International Law

New Federal inquiry into Australian Franchising

The Australians have launched yet another enquiry into franchising.

But there was a nice economic observation in the piece.

"The reality of franchising is that a franchisee has to outperform other independent businesses by a significant margin to have an equal return to their pockets, let alone a better result.

Most retail franchise systems charge levies and advertising contributions of around 10% of gross sales.

Franchisees don't get cheaper rents, cheaper employees or cheaper government taxes and charges.

The biggest promise of the franchising is brand awareness.

Some franchises also obtain access to somewhat exclusive merchandise - there is not much in retail that is truly exclusive - and some buying advantages on stock and advertising over other independent retail stores.

When consumer spending falls, that 10% bite on gross sales translates to a very onerous commitment for franchisees and can leave them with little on the bottom line or, increasingly, with other costs such as rent, wages and energy costs rising, in the red. "

Think about this for a moment. Suppose that your store grosses $1000 a day, and you have to pay 10% up front, so your adjusted gross is $900.

Suppose also that your average meal grosses $5.00, and so you have served 200 meals a day.

The independent competition can undercut you down to $4.50, or alternatively free-ride on you establishing the market price of $5.00 per average meal.

Do you have any idea if your franchise fees are worth this economic disadvantage?

Full post as published by Misleading Advertising Law on July 15, 2008 (boomark / email).