Oporto and Red Rooster shops on verge of collapse
OPORTO, Red Rooster and Chicken Treat shops across Australia are on the verge of closing their doors due to the parent company's unfair business practices, it has been claimed.
In a submission to a Senate inquiry into the operation and effectiveness of the Franchising Code of Conduct, a group of chicken shop franchisees say their businesses were in distress due to the "poor business model" imposed by the parent company Craveable Brands.
The Franchisee Association of Craveable said the high costs of the franchises had led to stores closing down, including Red Rooster outlets in the Sydney suburbs of Mt Pritchard and Parklea.
"There are many more on the verge of bankruptcy," the group said. "The business model needs to be questioned and rectified prior to more franchisees becoming bankrupt."
Craveable Brands, which operates more than 570 restaurants across the three chicken brands, is accused of acting in bad faith by forcing franchisees to pay inflated rates for goods as a result of "unreasonable rebates" from suppliers.
According to the submission, a case of Mount Franklin water can be bought for $11 at IGA but costs $18 through Craveable suppliers. Packaging prices are also wildly inflated. Franchisees pay more than $70 for bulk plastic spoons, knives and forks, compared with the open market price of $40.
The group estimates the cost of goods (COG) for Craveable is 38 per cent, significantly higher than 32 per cent for Subway franchisees, 28 per cent for Coffee Club, 33 per cent for KFC, 30 per cent for Hungry Jack's and 30-32 per cent for Domino's.
"It should be noted that the franchisee pays over 95 per cent of all COGs, however has no presences or contribution to negotiations with suppliers," the submission said.
"Neither are any rebates disclosed or shared with franchisees. It is the belief of franchisees that the franchisor is not acting in good faith whilst determining prices. The franchisees' hands are tied, as the franchisor determines the cost price and the selling price."
Other "astronomical" costs allegedly not disclosed to franchisees include GetSwift delivery management software, finger scanners, media player licences, "unreasonable" IT costs, software licences and digital menu boards.
"The cost of the above appears to be astronomical when compared to the open market, which suggests rebates may have been a driving force behind the decisions, further highlighting lack of good faith from the franchisor," the submission said.
Another area of concern highlighted was the cost of the customer loyalty program and the poorly implemented home delivery model, introduced in the past three years under a turnaround plan by the new chief executive.
Franchisees said the customer loyalty scheme was "a direct hit to franchisee without any contribution from franchisor" and was introduced without warning or cost-benefit analysis. "It is a conservative estimate that the average store has lost over $25,000 to this program," the submission said.
"The loyalty program offers the customers to earn a $1 reward for every $15 dollars spent. This can be used in any restaurant of the same brand. Often customers will earn reward at one restaurant but redeem at another.
"This means the franchisees are not offered any compensation for the items redeemed, which negatively impacts their cost of goods.
"If the customer chooses to redeem via home delivery, it further raises the cost, in the form of the driver, fuel and insurance. Franchisees were also forced to purchase scanners, which was again an added cost not disclosed to franchisees.
"The customer database is actually owned and kept by the franchisor, whilst all costs are incurred by the franchisee."
Home delivery, which had been touted as the "silver bullet" behind the company's turnaround, has "caused further financial stress" for franchisees, according to the submission.
"All franchisees are expected and pressurised to introduce delivery within their stores as a total brand direction," it said. "This has burdened them with the added cost of vehicle ownership (insurance, registration, maintenance, finance), plus a higher wage bill.
"Stores that are not doing delivery are made to miss out on marketing and media spend (which franchisee has contributed towards).
"Stores that do not do delivery also negatively affected by close proximity doing delivery taking their market share and revenue. Forcing delivery was not disclosed as part of business model when stores were sold."
The delivery model was "not implemented efficiently", causing the "cannibalisation of sales" from in-store, resulting in "huge cash flow issues for all franchisees", which was "further enhanced by lack of marketing and poor execution".
The group alleges the delivery was introduced to increase the top-line figures to make the brand more suitable for a stockmarket listing. Last year, Craveable Brands shelved plans for a $250 million float.
The lack of TV advertising, despite contributions by franchisees to the marketing fund, was also highlighted. "Over the last three years the franchisor has refused to spend on free to air TV," the submission said.
"Upon questioning the franchisor has no satisfactory response as to why this decision was made. This has had a huge impact on the negative sales of all franchisees. It is alleged that the lack of transparency indicates there is unethical behaviour on the part of the franchisor with regards to the marketing fund."
Franchisees also alleged a "conflict of interest", as Red Rooster and Oporto are "very similar businesses". "Product innovation has been an issue for both these brands," the submission said.
"The franchisor is not able to do justice to either brand product innovations. The common complaint for Red Rooster chicken has been 'it is the same chicken, which is available at the local supermarket for half the price'.
"A simple move like adding flavours and sauces cannot be done because that competes directly with Oporto, Red Rooster's sister brand. The conflict is not just in product innovation. The franchisor has opened both brands within proximity to each other putting the franchisee at direct disadvantage.
"This has caused great concern and confusion as it is noted that the marketing resources are shared for both brands, but site opening decisions are made with both brands competing each other for the same market share."
The franchisees further alleged that since forming the association a year ago, they had been subjected to "bullying" from head office.
The alleged bullying includes "interfering in the sales process by lowering the price on restaurants in order to remove the franchisee quickly", "breach notices on items that were not taken up previously", "constant harassment by brand management over minor issues" and experienced franchisees with no prior issues being "placed on a back foot".
Speaking to Sydney radio station 2GB, Nationals Senator John Williams said he was not surprised. "We hear this all the time," he said. "They're paying $2.40 for two litres of milk, you can buy it at Coles and Woolworths for $2 for two litres of milk.
"In some cases, like Brumbies, they take a slice of their gross turnover, regardless of their profit. Many are making losses yet they're taking a slice of their turnover."
Craveable Brands has been contacted for comment.