Supplier Rebate Secrets
The Australian Code approach to the contentious issue of supplier rebates is to disclose they exist and with whom but not the extent and typically any lack of transparency ensures franchisees will be suspicious. Is this any different anywhere in the franchising world?
Franchisees cannot expect any change to this second-string revenue streaming as a legitmate right of the franchisor to make a buck; however it will always be contentious and particularly in franchise systems where franchisee failure rates are high.
The matter has been raised in several forums related to government inquiries but, to date, no formal complaints have been received by the FCA. Steve Wright – Franchise Council of Australia
It should be noted here that no one in their right mind would bother to submit any complaint to the FCA representing franchisors.
Retail Food Group recently purchased the Michel’s Patisserie brand where royalties were not paid under the old franchisor; however franchisees complained that the cost of product from that franchisor destroyed their financial model. The new franchisor negotiated with franchisees to introduce royalty and to create a product pricing strategy that has seemingly satisfied franchisees.
Our approach is to ensure that any rebates or discounts are passed entirely on to franchisees, preferably through the invoicing by suppliers to the franchisee, to ensure maximum transparency.
We have also written our policy into the franchise agreement in the clearest possible language. I was previously associated with a group where the franchisor simply added the value of any rebates to their own bottom line, and I saw that as improper - Fellas Gifts group's director Brian Werner
Complaints that the Australian Competition and Consumer Commission simply 'hand out' authorizations exempting franchisors from third line forcing [s47 of the Trade Practice Act 1974] when such behaviour is excessive and abusive have definate legitimacy.
The dark cloud over Poolwerx franchising has resulted from the introduction of contract changes many claim are designed to push them out and/or ‘cut the territories in half’; however, most controversial is that the ACCC gave Poolwerx the ability to avoid the intent of the TPA to control abusive rebate systems more than a year after the franchisor applied supplier purchasing demands that covered virtually every aspect of their businesses.
There are way too many examples to choose from where abusive rebate systems have been central to high franchisee failure rates. We saw in the old Midas Australia where one aspect of the franchisor’s financial model had become dependent on extreme rebate revenue streams that seemingly created a need for acute franchisee churning that eventually led that franchisor into administration and a new owner appeared.
Two of the issues here are the detrimental effect that such abuses has to the longevity of the franchise systems involved in such abuses and; the behaviour of the ACCC in allowing such abuses when they develop to being clearly contrary to what was intended to be legislated protection from such behaviours.
The argument typically touted to support mandatory suppliers that deliver the secret rebates has weight in that the franchisor claims they are simply utilizing group purchasing benefit while maintaining the standard of product and equipment. While this may well be accurate in some systems the ACCC in effect accept this across the board and escape their responsibility to the Act.
Today in franchising we seem to accept rebate systems as an operational standard even when the level of damage is reported as blatantly obscene and too often financially and totally devastating to franchisees.
This subject must be a significant element of due diligence and this is the stuff of interpreting and projecting a franchisor’s behaviour. Once the contract is signed such abuses can only be dealt with by utilizing and valuing independent franchisee associations. In Australia the ACCC hand out Authorities to s47 as if they were bus tickets.
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