What can be learned from the 7-Eleven crisis?

The recent suggestions that some 7-Eleven franchisees may be underpaying staff in a bid to survive in business have put the spotlight firmly on the viability of franchising as a business model.

The convenience chain has a particular franchise model that differs from most other systems in the Australian franchising sector. Rather than being royalty based, the model is a profit share system, with the franchisor taking 57 percent of gross profit – and paying for rent and utilities – and the franchisee taking the remaining 43 percent.

Natalie James, Fair Work Ombudsman says “We are exploring whether the model places significant pressure on a franchisee’s ability to meet statutory obligations, predominantly through a lack of cash flow. In some cases, we suspect it is the reason franchisees have underpaid staff.

“In our experience, there are many different models of franchising. Many of the effective models, from our perspective, involve the franchisor providing significant infrastructure and robust processes for franchisees to assist with meeting their regulatory responsibilities and resolving issues when they arise.”

So how does your franchise model shape up?

Are your franchisees profitable?

Franchising is only successful if the franchisor and franchisees make a profit. Why should anyone invest in a business with little hope of making money?

If your franchisees are struggling to reach profitability, they will be disgruntled, disaffected and bad ambassadors for your brand.

If the lack of profit is systemic, you would be well-advised to review the business model.

Are you showing leadership?

A franchisor commitment to continual leadership and education is critical. This is particularly relevant in any network where there is cultural diversity and franchisees and employees may be unfamiliar with Australia’s regulations and workplace agreements, says Frazer.

What is your moral responsibility?

Franchisors may lay claim to following the letter of the law, but is compliance alone sufficient?

Professor Lorelle Frazer, director of the Franchising Centre at Griffith University, asks in The Conversation, “Are there wider moral obligations incumbent upon franchisors? Should they go beyond the minimum legal requirements to show leadership in setting the direction and culture for those who are now ambassadors for their brand?”

Frazer says “When things go wrong at the franchisee level, it is easy for the franchisor to say that legally “it’s not my problem”. But it IS most definitely their problem in terms of public perception of their business and brand, and also on franchisee and staff recruitment and retention.”

Are you encouraging transparency in your system?

A pilot study by Griffith University and the University of New South Wales found potential franchisees did conduct diligence before signing an agreement, but only one out of 30 in the study undertook research on the franchisor.

Jenny Buchan, Associate Professor in business law at UNSW, writes “Sometimes they can’t learn more than the franchisor wants them to know. For example, the company behind 7-Eleven in Australia is a large proprietary company that has been exempt from lodging accounts with ASIC since 1994.”

But, she adds, it can be hard to dissuade a franchisee from proceeding with a purchase if they have already fallen in love with the brand.

“Franchisors hold all of the information about franchisees’ businesses so can see each franchisee in context of the whole system. This absence of context disadvantages franchisees in all franchisor-franchisee negotiations. Every aspect of a franchise relationship is profoundly asymmetrical. It can work superbly when a franchisor and its franchisees share common motivations, otherwise it can be a nightmare.”

Are you an employer of choice?

Exemplary franchisors will be extending their business values beyond financial gain, and looking to care for the individuals in the workplace.

Lawyer John Sier of MST Lawyers writes, “Franchisors must take an active interest in the manner in which its franchisees seek to employ their staff, and to ensure that whatever legal framework is being used by its franchisees to regulate the conditions of employment of their staff, the legal framework is compliant and being applied.”

One step to take is to sign up to a Proactive Compliance Deed. This allows businesses to benefit from improved training, systems, communication, self-auditing and self-resolution. The franchisors set best practice standards for both franchisees and staff.

Those franchisors who have signed up already include Dominos, McDonald’s, Red Rooster and the Retail Zoo group.