Is the RFG issue a wake-up call for the franchise sector?

RFG’s current plight is of relevance to everyone in the franchising sector says Greg Nathan, as the franchisor faces Fairfax Media claims of franchisee mistreatment. Here he outlines his perspective on good faith and fairnesss in franchising and offers some practical advice.

“The phenomenon of brand damage is well known in franchising — where the reputation of franchisees who do the right thing by their brand and customers, is tainted by a franchisee who does the wrong thing. Similarly, all of us who work hard to improve the sector will be deeply disappointed and troubled by the allegations in these articles, and the subsequent damage to the reputation of the whole franchising sector.

“On the positive side, this is a wake up call. It’s time the issues raised in these articles were aired and faced.

“But let’s not assume the majority of franchisees across Australia feel their franchisors exploit them. In fact the opposite is true. Our extensive research at the Franchise Relationships Institute (FRI) shows that 81 per cent of franchisees across the sector believe their franchisor acts fairly.

Understanding the psychology of fairness

“Fairness is a deeply ingrained human quality, hard-wired into our consciousness. We expect others to behave fairly and do the right thing in relationships, sport and business. And when they don’t we probably feel outraged.

“However the reality is, for all sorts of reasons — ego, greed, insecurity and psychological problems — people sometimes behave badly. We have all seen examples where people, even those we know, can cheat, bully, abuse and take advantage of others. Unfortunately, if these people are in leadership roles, their businesses also start behaving badly and we get a toxic culture.

“Let’s be real. We are going to find examples in all human institutions, including franchise networks, where power is abused. Some franchisees, franchisors, advisors, and dare I say, journalists, will occasionally cross the line that separates looking after one’s legitimate interests, from exploiting an opportunity for personal gain at the expense of others.”

Revisiting the obligations of franchisor

Nathan points out that Australia’s Franchising Code of Conduct helps manage “the creative tension between legitimate opportunity and opportunism” with an obligation by franchisors and franchisees to act in good faith.

“Let’s define this as being fair, honest and well-intentioned in delivering on your obligations. For franchisors, this means providing credible leadership, and offering franchisees a proven business model that delivers a reasonable return on their energy and investment. The assumption is of course they work hard and apply the model.

“To deliver on this obligation, franchisors need to also work hard to keep their business models competitive, relevant to customers, and profitable for their franchisees.

“There is still a lot of work to be done here. Data from thousands of surveys conducted by FRI show that a third of franchisees do not feel optimistic about their future in their franchise. This is mainly driven by concerns over margin compression and a lack of profitability.

“Many of the pessimistic franchisees in this research also believed their franchisor was self-serving.

“Perhaps it’s time all franchisors reflected on the health of their franchise networks — culturally and commercially — and asked themselves this important question: “Would you invest as a franchisee in your own network?”

“If you are wondering why franchisors should care about franchisee optimism or satisfaction, consider that franchisees who feel more optimistic achieve 15 per cent better business results. And franchisees who feel supported, are not just easier to work with, they deliver a better customer experience, and are more likely to proactively promote their business in the local community.”

8 actions for franchisors

So what should franchisor do? Here are eight things Greg Nathan suggests franchisors can and should be doing to protect their brands, guarantee network sustainability, and ensure the majority of franchisees are satisfied.

Monitor the profitability of all franchised units using an agreed chart of accounts. If a franchisee who works in the business is paying you or the landlord more than they are paying themselves, you have a fairness problem.
Have a formal remediation program for franchisees who are not profitable after a reasonable ramp up period, including identifying the causes and solutions. Be tough on franchisees who don’t commit to following the agreed action plan.
Measure franchisee satisfaction annually using a valid instrument, and share the findings back to your network. Use the findings to build on your strengths and address legitimate weaknesses.
Set an agreed target for unit level profitability and franchisee satisfaction, and make these corporate KPIs. It’s also a good idea to link these two metrics to the franchisor team’s remuneration.
Ensure your leadership team understands you are in the franchising business, as well as the other industries you operate in. They also need to understand what’s important to franchisees, and have the expertise to deliver relevant, effective support.
Ensure your marketing strategy is primarily designed to drive customers to franchisees’ businesses. Also equip franchisees with the skills to maximise the value of every customer interaction, and the tools to drive sales in their local communities.
Deliberately create a franchisee-centric culture where the franchisor team appreciates the hard work and commitment of franchisees, and shows through their actions they genuinely care about franchisee success.
Before making major decisions that impact on stakeholders, ask yourself the following questions: Is this legal? Is it fair? Is it good for our _brand and customers? Will it improve franchisee profitability, and if not, what is the justification?