The franchise model of small business rip-off

Who in their right mind would set up a small business today when the options for so many are limited to the corporate strategy of ‘franchises’? And especially when these are overseen not just by the corporate chains of such companies as 7-11 (and most big fast food giants) but also people like Tony Alford (Australia’s ‘franchise king’ behind the RFG group – which includes brands such as Donut King, Brumbys, Gloria Jeans, Pizza Capers, Crust Gourmet Pizzas and Michel’s Patisserie) – who, we are now being informed, was apparently much more a con artist and rip-off merchant than an entrepreneur [1].

It was the 7-11 chain scams that recently focused awareness on how the franchisees of many shopping and fast food chains in Australia are often being gouged within an inch of their lives often barely surviving and often agreeing to participate in additional dodgy practices just to get by. In addition to underpaying their workers, many 7-11 franchisees have gotten caught up in the ‘sideline revenue stream’ of charging prospective overseas immigrants and/or international students (often one and the same) up to $70,000 to with (often unfulfilled) promises of securing an Australian work visa [2] [2b]. However, adopting a similar model to some Chinese (and other) restaurants exploiting low-paid Chinese students as workers (especially Bing Boy), it has been the fast-food chains which have regularly underpaid and generally exploited the young, the poor, students (especially international students) and generally vulnerable members of society [e.g. 3]. For instance, after it was discovered two years ago that many Dominos Pizza workers were underpaid, Dominos promised to rectify this.But recent reports confirm that the chain and its franchised stores have generally failed to do so [4]. The local Subways franchisees have also been at the mercy of how the global chain has been caught up in a ruthless competition wars [5]. It was no surprise then that a 2016 audit based on spot-checks confirmed that half of Australian fast food outlets are underpaying staff and violating payroll obligations [6].

There is no doubt that labour is relatively expensive in Australia, that margins are tough for franchise operators, and also that the Fair Work Commission should have some flexibility especially in relation to casual work which allows many very young Australians (and also international backpackers) to get some valuable work experience as well income. However, both major political parties seem to have no real interest in supporting small businesses AND their workers. On one hand, the Liberal-Nats have uncritically supported off-shore work visas that are left open to the abuse and exploitation of not only foreign workers and backpackers but the local Australians missing out [7] – and have keenly adopted the loss of weekend penalty rates for working Australians [8]. On the other hand, Labour have been complicit in dodgy union-business dodgy deals across the retail and hospitality as well as fast food sectors that would see locals paid even less than the Fair Work Commission changes [9]. An example of this was the reported ’50 million dollars or so underpayments by McDonalds last year [10]. Another is the industry level is how meat factories in Tamworth epitomized by linked scams of using ‘shadowing labour-hire companies to source foreign workers, to ‘routinely underpay and overwork workers on 417 visas, and also to tacitly support linked accommodation rackets where small rooms are routinely used to house up to six people at a time [11]. The fact that neither of the two main Australian political parties have any real or great interest in the welfare of either small business or vulnerable workers is just typified by the lack of genuine watchdogs to monitor or regulate such abuses.

However, it needs to be understood better that ‘underpaid workers’ are not where the main scam lies. Rather it is with how the franchisees themselves are being ripped off and that their own desperation often underlies the mistreatment of their workers. The model template for how Australian franchisees have been gouged and their business dreams exploited with typically non-sustainable promises that are increasingly turning sour is exemplified perhaps best of all by the story of ‘the King’ Dick Alford and the rise (and the ongoing fall) of his RFG group and its share price – a group which is claimed to have $800 million in market capitalisation and more than 2500 stores through chains such as Donut King, Brumbys and Gloria Jeans. How Alford set up on the likely site of the Gold Coast (see our post on my hometown and Australia’s ‘scam capital’ [12]) and partly funded his rise through ripping off INXS front-man Michael Hutchence and his family should have flagged some warnings [13]. An SMH report on how many franchisees have gone bankrupt after investing often their life savings because of a ‘brutal business model’ – a model which puts an unethical ‘squeeze on franchisees from crippling fees, rising labour costs as well as higher rent and food imposts’ [14]. The SMH review of RFG has recognised there is no real watchdog operating in Australia to protect the interests of franchisees and that the dominant franchise model of small business is inherently a scam.

