Spotlight on Franchise Marketing Funds – The Parliamentary Inquiry

In March 2018, the Australian Senate referred an inquiry into the operation and effectiveness of the Franchising Code of Conduct to the Parliamentary Joint Committee on Corporations and Financial Services. This parliamentary inquiry published their report in March 2019, titled “Fairness in Franchising”…

Thirty one percent of those who submitted information confidentially, raised “poor accountability of a franchisor’s use of franchise marketing funds” as a “substantive concern”.

All concerns centred around the lack of “transparency, accountability and fairness” demonstrated in the collection, expenditure and management of Franchise Marketing Funds, by large franchise organisations. The key complaints were:

• Unequal contributions
  A franchisor must contribute to the marketing fund at the same rate as franchisees, for any stores they manage. At worst this was not the case and at best, it was not transparent.

• Poor fund management
  Over-spending or un-monitored deficits, where budgeted costs exceeded contributions, due to falling sales.

• Misuse of Franchise Marketing Funds
  This varied from spending on items, which didn’t benefit the Franchisee, e.g. advertising sites for sale or promoting on-line sales, to paying non-relevant salaries.

• Inadequate reporting
  This included late reporting – after the relevant deadline for end of financial year reporting – and lack of relevant detail. In some cases, mistakes in auditing were caused by lack of understanding or experience. Ironically, this incompetence was still paid for by the franchise marketing fund!

 

How did it become an issue?

Start with 3 separate codes of conduct for; Franchising, Oil & Food and Grocery. Each code containing different standards for reporting on marketing funds:

• 4 months + 30 days after year end for Franchising and Grocery
• 3 months + 30 days for Oil.

Then, add two clauses within the Franchise Code of Conduct, which both refer to the collection and use of marketing funds but use inconsistent language. Therein lies the problem:

• Clause 15 referred to a ‘Marketing Fund’
• Clause 31 to ‘Advertising & Marketing Fees’

This provided a loophole for franchisors to duck compliance by claiming they were not in fact even running a “Franchise Marketing Fund”.

Throw in a 3^rd clause, (12) which muddied the waters further, by excluding Master Franchisees from complying with certain clauses, where a sub-franchisee exists, then stir the pot!

These inconsistencies and loopholes paved the way for franchisors to ignore other stipulations within the franchising code of conduct, such as:

• Requirement for separate Bank accounts to collect marketing contributions.
• Limiting marketing fund spend to legitimate marketing & advertising expenses, reasonable fund running costs and areas listed in the initial disclosure document, unless agreed by 75% of the contributors.

…and with little more than a slap on the wrist for breaches, as a consequence!

What is likely to change?

There are 6 recommendations, which concern on-going marketing funds (others relate to what happens to funds when a business winds up) and they boil down to 4 key points:

1.Consistency in the language used between clauses in the Franchising code. This would remove confusion regarding master, sub franchisee and franchisee relationships, force equal contributions, recognise the presence of the Marketing Fund and bringing the 3 industry codes into line with reporting.

2. Requirement for quarterly reporting, distributed to Franchisees, within 30 days. Standards of reporting and auditing detail to be set out by Australian Accounting Standards Board.

3. Annual reporting & auditing to a standard chart of accounts and auditing guidelines provided by the Auditing and Assurance Standards Board.

4. Civil and Financial Penalties for non-compliance.

 

What is happening now?

The Government set-up a Franchising Taskforce on 10/4/19 to look at feasibility & implementation of the recommendations. They have issued & are now consulting on a Regulation Impact Statement (RIS) which:

• identifies the key issues
• sets out policy options
• identifies the cost of the options
• identifies impact on parties involved
• sets out the requirements for implementation, enforcement & consequences of non-compliance.

The current debates relating to Franchise Marketing Funds are:

• improving consistency of treatment of franchise marketing funds
• potential civil penalties for non-compliance
• defining what “meaningful information” on marketing funds costs should be disclosed to prospective franchisees
• interpreting what are “legitimate marketing expenses”
• examining the cost benefit of increased financial reporting frequency
• deciding what happens to remaining funds if a franchise ceases trading

Other potential impacts on the marketing function include transparency around supply rebates & conflict of interest for capital expenditure.

In the meantime, we watch the inquiry page with interest https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Franchising

We also owe it to our Franchise Partners to gear up, by taking a hard look at our Franchise Marketing Fund Management, to ensure we are delivering best practice.

Read our article on the 10 things you should know about Franchise Marketing Funds

Read more about our Franchise Marketing Fund knowledge, experience and the services we offer, on our Franchise Marketing page.

BrandCents Consultancy is an independent Marketing Consultancy. We have 20 years specialising in Brand Transformation, Growth & Customer Experience, working with Global, US, UK & Australian Multi-site & Franchise Companies. Call us to see how we can help you, or take our Marketing Fund Fitness Test to see what shape your Marketing Fund is in.