Why did the chicken customer cross the road…?

Craveable Brands, the operator of franchise business such as Red Rooster, Oporto and Chicken Treat has recently come under criticism from a number of employees in a Senate enquiry about the implementation of certain strategies that some franchisees have said are eroding profits. Primarily the implementation of home delivery, a concept franchisees have said was never contemplated in their original business models.

While we await a determination on the issue, it certainly highlights the concept of good faith in franchise relationships, a fairly recent addition to the Franchising Code of Conduct.

The Code requires parties must act towards each other in good faith. This was a concept that was highlighted in a recent decision of Diab Pty Ltd v Yum! Restaurants Australia Pty Ltd - [2016] FCA 43. In that case, much like in the present chicken battle, the franchisor sought to implement a marketing and costing strategy which the franchisees alleged negatively affected their business and the franchisor implemented the strategy in bad faith. That is, it was alleged the strategy was implemented without any real regard to the impact it would have on franchisees.

In that case, the court found that the franchisor had not acted in bad faith, because the executives had consulted with market research, invited comments from the franchisees and had in fact given careful thought to the strategy. It just so happened in that case that the leading competitor had anticipated the marketing strategy and had already dropped their prices.

It is important for franchisees to remember just because a decision implemented by a franchisor doesn’t make you more profitable, does not mean it was implemented in bad faith.

It will be interesting in this present case with Craveable to see, just what level of investigation and consideration was given to the strategy before it was implemented. We know from their own submission the franchisor confirms they did not consult with the franchisees.

As much as franchisees need to be aware that it is not a franchisor’s duty to make a franchisee profitable and put their interest above the franchisors, they should also realise that a franchise business still rises and falls on the backs of its franchisees.  Rather than merely trying to avoid allegations of bad faith, with greater consultation with franchisees you may find there are profit and growth out there for franchisors and franchisees.

Again we will watch this space to see how our quarter chicken and chips and paradise packs survive the Senate inquiry!

Authors

Spencer Slasberg is a Senior Associate at Bennett & Philp Lawyers

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