McDonald’s golden arches are one of the most recognisable symbols in the world. It represents not only happy childhood memories (I love a happy meal!) but is also of the leading examples of the power and success of the franchise model. However, things have not been going so well for McDonald’s lately. McDonald’s recent earnings figures show that the franchise’s global profits have fallen 15% compared to the same time last year, and it is now less than what it was five years earlier. This has occurred as a result of a number of factors including:

  1. Increased competition from traditional competitors (such as Burger King in the US or Hungry Jacks in Australia) which provides a simpler and less complicated menu;
  2. Increased competition from non-traditional competitors (such as Chipotle in the US or Grill’d in Australia) which provides restaurant quality food but at fast food service;
  3. Changing customer preferences; and
  4. Scandals in key markets (e.g. Chinese suppliers found to have used old meat, and Japanese food items found to contain foreign objects such as plastic and in one case a human tooth).

McDonald’s recent downturn provides a timely reminder for those in the franchising world of the importance of adapting to changing market conditions and consumer preferences and ensuring strict controls on suppliers and product quality – all of which should be provided for in the franchise documents themselves, as well as the internal systems.

From a legal perceptive, there are some things a Franchisor can do to make sure their franchise documents contain mechanisms to facilitate change and quality control (and avoid what is happening to McDonald’s).

Adapting to Changes and Flexibility

Franchisors need to make sure their franchise documents can accommodate changes in market conditions and consumer preferences. The most important thing to consider is the ability for a Franchisor to add, remove and make general changes to the range and types of products and services that are sold.

Generally, a franchise agreement will contain a provision where changes to the products and services sold can be made via an amendment to the Manual. If this is the case, then it is vital that the franchise agreement allows for these changes to be made and that it includes an obligation on franchisees to implement these changes. For example, it is no good to introduce a new type of product only for the introduction to it be resisted by franchisees and having no way to enforce the change.

In most cases, changes of this nature also require a franchisee to incur significant capital expenses, and in these situations, the franchise agreement (and disclosure document) needs to include a provision that allows Franchisors to require franchisees to incur such costs. These type of costs are strictly regulated by clause 30 of the Franchising Code and in some cases it is simply not possible to require a franchisee to incur a significant capital expense, nevertheless having a well-drafted franchise agreement will help with this.

Control of Suppliers and Quality Control in the Franchise Model

One of the most important parts of operating a successful franchise is being able to ensure products and services are delivered at the same quality irrespective of which franchise a customer may buy the product or service. Ensuring franchisees only use supplies from approved suppliers goes a long way to ensuring this happens.

Most franchise agreements contain a provision that restrict the suppliers franchisees may purchase their supplies from. However, the standard of some suppliers may change, or they may simply stop offering certain supplies and in these circumstances Franchisor’s need flexibility to change suppliers. This is normally done by a change to the Manual, and therefore it is important that the franchise agreement allows for this to happen. Also, when it comes to suppliers, any restriction from whom a franchisee can obtain supplies is considered a form of anti-competitive practice. Obviously, this is very common in the franchise industry, however Franchisors need to remember to either ensure they have applied for ACCC approval or have updated their approval (if required).

Embracing Technology

Having in place systems that share information quickly, and that just makes things easier from an operational perspective, will also give you a competitive edge. Leveraging cloud technology and online service providers such as Xero can help you help your franchisees.

Conclusion

Don’t end up like poor Ronald! Think about implementing systems from the outset for monitoring both your franchise and the market generally, opening up lines of communication between the franchisor and franchisee, and implementing systems for quality control. Our team of franchise lawyers can assist – simply call us on 1300 544 755 or contact us through the form on this page.

Masao Watanabe

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