When Retail Franchises Collapse

29 Apr 2009

Despite industry reports that franchising booms in tough economic times, the current deteriorating economic climate has seen the collapse of a number of well known franchise groups. The Queensland based kitchen and laundry appliance franchisor, Kleenmaid was placed into administration in early April 2009. This is hot on the heels of other franchisor collapses.

In May 2008 administrators were appointed to electronics retailer Strathfield Group. major car care company Midas Australia and Australia’s largest DVD retail chain and online retailer, EzyDVD, were both placed into administration in December 2008.

The largest retail system collapse in recent times was that of Kleins retail jewellery chain in mid 2008, which saw 130 franchised stores following the insolvency of the Franchisor.

Whilst it is too early to say what has caused the latest collapse of Kleenmaid, the early signs are that as with the Kleins collapse, most franchisees will have little choice but to cease operation and will most likely lose everything.

Kleenmaid, Kleins and the other chains that have collapsed in recent times are by no means alone in this category. A 2006 report by University of New South Wales academic Jenny Buchan named at least 40 Australian franchisors which “failed” between 1990 and 2005. Some of the more significant examples of franchise system implosions in the retail industry include systems such as the Traveland chain of travel agents (a former subsidiary of Ansett which involved roughly 270 franchisees), Cut Price Deli (with approximately 150 franchisees), and Century 21 Pty Ltd.

In each case, different reasons were cited for the collapse of the retail chain including problems peculiar to the particular company or the industry sector in which it operated. Some blamed product manufacturing issues and insufficient control over costs, others failed to adequately adapt their model to different marketplaces or keep the brand up to date and in line with current trends. All these individual internal difficulties were exacerbated by external economic forces.

However, the real difference between the collapse of many other franchisors and the Kleins experience becomes apparent in the aftermath of the franchisor’s failure and lies in the effect that the franchisor’s failure has on its franchisees.

Certain brands have continued operating long after the franchisor’s collapse. Notably, most of the Century 21 franchisees have enjoyed prosperity under new ownership with an ongoing franchise model. The majority of Traveland franchisees were able to continue operating independently or by joining competitor’s chains when their franchisor went under. In other cases, groups of franchisees have formed buying syndicates to purchase the franchise system from the stricken franchisor, thus salvaging the brand, the retail chain and their livelihoods. For the unfortunate Kleins franchisees, none of these options were available.

What is common to all these scenarios is evidence that the fate of franchisees is inextricably linked to that of their franchisors. Buchan’s study found that 93% of franchisees involved in a franchisor collapse lost substantial amounts of money and were forced to terminate the employment of their staff irrespective of whether their businesses continued.

In the face of what is being touted as the ‘worst global economic crisis since the Great Depression’ it is more necessary than ever for franchisees to turn their minds to what might happen to them if their franchisor does go under.

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Author: Esther Gutnick

Recent article published in My Business Magazine March 2009 – Click here to view