When franchisors fail

The implosion of jewellery chain Kleins highlights how closely franchisees are tied to the franchisor and emphasises the potential downsides to franchising. JASON GEHRKE

By Jason Gehrke

The current implosion of the retail jeweller Kleins has again brought into sharp focus the tied destinies of franchisees with their franchisor.

Despite being around for 26 years, despite its large number of stores, and despite its wholesale and international operations, Kleins is now in its final death throes after the company’s administrators last week announced that out of 36 expressions of interest, none were prepared to buy the business.

In other words, it was too far gone to be rescued, and needed to be put out of its misery. And because the franchisor held the head leases on all of its franchised locations, it means the end of the line for its franchisees too.

For those franchisees who had staked all or part of their future prosperity on a Kleins franchise, this outcome must be devastating. In the main they will be left with next to nothing (or worse) from their franchising experience – no capital gain on the business asset they worked to build, a shop fitout that is now effectively worthless, and the prospect of hawking unsold products on the cheap at markets or on eBay to recover some of their stock outlays.

In the 2006 report When the Franchisor Fails, University of New South Wales academic Jenny Buchan looked at the critical issue of franchisee survival in the event that a franchisor collapses.

The result was not good. Buchan found that 13 out of 14 franchisees involved in a system collapse lost money – a staggering 93%. Most were unable to continue their businesses directly or indirectly as a result of the franchisor’s failure, and in addition to losing their own livelihoods, also had no option but to terminate the employment of their staff.

Thus begins a ripple effect that is yet to be felt to its full degree in the Kleins collapse. This collateral damage to those franchisees, their families, employees and communities is substantial, and forgotten amid the confusion around the demise of a high-profile brand.

At the time Buchan’s report was released, it was widely criticised by some high-profile participants in the franchise sector as scaremongering, and casting a shadow over the sustainability of the entire sector. Their interpretation of the report was completely at odds with the report’s underlying issues, and indicated that the franchise sector was only interested in good news about itself, and not prepared to consider potential downsides to franchising.

Buchan’s report found that 40 franchise systems had failed between 1990 and 2005, with the largest of these being the Traveland chain of travel agents, a subsidiary of Ansett. (Most of the Traveland franchisees were able to continue operating as independents or by joining another chain, but this is not an option for Kleins.)

The difficulty of finding details of failed systems meant those that had sunk without trace were not able to be included in the survey. The 40 systems that were included had an average size of 27 outlets. How many more systems that failed with far fewer outlets and which did not make it on to the research’s radar during the survey period may never be known. It is more correct to say that at least 40 systems failed between 1990 and 2005, but the number could be higher.

My own research analysing the advertiser list of a 1996 edition of Franchising Magazine indicated that of 113 franchisors then advertising for franchisees, 34 could no longer be found to exist just 10 years later – an attrition rate of 30%. Many of these were very small, start-up systems with a handful of outlets, but the consequences of their failure are equally devastating to their franchisees nonetheless.

Kleins and many other businesses today are sailing in murky economic waters. Not only are the conditions becoming unpredictable, but icebergs can appear from nowhere to sink a system, and with it, the dreams of its franchisees. An ever-vigilant franchisor captain and crew, plus a ship nimble enough to avoid disaster is essential for successful franchising.

Calls for an ACCC investigation of the Kleins franchisor may give its franchisees some hope of a future reckoning, but for many, the sinking feeling of being a passenger on the Titanic must be quickly becoming a reality.

Read more on Kleins and franchising

Jason Gehrke has a passion for franchising. He has been involved in the sector for 17 years as a franchisee, a franchisor, provided PR and marketing services to more than 30 leading Australian franchise systems, and presented to literally thousands of potential franchisees and franchisors over the years. He is a director of the consultancy Franchise Advisory Centre and is the immediate past CEO of automotive paint and plastic repair franchise, Kwik Fix International, a 2004 Australian Franchise System of the Year winner.

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Comments

K writes: I am one of those franchisees and while my contract with Kleins was terminated not long ago I have lost everything. I am single with a mortgage and people to support. I am about to lose the lot because of the way Kleins was run and the pressure they put us under. Remeber the adage “what goes around comes around”. I am watching with interest what is happening. I especially want to see the ACCC look at their business practices and stop this happening to anyone else.

Les Stewart writes: My best wishes to all the Kleins investors.

J writes: I think it’s important for franchisees to also take some lessons from this with regard to how they treat their franchisor. I work for a franchisor and am amazed at the attitude of many franchisees towards the franchisor, particularly when it comes to paying royalties and fees. How do franchisees expect their franchisor to survive and prosper if they aren’t willing to pay their royalties. I think many franchisees forget that the franchisor is trying to run a business as well. While I know franchisors aren’t perfect and some do the wrong thing, I get a little sick and tired of the “franchisor bashing” that appears to have become the flavour of the month, particularly with inquiries in WA and SA.