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The Real Loser is the Brand!

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The Real Loser is the Brand!

The Real Loser is the Brand!

By Kurt Illetschko

The widely reported spat between Woolworths and one of its franchisees involving allegations of bullying has now been resolved and I have no wish to reopen this particular debate. I believe, however, that it contains important lessons for the franchise sector as a whole and this is what prompts me to write.

Briefly, the facts of the case were as follows: Dennis Hamer, the owner of the Woolworths franchise in Waterkloof Ridge, lodged a complaint against Woolworths with the Competition Commission. He alleged that to maintain market share after Woolworths had opened a company-owned Woolworths store in a near-by mall, he had no option but to lower prices and make this fact widely known. His intentions were thwarted by Woolworths on two fronts:

  • The POS system used throughout the Woolworths chain made it impossible for individual operators to change pricing at store level.
  • Woolworths refused to approve Hamers proposed advertising campaign, which apparently revolved around the slogan: Woolworths Waterkloof Ridge is the cheapest Woolworths in the country!

When Hamer realised that it would take up to 18 months for the Competition Commission to make a ruling, he applied for interim relief at the Competition Tribunal. Fortunately, common sense prevailed and the parties reached a settlement before the issue was head.

The outcome was that Woolworths allowed Hamer to sell at lower prices. In return, Hamer undertook to scrap the offending advertising campaign. On the face of it, peace has been restored but in my view, important underlying issues remain unresolved. I am referring to the events that led to disagreement in the first place and which don’t seem to have been addressed at all.

A case of poor franchise practice

It seems that the opening of a company-owned store in his immediate neighbourhood motivated Hamer to come out fighting. This assumption is supported by recent reports on Woolworths trading performance indicating that while sales and profits were up, sales per store were not. It suggests to me that Woolworths are opening additional stores for the sake of gaining market share. Great for them, but where does this leave a one-store franchisee who is caught in the middle?

And then there is the computerised POS system used by Woolworths. In the past, it was centrally controlled, making the changing of prices at store level impractical. This approach fits in well with a corporate mindset but has no place in a franchise organisation. After all, price fixing is against the law this is what it amounted to. Their excuse that systems constraints prompted them to act in this manner does not hold water because they were able to modify the system within days after the settlement with Hamer had been reached.

Two to tango

For any franchise relationship to work, both parties must do their part. While I have sympathy for Hamer’s predicament, he is not without guilt either. It is safe to assume that before becoming a Woolworths franchisee, he would have investigated the brand and what it stands for.Cheap is not one of the attributes any reasonable person would associate with the Woolworths brand, and to want to advertise his store as the cheapest Woolworths in the country shows bad judgement.

At this point, I must quote from a press release issued by Woolworths which states: Woolworths seeks to maintain the integrity of the brand at all times and to this end, require that all business partners reflect the brand in the manner consistent with the Woolworths brand principles.I concur.

What’s the answer?

All factors considered, one thing is clear: this incident does not rank among franchisings proudest moments. Here’s hoping that the truce between franchisor and franchisee is more than skin deep, but how can similar incidents be prevented in future, not just at Woolworths but in any franchise operation?
I believe that franchisors owe it to their franchisees to protect the value of their sites. I am not advocating the imposition of territorial constraints, which would also be against competition legislation, but call for fairness, an integral part of franchising.

Should strategic reasons prompt a franchisor to establish a new unit in close proximity to an existing franchise, the franchisee should be offered the right to operate this outlet. Alternatively, the franchisor could offer to buy the existing outlet from the franchisee, at a fair price, and operate both units as company-owned stores.

After reading an interview with Hamer published in BigNews for the Business Owner, I cannot shake off the feeling that Hamers crusade was an attempt to set himself up as a crusader for consumers rights. If so, he came out as a poor imitation of a well-known consumer champion.

In my view, a franchisee faced with Hamers predicament should exhaust all available channels before seeking redress from the competition authorities, and milking the incident for its publicity value in the press. Woolworths are a member of the Franchise Association of Southern Africa (FASA), and Hamer could have appealed to this body for relief. Should this have come to naught, he could have tried an entirely different approach.

Instead of cheapening the brand by attempting to advertise it as the cheapest Woolworths in the country, Hamer could have turned it into the best Woolworths in the country. How? By using the advantage every franchisee has over any corporate, namely his personal presence on the shop floor. By applying his mind to service excellence in the widest sense of the word, Hamer would have attracted customers without cutting prices and Woolworths would have been hard pressed to fault him on that.

This article is the opinion of the writer and does not reflect the views of or any of its sponsors or advertisers.

Kurt Illetschko 2007; reproduced with permission of the copyright holder

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