Franchisees report years of “hell” as prospect of a Retail Food Group class action looms: Will court action fix the sector?

SmartCompany, January 30, 2018

Franchisees at listed food company Retail Food Group have continued to speak out about the significant debts they now owe as a result of their franchises failing, as one law firm investigates a possible class action lawsuit against the company.

However, franchising experts say such legal action is unlikely to fix concerns about operations in the franchising sector overall.

Retail Food Group (RFG) owns a number of food retail franchises, including Gloria Jean’s and Michel’s Patisserie. A Fairfax investigation into the business last year uncovered stories of franchisees who say they were left stranded after buying into the businesses only to discover tough terms made it hard to build profits.

At the time, Retail Food Group rebutted the claims, saying it had taken steps to improve its support to franchisees.

However, with class action firm Bannister Law now investigating the possibility of a class action against the business and calling for information from franchisees about their experiences, more stories from franchise holders at the company have come to the surface.

One couple who owned a Brumby’s store on the Sunshine Coast told the Sunshine Coast Daily this week they are now $800,000 in debt after taking on the franchise, only to experience “four years of hell”.

Bannister Law, which is asking franchisees to register their details with the firm, said in mid-January that it had decided to gather information from franchise operators to contribute to a class action, which was originally slated as a potential shareholder class action around guidance Retail Food Group had given to the sharemarket.

In a statement, the firms founder Charles Bannister said the investigation is looking at possible “severe financial hardship” experienced by Retail Food Group franchisees.

When contacted by SmartCompany this morning, Retail Food Group said in a statement it will defend any class action “vigorously” if it occurred.

However, franchising expert Jenny Buchan, who is a professor in the school of taxation and business law at the University of New South Wales, says a class action alone will not be enough to fix concerns about the franchising sector.

“It’s really hard to force them to change their ways,” she says of the franchise sector.

Overall, challenges for franchisees come down to the fact that they have limited protection for their interests under the Corporations Act, she says, with franchisors responsible primarily to their shareholders under the act.

Australia has seen a number of alarming stories in the world of franchising over the past two years, including concerns about underpayments and practices at convenience store operator 7-Eleven and there have been calls for a parliamentary inquiry into the sector. However, franchisees have been speaking out for years with tales of lockouts, lost profits and family breakdowns at major franchise networks.

The examples show the difficulty many franchisees have when it comes to resolving disputes with franchisors, and Buchan observes a more important long-term change for the sector would be to enshrine more rights for franchisees in legislation.

“The most valuable thing would be the governance duties of the directors [of franchisors] be extended beyond the shareholders to the franchisees, so they are also owed duties in the Corporations Act,” Buchan says.

Class actions  “David and Goliath” affairs

Principal at Legalite Marianne Marchesi says when class actions do happen in the world of franchising, they tend to see small franchisees having to band together to fight big corporate companies.

“Usually, those facing class actions have big legal teams and feel that they can fight it,” she says.

While a high-profile court case like the one proposed against Retail Food Group “won’t do the sector any favours” in terms of reputation, Marchesi suggests there are other options to prevent possible poor behaviour in the world of franchising.

One option would be the Australian Competition and Consumer Commission using its powers to issue infringement notices against franchisors more readily, she says.

“They can already issue infringement notices, but I think they could do this more often, just to come in and slap the franchisor on the wrist,” she says.

Another way to put the interests of franchisees more front and centre would be to establish a standalone, independent body to represent franchisees and lobby for better deals in franchise agreements, she says.

“That would go a long way in terms of balancing the system,” she says.