.  Most instances of opportunism don’t start out as such.  They evolved from workable models where greed was introduced in small hits that escalated into bigger and more creative hits.  Often this can be seen coming from a new senior exec who wanted to make his/her mark on the profitability of the franchisor or where the franchisor realised that maintaining a relationship with ungrateful franchisees was hard work deserving of greater remuneration. 

Whether it be a large franchise or a small franchise there is under all existing legislation and regulation, the ability for the franchisor to increase his revenue to the detriment of the franchisee.  

As an example; say a franchisor delivers 90% of what a franchisee is entitled to from advertising, support and training and then takes the cream from group purchasing benefits through abusive levels of rebates and inflated costs for mandatory purchases from the franchisor. And say he only adds 10% to rents.  Across a network of franchisees this is serious money. 

And it can be all, most of and in many reported cases, more than the margin needed by the franchisee to survive.  When the franchisee fails the next sucker steps up to buy the “golden opportunity”, from the franchisor, and the cycle continues.  Man is flawed therefore franchising is flawed?  

In worst case franchising franchisees get very little and often no benefit.  Just pain - pain that goes far beyond financial loss.

Foolish franchisees aside, the reality is that laws are meant to protect man from man.  In franchising there is no protection anywhere and that lack of protection fertilises the greed.

I am not suggesting that franchisees are innocent of similar bad behaviours.  Many leap into the grey whenever they can get away with it.  Proportionally they are in the minority but only because they have everything to lose.  Under existing franchising legislation, regulation and the cost of accessing justice, franchisors know they have very little to fear.

Many suggest, and I don’t disagree, that educating franchisees will save most from themselves.  Others suggest that exposing franchising dangers to the world is the only way.  And then many suggest that better law can protect franchising.  The reality is that governments are swayed conveniently by a cultivated vision of doom and gloom and they justify economic protection over the protection of those they need to portray as a noisy minority of failures.  The further reality is that dishonesty and abusive greed flourishes within most of franchising and if governments cannot act then franchising must be exposed to protect those that deserve to be protected whether they be 80% or 10% or 2% or even 1% of the millions at risk.

The largest hurdle in all of this is the complexity of what format effective law should take.  Both franchisees and franchisors have a right to be protected but governments don’t have a solution.  Academics and expert lawyers have not offered an effective solution.  They select parts, large parts, and offer valuable remedies but overall it remains as ineffective law.   Lobbyists from both sides argue for their cause but do not argue or offer an adaptable, balanced and absolute solution.

Governments have not invested in bringing together those who would create the package needed.   The need is as undeniable as the levels of franchisee disasters and governments need to invest.  I’m not suggesting it isn’t bloody difficult but don’t tell me it isn’t doable.   Avoiding hard yakka and decisions is another human weakness but should we have to attribute that to representatives of the people?  Maybe so – they don’t seem to give a siht!

As to economic concerns; if franchising is one day seen by all as an absolutely dangerous business format to be avoided, it won’t affect Gerry’s business or any of the many legitimate franchises one iota.  Their reputation will over-ride the dirty reputation of the rest of franchising.  And if there were no coffee franchises I doubt that anyone is suggesting people won’t open coffee shops.

So is the franchising concept flawed?  Not really – but clearly most players and laws are.