Senate report slams exploitation as franchisees struggle to recover losses

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Posted

March 14, 2019 16:21:59

Brent Harrison is out of a job and facing financial ruin.

Key points:

  • Senate committee finds franchising needs a drastic and immediate regulatory overhaul
  • Committee recommends a multi-agency investigation into many business practices at Retail Food Group
  • Jamaica Blue franchisee Brent Harrison is locked in a legal battle with franchisor Foodco over a million dollars in alleged losses

It has been a long and slow decline for the young Queenslander, who diligently amassed a neat little pile of cash toiling on oil rigs off Australia’s north-west coast.

Three years ago, Harrison decided it was time to come home, work regular hours and spend more time with his family.

Attracted by the idea of running his own business, Mr Harrison looked at franchise operations and eventually settled on Jamaica Blue, a coffee shop chain run by Foodco.

They offered him a new outlet on the Gold Coast, not far from the company’s very first outlet in Coolangatta.

But things didn’t work out as planned. Mr Harrison claims Foodco owes him $1 million and he’s using the last of his savings in a legal battle with the company.

The case hinges around what Mr Harrison has alleged were the inflated sales figures Foodco sent him, claiming he took out a loan based on unrealistic earnings estimates.

“The crux of our claim is misrepresentation that was used to induce me to buy the store,” he told The Business.

Mr Harrison was offered a franchise for $475,000 after doing a course with Foodco. He took on debt to fund the deal and the added expenses of establishing the operation.

“On top of that, you’ve got your working capital, a bank guarantee, so by the time it adds up, you’re around the $600,000 mark to get it up and running,” he explained.

The clincher for the deal was an email from Queensland Foodco executive Luke Stenner that estimated the shop would generate up to $30,000 a week in sales. That is $1.8 million a year.

The company has since argued he should never have relied upon that information. When Mr Harrison ran into trouble and missed paying the rent and franchise fees, Foodco seized control of the cafe.

Foodco refused to comment for this story, arguing that it was inappropriate given the matter was before the court.

“It’s supposed to be a partnership but it’s more like a dictatorship,” Mr Harrison said.

Franchise sector requires drastic overhaul, report says

Mr Harrison’s story is not unique. Nor is it unusual.

According to the findings of a recently released senate committee report, the entire franchise sector requires drastic and immediate overhaul.

It recommended civil law penalties be included in the industry code along with greater enforcement power for the competition watchdog to help eradicate “exploitative behaviour” in the franchise sector.

In addition, the senate committee has called for better disclosure, particularly around financial performance when franchises are sold, and it has demanded greater accountability about how compulsory marketing levies are spent.

The committee wants the Federal Government to establish a taskforce to oversee and implement its recommendations.

It also took aim at Foodco rival, Retail Food Group, demanding a multi-agency investigation into the company from the competition regulator, the Australian Taxation Office and the Australian Securities and Investments Commission.

It wants the agencies to probe current and former directors over allegations of insider trading, short selling, market disclosure obligation breaches and tax evasion.

Retail Food Group, which is behind Michel’s Patisserie, Gloria Jeans, Brumby’s Bakery, Donut King and Crust Pizza, has been embroiled in controversy over worker exploitation and tales of hardship from franchisees.

There was no mention of the latest developments on its website after the committee’s findings were delivered.

Instead, under its “Latest News” heading, RFG had stories that included: “On a roll: Brumby’s Bakery at Baking Awards” and “Kings of Pizza Spin Out New Look Store”.

‘Lives ruined’ by shattered franchise dreams

Mr Harrison explained that things began going off the rails almost immediately, as his sales fell well short of projections.

“Three months into it and turnover wasn’t anywhere near where we needed — we weren’t exactly streets apart, we were planets apart,” he explained.

A little more than 15 months into the venture, Mr Harrison was experiencing severe cash flow problems and missed rent and franchise payments, prompting Foodco to seize control of his business.

The business performance has not improved, according to documents sighted by the ABC.

Reflecting that, Foodco now has Mr Harrison’s Jamaica Blue coffee shop up for sale at just $220,000 — less than half the price at which it sold the greenfield operation to him.

The senate inquiry uncovered examples where others had similar experiences.

Senator John Williams quizzed Foodco managing director Serge Infanti about a case where a loss-making business was sold for $300,000 in Sydney’s Burwood.

“Had the business been making a profit prior to her buying it?” he asked.

“Not that we believe,” Mr Infanti replied. “But there was no profit/loss in the sale contract.”

“So she bought the business and it wasn’t really making a profit and she paid $300,000?” the senator continued.

“I’m not sure of the price,” Mr Infanti replied.

For Mr Harrison, the report’s findings are timely, but cold comfort.

“There’s a lot of people out there whose lives have been ruined, just been destroyed,” he said.

Topics:

retail,

food-and-beverage,

consumer-protection,

regulation,

federal-parliament,

australia,

coolangatta-4225,

qld



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