Many Red Rooster, Oporto and Chicken Treats store owners claim they are being pushed to the verge of bankruptcy as high costs and operating restrictions are forced on them by the company which controls the chains.
The complaints are contained in a submission from franchisees to the Senate’s inquiry into the Franchising Code of Conduct which was launched after Fairfax Media revealed issues at several large franchise chains including Retail Food Group, Caltex, Domino’s Pizza and 7-Eleven.
There are 570 Red Rooster, Oporto and Chicken Treat restaurants around Australia operated by a company called Craveable Brands which in turn is owned by private equity firm Archer Capital.
The Franchisee Association of Craveable has made a submission to the inquiry claiming franchisees are struggling.
“Many franchisees are in distress due to the poor business model of Craveable,” the franchisees claim.
The association was formed nearly a year ago “to protect the interests” of Craveable franchisees.
The submissions claimed Red Rooster franchisees in Mt Pritchard and Parklea in NSW had already gone to the wall.
“There are many more on the verge of bankruptcy,” the franchisees claim. “The business model needs to be questioned and rectified prior to more franchisees becoming bankrupt.”
The franchisees claim there is a conflict of interest between Craveable’s two brands Red Rooster and Oporto which both operate “very similar businesses” selling chicken.
“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’,” the franchisees say. “[But] a simple move like adding flavours and sauces cannot be done because that competes directly with Oporto, Red Rooster’s sister brand.”
The franchisees claim Craveable also opens both brands within close proximity to each other putting the franchisees at direct disadvantage.
Cost of goods
The franchisee’s submission highlights the high cost of goods for Craveable franchisees which they claim is “significantly higher” than competitors and directly impacted store profitability.
“Beverages can be bought at much cheaper prices these days at local supermarket[s],” the franchisees claim.
“A very good example is Mount Franklin Water carton which can be bought for $11 every day price at IGA and costs $18 through Craveable suppliers.”
It also claims essential items such as plastic cutlery were significantly more expensive when bought from Craveable than in stores.
“The franchisees hands are tied, as the franchisor determines the cost price and the selling price,” they claim.
Loyalty scheme and home delivery
The franchisees also claim they are being hurt by Craveable’s customer loyalty scheme which is a “direct hit” to franchisees and was introduced without disclosure.
Franchisees estimate the loyalty program, which enables customers to earn a $1 reward for every $15 spent, has cost the average store over $2500.
Another bone of contention is the home delivery service introduced two years ago which franchisees say has “caused further financial stress” due to the added cost of vehicle ownership and a higher wage bill.
“The delivery model was not implemented efficiently which caused the cannibalisation of sales from the core business (ie instore sales), which has resulted in huge cash flow issues for all franchisees,” the franchisees claim.
“It is alleged that delivery was introduced to increase the top line, to make the brand more suitable for an IPO by the franchisor, which continues to result in huge cash flow problems for the franchisee.”
Craveable was planning an initial public offering, seeking to raise $250 million, but these plans were shelved in 2017.
The franchisees also claim a “lack of transparency” around spend on Craveable’s marketing fund and they say despite franchisee contributions over the last three years Craveable has not spent on free to air TV.
A spokesperson for Craveable told Fairfax Media the submission is “surprising” as Craveable has never been contacted by the association and doesn’t know who its members are or who it represents.
“We don’t believe the submission reflects the views of the vast majority of Craveable franchisees,” the spokesperson says.
“It contains several inaccurate claims that omit vital context about the operation of the broader franchise system. In a business with more than 400 franchisees across three brands there will be a range of experiences, but our system is healthy and growing and we work closely with our franchisees to support their businesses.”
The submission by the Franchisee Association of Craveable is one of 15 that have been made to the Senate’s inquiry.
However a spokesperson for the inquiry told Fairfax Media more submissions have been received and staff are still working their way through them.
Submissions close on Friday to the inquiry which was established by Nationals Senator John Williams following a run of scandals in the franchising sector embroiling some of its biggest players including the Retail Food Group, Domino’s Pizza, 7-Eleven and Caltex.
Small business and family enterprise ombudsman Kate Carnell says it is concerning that the problems raised by the Craveable franchisees had not been raised with her office.
“I really wish that franchisees that feel that they are in an unreasonable or unfair situation or treated badly seek help,” she says.
“I absolutely understand that sometimes they feel that if they did that individually there could be retribution, I understand the position they are in.”
Ms Carnell said it was good that submissions are being made to the inquiry.
“But it is still concerning it is as few as it is and you have to ask the question whether people are feeling a level of intimidation,” she says. “It is concerning that small businesses are under pressure like that.”
The joint committee will report on 30 September 2018.
This article was originally published by the Sydney Morning Herald’s Business Day. Read the original here, or follow Business Day on Facebook.
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