More franchisees claim to have been duped

Guthrie Bowron's new owners say the chain is performing "exceptionally well".

Stewart Germann and Gehan Gunasekara go head-to-head on the franchising debate.

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More franchisees who claim to have been duped into buying dud businesses are backing calls for the $20 billion franchising industry to be regulated.

Some franchisees of the 42-store Guthrie Bowron home decorating chain have told NBR they want the law strengthened, following the failure of at least three of the chain’s stores in the past three years.

They blame a new format introduced five years ago, which the company says it has since scaled back.

The concept was hatched under the chain’s previous owner, private equity firm Waterman Capital.

Waterman Capital executive director Chris Marshall disputes the claim that franchisees were duped, saying his firm restricted the new concept to a company-owned store, precisely because it recognised the risk involved.

The flagship store, in the Auckland suburb of Sylvia Park, has since closed, and Guthrie Bowron has since been sold in a management buyout.

However, franchisees say the closure of at least two more new stores, in Christchurch and the Auckland suburb of Silverdale, proves that problems were not restricted to Sylvia Park.

The claim follows similar claims by franchisees of Palmers, Nosh and the Mad Butcher, that they were misled about the state of the businesses they were buying into.

As NBR has previously reported, one Nosh franchisee claims he only learned about the chain’s financial woes two days after he had sunk his life savings into his own store.

Other franchisees would only speak to NBR on condition of anonymity.

They would like New Zealand to take a leaf out of Australia’s book, and consider regulation to force franchisors to disclose more information to potential franchisees.

Trail of destruction
Auckland University franchising expert Gehan Gunasekara has been arguing for regulation for more than a decade.  So has the Motor Trade Association, which represents more than 4000 small businesses.

The government previously considered the issue in 2008 and decided not to act.

One problem is that less than half of the country’s franchisors belong to the Franchise Association, which is meant to self-regulate the industry, Mr Gunasekara says.

The official line from the association is that it doesn’t have a position on regulation.  However, it has previously been strongly opposed to the possibility.

In a head-to-head debate with Mr Gunasekara on NBR Radio, franchising lawyer Stewart Germann says he believes reports of problems in the sector are “overblown."  He also doubts that regulation would solve many franchisees’ problems.

However, he believes regulation is inevitable and would like to see it include "good faith" provisions.

Mr Gunasekara argues that many problems remain hidden due to confidentiality agreements and other issues.

Many of those who spoke to NBR agreed with Mr Gunasekara.

“Unfortunately, the sort of entrepreneurial small business bent that most Kiwis have, they need protecting from themselves,” one says.

The same person believes franchisors should support regulation, as it would help make their businesses stronger, and would help counter the strong incentives to sign up as many franchisees as possible.

“Ultimately, they’re doing themselves a disservice because it’s likely to cause themselves problems to their brand and reputation if people don’t succeed.

“From a long-term business point of view, you don’t want any bad attention to your business.  The worst attention is when businesses fold and leave a trail of destruction in their wake.”

 

Print subscribers and those at an organisation with an Enterprise IP Subscription can read the full story in today’s NBR print edition.

See also Top tips for potential franchisees and Skating on 'pretty thin' margins

To subscribe to the print edition visit this pageOr sign up for a free trial.


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13 Comments & Questions

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Every franchise system has poor performing stores, mostly due to the operators. There is nothing in the article which talks of the success of the majority of franchisees or the fact that franchise systems provide proven, valuable resources and systems. I also fail to see how anyone has been "duped" .

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Hi Alex, we have explored this issue in much more depth in our print edition, and in lots of other articles we have run on this issue.  Totally agree that franchising is very successful for many people, and I have acknowledged that.  What we have focussed on is what happens when it's not.

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Thanks for the quick reply. Just been researching GB, they have been around for 120 years so obviously they are doing something right. They also belong to FANZ. Did the disgruntled franchisees use the disputes process?

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This is all covered in the print story.  No, the franchisee wasn't aware of the dispute process, which is something I think both the franchisor and the association probably need to work on.  Care to reveal your identity?

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I don't think you have given enough credit to the majority of franchisees who are successful

The story is focussed on a few franchises who may not cut the mustard in business.
Your story implies that HB is as bad as Nosh and the Mad Butcher which it is obviously not

If I was the GB management I would consider legal action as the article is imbalanced and unfairly biased

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It certainly doesn't imply that, it simply states that franchisees from those chains have made similar claims that they were misled.  Our print story covers the issue in full, and both Waterman and Guthrie Bowron have responded to the allegations and made it very clear about their side of the story.

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Drawing a long bow, to extrapolate -- what is an occurring fact --as a sweeping indictment on GB.

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Australia requires any Master Franchisor to have run a franchise operation for at least a year and to disclose its full financial results.

Frankly I think there are too many professionals pushing franchises in NZ on the basis of the supposed support given to franchisees. But there are many cases of, for example, a marketing/advertising fee charged to franchisees with no associated plan, no franchisee representation on a marketing/advertising committee and no actual marketing/advertising undertaken by the Master Franchisor.

Personally I gave up on franchises when people like franchising lawyer Stewart Germann encouraged Master Franchisors to introduce term limits on franchising contracts. So franchisees did all the work to build up their businesses but then the Master Franchisor took them back, paying nothing for them but gaining all the commercial success while the franchisee didn't get the increase in capital value he/she had built.

More recently there has been a trend for Master Franchisees to insist that no-one can own more than one franchise. So we have basically small business owner/operators earning around only $60K a year instead of people developing multiple franchisee businesses. A lot of work for low return and high risk.

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All franchises have good, bad and average performers. Having been a franchisee I've witnessed first hand that many people believe that simply buying a franchise is a guaranteed pay check that they don't need to work for. Far from reality. I agree there are some hard luck stories and many immigrant franchisees that have probably gone in naively but equally there are muppets that can't get out of their own way, won't listen to Franchisor advise and only have themselves to blame.

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"pay check" ??! Are you checking you have been paid?

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I totally agree that franchising needs to be tightened up and regulation put in place! We purchased a franchise in 2008 thinking we were doing the right thing in a successful business. Which was far from the situation

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Ditto, I had a similar situation back in 2007. There's some issues out there which need to be addressed.

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No surprises here!

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