Making Sense of Jim's Franchise Saga

   By Marwan Kojok*

That master franchising is commercially difficult as well as a legally complex relationship is amply demonstrated by the widely reported problems within the Jim’s Group - Australia’s largest franchise system in terms of outlet numbers.

Although Australia Post is usually credited with being our largest franchise network, the majority of its outlets are licensed rather than franchised and, with almost 3,000 franchisees operating in almost 30 business sectors, Jim’s Group is in fact the largest.

While master franchising is a relatively common strategy in Australia, Jim’s Group with a reported 216 master franchisees responsible for development of the franchise network within particular territories, is also the leading Australian network for this expansion strategy. The tensions that are inherent in any franchise system are nevertheless compounded by a layer of master franchisees between the franchisor and the franchisees and these tensions have been starkly exposed in the current disputation within the group.

The current dispute has apparently arisen, at least in part, as a result of unilateral fee increases and operating manual changes which regional and divisional master franchisees claim are “rewriting the contracts”. Unilateral variation is an inevitable feature of franchising. A franchise agreement enshrines a “relationship’ rather than a mere “exchange’. The  relationship is usually of long duration (5 years plus a renewal option is the most common term) and to accommodate system development and change to meet competition and consumer demand during this period franchisors need the power to mandate system changes.

This is nevertheless a difficult area which commonly generates disputation. Unilateral variation is included as one of the discretionary criteria which a court can take into account in determining unconscionability under s51AC Trade Practices Act  and its capacity for “abuse” was influential in the recent federal franchising report, “Opportunity not Opportunism” recommending the inclusion of an obligation of “good faith” in the Franchising Code of Conduct.

While unilateral system change is a common and necessary event, unilateral fee increases - and even the provision for them - are much less common for obvious reasons. In the Jim’s system the sub-franchisors/master franchisees have a “veto” right in respect of system change.

Jim Penman, is reported as commenting that his system is “crazily democratic” in that proposed system changes can be voted down by the sub-franchisors. Similarly, and quite unusually, franchisees can force their sub-franchisors out of the system and sub-franchisors can force the franchisor out.

The current debacle is clearly not good for Jim’s Group. What is perhaps more surprising is that it has been so long coming. From relatively humble beginnings in the late 1980s as Jim’s Mowing, another 43 business divisions have been added. However 16 of these divisions no longer operate. It presumably reflects the disproportionate cost of litigation in the context of a low entry cost franchise that there is no reported litigation. That may be about to change.

November 2009

*Marwan Kojok is Executive Solicitor at DC Strategy - consulting and legal firm. DC Strategy has specialist teams in Strategy, Franchising, International and Legal who have developed the networks and brands of many of the region’s most successful businesses. www.dcstrategy.com

Contact Marwan Kojok at marwan.kojok@dcstrategy.com  

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