Robert Toth

Food in Franchising

Where are we now?

We all have to eat, so surely the food and hospitality sector is virtually recession proof you would think but every sector has its unique challenges.

Some of those challenges over the past few years have been the impact of covid which also saw the rise of home delivery services such as Uber Eats, Deliveroo and others. Then there were (and continues to be) staff shortages with many restaurants and cafes struggling for staff. Covid rent relief kicked in for retail tenants and kept many businesses alive when they would otherwise have failed but those benefits have now stopped and landlords are catching up and seeking to recover deferred rent payments and get back to recouping rent leading to some vigorous rent and lease renewal negotiations. Many hospitality and fast food franchisees were already struggling before covid due to rising costs and tightening margins of course. CBD cafes, bars and restaurants suffered enormously through that period and are still attempting to bounce back with office workers returning to the CBD at around 65% to pre Covid times and foot traffic in centres such as QV and Emporium still well below pre covid figures. Supermarkets went gangbusters during Covid (apart from supply chain issues) and amazingly anything that was for sale used cars, and houses went crazy! Ironically many food and café establishments in the suburban areas did very well during covid due to the forced working from home conditions and I know many of those cafes were more profitable without having staff waiting on tables. On top of all of this consumer demand, tastes have changed with increased demand for vegan products leading to most in hospitality having to now offer vegan options. The food and hospitality sector is dynamic, somewhat fickle and highly competitive with so many options for consumer tastes. Many businesses in the sector are franchised brands from the most well known McDonald's the world's largest fast-food restaurant chain (more than 39,000 locations in around 100 countries) to the myriad of other well known chains we all know Subway, Pizza Hut, KFC and the list goes on.

the challenges

Every franchisor even McDonalds has over the years had to reinvent their brand, offer and presence in the market. The well known brands have taken decades to grow and evolve and generally have huge financial capital and backing. They can also afford to make mistakes and recover from them which is not the case with new franchisors.

There are a myriad of new players in the market from Betty’s Burgers, Burgatory and others that have the benefit of starting from a blank canvas with their own offer.

Older established franchise systems have issues with their older fit outs needing capital investment by their franchisees to upgrade their fit outs when times are already tough to replace aging plant and equipment. Despite all of the above issues there is still no lack of new franchisors in the sector looking to take on the big names and systems with new and innovative offerings. For an incoming franchisee there is some comfort buying into a long established, well known brand but it has to be weighed up against the opportunity to get into a new system. New franchise opportunities however may mean greater risk for a new franchisee. So franchisees need to be cautious and get the right advice and do their due diligence on the franchisor!

Brendan Kingwill, Director of BK’s Takeaway Franchising (for whom we act), and has a number of regional stores, thinks ‘the biggest issue businesses face is sourcing and keeping quality employees after the investment of recruitment and training. Brendan noted that many businesses in the hotel and hospitality sector are now working on reduced days and hours of operation, even closing a couple of days a week, which may be a trend that will continue partly due to staff issues.

Many existing franchisor’s are now consolidating their franchise units by closing their C grade sites and reducing store numbers or going back to company owned outlets which franchisees should also be aware of.

franchisees holding under occupancy license

In many systems the Franchisor holds the head lease for the premises and grants the franchisee an occupancy license for the term of the franchise. franchisees but what has become clear post Covid is that franchisees were left out of discussions with Landlords and shopping centre management in relation to rent relief negotiations. Under an Occupancy License, franchisees are disadvantaged as they have no standing and little ability to communicate with their landlord or shopping centre directly. For the franchisor the benefit of holding the head lease is one of control over their brand and premises in case the franchisee abandons the business or they are terminated In these cases the franchisor can retain their presence in a location. On the other hand the franchisor is then primarily liable to the landlord under the lease.

For franchisees that do hold the lease, they are primarily liable under the lease. Either way the franchisee generally has a bank guarantee or security deposit at risk if things do not go to plan Shopping Centres also demand store upgrades which can place a financial burden on the franchisee and this has led to negotiations with the franchisor over how those costs will be paid and funded. Many store fit upgrades have therefore been delayed or taken much longer than is ideal for the franchisor and franchisee.

robert toth is Special Counsel Sanicki Lawyers, with over 35 years’ experience in Franchise, Licensing and Distribution law acting for both local and International franchisors, franchisees and master franchisees and with expertise in dispute resolution. Robert is an Accredited Commercial Law and Franchise Specialist, a member of the Franchise Council of Australia (FCA) and the International Franchise Lawyers Association (IFLA) and regularly writes for franchise and corporate journals online. contact robert@sanickilawyers.com.au or even call him on mobile 0412 67 37 57

so why are some brands expanding while others are reducing their unit numbers?

Some brands have significant capital backing which allows them the luxury to expand even during tough times. My brother Ted of Ted’s Camera Stores fame always said ‘when times are tough you should market and advertise even harder, then you will gain market share over your competitors many of whom will likely have not survived. He was a wise and very successful retailer! Guzman Y Gomez have led the Mexican revival due to their capital backing and aggressive marketing and promotional presence in social media while others such as Nando’s have reduced their unit numbers over the past few years. Many of the Franchisors reducing their store numbers may be partly due to the significant cost of refurbishing older stores and it is hard to attract incoming franchisees when it is a tired brand or system or one that lacks technology systems and social media marketing presence. The challenge for older established brands is to keep their brand and offering fresh in a market where there are many new options for the franchisee dollar.

Franchisees should consider if the franchisor is on an expansion path or looking to reduce their franchise footprint. The franchisor may be on a drive to increase their company owned outlets and reduce franchisee outlets.

What does this all mean to franchisees? Here are some things to consider before you jump i !

• If looking to take on a franchise do your due diligence on the franchisor just as much as they do their due diligence on you.

• Consider if you are taking on a greenfield site which may be a higher risk than an existing site. • Are you being offered an A, B or C grade site?

• Is the Franchisor big on technology and innovation? If not, how will they compete in the market sector they are in?

• Is the store fit out due for an upgrade and refurbishment?

• Is the plant and equipment new or will it need replacement?

• Will you hold the lease or hold under an occupancy licence? Above all if you are considering entering into a franchise make sure you seek advice from a Specialist Franchise Lawyer and seek independent financial advice before you commit so you can make an informed decision. v