A rumour has been floating around for some time that Australia's Bakers Delight franchise is in financial trouble. That its business model does not work; too many of its franchisees were going broke.

A few weeks ago other rumours emerged. This time the quiet talk was that Bakers Delight was being bought by Coles Supermarkets – that Bakers Delight bakeries were to be opened inside Coles supermarkets.

Coles is owned by Wesfarmers, one of the largest public companies in Australia. Bakers Delight has a well recognised brand, that is true, but it is a brand that has been dogged by bad media, allegations of misconduct, an ACCC investigation, and litigation. One wonders why Wesfarmers would deal with a company with such a poor reputation and damaged brand.

By Tuesday this week the rumours were gaining momentum. Information came in quickly from two different States; from sources independent of each other. High level negotiations had been held in Melbourne last week regarding the sale of Bakers Delight and in attendance was a major overseas Wesfarmers shareholder who had flown in for the occasion.

This not so ‘well guarded secret’ seems to be the topic of much discussion around the country, with the main points all being:

• That Bakers Delight and Wesfarmers have been ‘in talks’ for the past 3 months;
• That Coles are currently restructuring their bakeries and are changing the way their bakeries do business; and
• That the franchised bakeries will be closed down or de-badged (made into independents).

Not all Coles supermarkets have their own in-store bakeries. It has been suggested that if the buyout goes ahead, those that do, approximately 70%, will be re-branded as Bakers Delight, and those without will be supplied with product from the larger in-store bakeries, in a hub-type system.

Bakers Delight is already dealing with declining sales, a continual fall in market share, franchisees going broke and abandoning their bakeries, and themselves suffering multi-million dollar losses when they failed in their attempt to move into the US.

This latest development for Bakers Delight can only be in response to their ongoing difficulties in selling franchises after years of damaging media exposure regarding their treatment of franchisees, complaints to the Australian Competition and Consumer Commission, complaints to the Commonwealth Ombudsman and the three government franchising inquiries, and current litigation with franchisees.

The latest scuttle-butt suggests that the franchisors of Bakers Delight, Roger and Lesley Gillespie, have sold the New Zealand division of the company. The franchise has always struggled there and it seems that they have finally decided to sell it off whilst it is still worth something.

In an obvious effort to offload as many stores as possible, Bakers Delight have also been selling their Australian company owned stores at bargain basement prices; some reportedly as low as $50k. Considering that a new franchise sells for around $500k, this type of behaviour reeks of company directors desperately making a last-minute dash for cash on their way out. It also devalues the brand and their current franchisees investment. 

There is also talk that the Gillespie’s are moving to Canada. Whilst Canada has not been the raging success that Roger and Lesley Gillespie hyped it up to be, the company trades under the name of COBS Bread over there. Gillespie’s children are currently running the business. Cut and run? Will we see COBS Bread make an entry into Australia in a few years?

The concept of placing a franchise brand inside a supermarket is not new. The franchise Lenards’ appeared inside IGA supermarkets a few years ago. This concept is also currently being trialled by two IGA supermarkets in QLD who now have the other Australian bakery franchise ‘Brumbys’ inside their stores.

So what does this mean for the franchisees?

There is no good news for current franchisees if the rumour about Bakers Delight being introduced inside Coles supermarkets is true. Already there are an increasing number of franchises for sale, and no buyers. The price for many of these stores is well below what the price would have been just a few years ago. Current franchisees cannot get out of the system that is sending many of them broke.

A major problem for any franchisee when their franchisor sells is that they will not know the mind of their new ‘owner’. The purchaser may want to build on the success of the franchise system and this should be good news for the franchisees. They will of course be expected to pick up all the associated costs of re-branding. But they still have their business.

The purchaser may, however, just want to buy the brand – to either absorb into their own business, with no franchisees, or just to remove it from the market.

When a franchise system is absorbed by a ‘major’ company that does not franchise, they must be prepared for substantial loss. It is only now that these franchisees will understand how few protections are afforded them by the contracts they signed.

In the case of Wesfarmers, who do not franchise, the franchisees should be looking at how to minimise their losses. 

An easy option for Bakers Delight is to terminate the franchise agreements. They have, over the last few years, perfected ‘contract termination’ – breach, terminate. There is sure to be an increase in franchisees receiving breach notices, quickly followed by termination of contract notices. In fact, it has been suggested that three such notices have been handed out in WA just this week. Expect more.

Another option is for Bakers Delight to simply terminate the lease on the store site. They hold the Head Lease and the franchisee signs a Licence Agreement. When the franchisee checks their Licence Agreement they will realise that it is only for 5 months, rolling into a month-by-month agreement. If the Lease is terminated, then effectively so is the Franchise Agreement. The franchisee will be held responsible for any loss on the term of the lease.

Once the franchise agreement has been terminated, the bank will call in the loan. No franchise agreement, no business, no security, no loan. In most cases the bank will know about it before you will. They will move to recover their ‘security’ – usually the franchisee’s home, before you even realise you have no business.

The easiest solution for Wesfarmers and Bakers Delight will be ‘passive terminations’ – that is, a non-renewal of the franchise agreement.

It has been suggested by a Coles bakery manager this week that Coles will be making a ‘massive’ announcement sometime in the next week. It appears that we will not have to wait much longer before finding out if there is any truth to all of this speculation.

Footnote:Wesfarmers started in 1914 as a West Australian farmer’s co-operative, listing on the stock market in 1985. It is now one of Australia’s largest public companies.

In November 2007 Wesfarmers purchased the Coles supermarket group for A$22 Billion, making it the largest successful take-over in Australian corporate history. 

Since becoming a public company in 1985, Wesfarmers have enacted an aggressive acquisition strategy. They now have portfolio packed with leading brands in the retail, industrial and insurance sectors.

Most of their Australian and New Zealand specialty businesses are believed to hold a leading market position in their categories.