As they also accurately summarise: “The $170 billion franchise industry needs the blowtorch put on it. “There are suicides, marriage breakdowns and bankruptcies. There is a huge problem in the franchise sector and we need to have a proper inquiry to fix it… Clearly there are small businesses being done over and going broke,” Nationals senator John Williams says” [15]. As this article points out, there are few if any happy franchisees around but many unhappy ones.

Of course, as RFG’s dodgy model gets further exposed and even more franchisees go to the wall as the value of their stores further decreases (along with RFG’s share price), Alford and also his girlfriend Alicia Atkinson have already cashed in and effectively done a runner into life of ultra-rich ‘retirement’ at the expense of ordinary Australians [13]. So what can we learn from all of this? As well as the obvious of making people like Alford accountable (even after his ‘runner’) and likewise big chain franchises like McDonalds and Subways, there likewise needs to be a genuine watchdog for the franchise industry better supporting ripped-off franchisees as well as ripped-off workers.

The great irony (as well as main scam) here is that the franchise model is really the very indentured labour of corporate AND/OR bureaucratic servitude that the small business battler was trying to escape from in the first place.  We also need to change a dominant culture which encourages a ‘get rich quick’ mentality and ignores ‘duty of care’ accountability and where rip-off artists like Alford seem to be proliferating not decreasing. ‘Brands’ (the basic rationale of franchises) are seductive but at the end of the day prospective small business operators should realise that the only sustainable model ultimately is one that involves not just a ‘good idea’ but also hard work, fairness to others and a resilient attitude.

1 http://www.smh.com.au/business/retail/cup-of-sorrow-the-brutal-reality-of-australias-franchise-king-20171207-h00lbl.html 

2. http://www.smh.com.au/business/7eleven-workers-pay-up-to-70000-for-visa-in-indentured-labour-scheme-20150923-gjsxzh.html

2a. http://www.news.com.au/finance/business/retail/the-7eleven-convenience-store-chain-has-been-accused-of-a-widespread-halfpay-scam/news-story/2223ec666aa55e516db3143786b5f67b

  1. http://www.abc.net.au/news/2016-07-13/international-students-underpaid-australian-working-conditions/7586452
  2. http://www.smh.com.au/business/workplace-relations/dominos-pizza-workers-kept-in-the-dark-about-underpayment-for-almost-two-years-20170214-gucq1f.html
  3. http://www.smh.com.au/business/world-business/the-rise-and-fall-of-subway-the-worlds-biggest-food-chain-20150529-ghd0va.html
  4. http://www.smh.com.au/business/workplace-relations/audit-of-fastfood-outlets-finds-half-exploit-their-workers-20160329-gntrbs.html
  5. https://www.sbs.com.au/yourlanguage/punjabi/en/article/2017/03/02/government-ban-fast-food-chains-sponsoring-457-visas-peter-dutton
  6. https://www.theguardian.com/australia-news/2017/sep/30/penalty-rate-cuts-long-weekend-loss-will-run-into-millions-for-workers
  7. https://www.dailytelegraph.com.au/news/nsw/dodgy-union-wage-deals-exposed-fastfood-hospitality-and-retail-workers-ripped-off-on-sundays/news-story/2f24f25329393184394638c32b97d8b7
  8. http://www.news.com.au/finance/work/mcdonalds-staff-underpaid-at-least-50m-a-year-investigation-finds/news-story/db19f424960e980e79a2ee000230369b
  9. http://www.northerndailyleader.com.au/story/3159459/six-tamworth-migrant-workers-cooped-up-in-this-tiny-room-poll/
  10. https://www.facebook.com/WildDingos/posts/899969906846324
  11. http://www.smh.com.au/business/retail/the-colourful-background-of-the-man-behind-a-franchise-fortune-20171208-h0180x.html
  12. http://www.smh.com.au/business/retail/cup-of-sorrow-the-brutal-reality-of-australias-franchise-king-20171207-h00lbl.html
  13. http://www.smh.com.au/business/comment-and-analysis/calls-for-probe-into-donut-king-get-louder-20171212-h03b21.html

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