Well… not quite.
First, greater regulation means greater compliance costs that in the end only very large established franchise systems can amortise over a number of franchise brands. Think scandal-plagued but still operating RFG, or Dominos, or McDonalds.
The endless revisions to the disclosure document regime in Australia are a sad case in point. The most recent changes to the Franchising Code made in late 2021 are very difficult for any small company director or officer to decipher or understand. Some changes appear trivial and unnecessary. Others appear almost random in their insertion in the regulations. There are now sections such as “17A” and “17.B2” in the Disclosure Document – a sure sign that document has been tinkered with to the point of being almost completely detached from its original purpose – a simple to read document laying at the out the key facts for a franchisee to easily review. Incredibly there is now the need for a Key Facts Sheet – a kind of summary disclosure document on top of the disclosure document. We await the time when the Key Facts Sheet becomes so weighed down with detail that we need a third Summary Key Facts Sheet document.
This is all fun and games for lawyers but a nightmare for real business people just trying to recruit franchisees and stay compliant.
Greater regulation is often a large – very large – barrier to entry for small or emerging franchise businesses. Indeed a number of successful businesses in Australia are now forced to opt for a looser licensing model simply because of the extraordinary compliance costs that are now imposed on the franchise industry.
Large franchise conglomerates in Australia with large in-house legal teams simply do not face the same competitive threats from upstart newcomers as they do in other countries such as New Zealand. They can rest on their laurels knowing new start-ups will have a difficult time navigating this now incredibly complex regulatory environment, let alone competing with incumbents. Exploitation is a temptation in this kind of cloistered, stagnant environment.
In New Zealand a growing, successful business can set up a franchise for relatively little money compared to the huge costs starting up a franchise entails in Australia.
The evidence for this is now clear – there are a number of new and emerging home-grown New Zealand-based franchise businesses that have been extraordinarily successful expanding domestically and overseas in comparison to the relatively small size of the New Zealand economy. Home-grown Australian-based franchise businesses now lag in comparison. Examples are numerous – Link Business New Zealand, Chipmunks New Zealand, Fastway (now Aramex) New Zealand. All of these New Zealand-based international business have emerged from the supposedly “chaotic” “anarchic” “unregulated” New Zealand franchise industry – and are held in high regard internationally as very successful and reputable businesses. If regulation worked, the relative “anarchy” of the unregulated New Zealand franchise market would not have produced these successes – or at least should only have produced relatively more scandal than Australia’s sorry record. Yet the opposite appears to have occurred. Ironically it is heavily regulated Australia in which scandal after scandal has occurred, not New Zealand.
In the New Zealand market, incumbent franchisors have to compete for franchisees’ money and have to deliver on their promises. In Australia prospective franchisees have relatively fewer choices amongst relatively larger franchise conglomerates – resulting in fewer competitive pressures.
Second, the real competitive threat to a number of retail franchises comes not from other franchise systems but from internet sales. Regulation on the franchise sector is actually a relative benefit to Uber Eats with grey kitchens, Amazon and large internet conglomerates. Marginally higher profits are accruing to these businesses – some of whom are not even regulated by Australian law – when compared to Australian franchise retailers who are suffering under the weight of extraordinary regulation when compared to nearby countries such as New Zealand. So the incentive for all retailers – not just franchise retailers – is to “cut corners” to try to scratch out a profit in the face of extraordinary competitive threats from internet businesses that do not face the same competitive pressures with retail lease costs and retail labour costs.
These are just two of the unintended consequences of excessive regulation.
Yet, in 2021 it was clear that, for the franchising industry in Australia, the regulatory beatings will continue until morale improves.
The question is this: when will the New Zealand government be pressured by lobby groups to set up a franchise regime similar to that in Australia? Currently the “zero regulation” New Zealand approach is showing up the bureaucratic “regulate to death” Australian approach. How long can that last, given that there is a natural bureaucratic and political pressure to regulate regardless of the economic consequences?
We wait. And we will see.
