Cut price pizzas result in class action
Slashing pizza prices has resulted in a class action against Pizza Hut by its own franchisees. The action, which began in late July this year, followed a move which dropped some pizza prices by half by Pizza Hut’s parent company, Yum! Brands. The move resulted in franchisees selling pizzas at below cost price.
The ex-franchisees involved in the class action have based their claim on the two companies having engaged in unconscionable conduct and breaching their duty to ensure that franchisees (and Yum! Brands) make a profit.
The intention behind Pizza Hut’s price cuts was to provide more competitive prices than that of their biggest rival, Dominos. Managers from Pizza Hut’s Sydney head office told franchisees that the price cut would improve overall sales and be of great benefit – clearly not the case.
Former franchisee involved in the class action, Lyn Bayakly, has said that her franchise was operating at a loss of approximately $5,000 per week. Six percent of all sales made at Pizza Hut by Australian franchisees are taken by Yum! Brands, regardless of whether the franchisees are operating at a profit or loss. Lyn subsequently closed her Pizza Hut store over seven months ago and is on the verge of bankruptcy.
Professor Lorelle Frazer, Director of Griffith University’s Asia Pacific Centre for Franchising Excellence, has commented on the importance of aligning expectations of franchisees and franchisors through transparent communication and due diligence by all parties.
Professor Frazer also claims that the regulation of the Franchise industry by the Franchising Code of Conduct lures franchisees into a false sense of security - that purchasing a franchise is safe and that franchisees will be protected. In reality, the franchisee is at the mercy of the franchisor and has little control over how their business is run.
Due diligence is an integral part of the franchising process in better preparing the franchisees for what they can expect in undertaking their venture and the benefits (or consequences) they can expect from the brand they are signing up to. The franchisor, as part of their obligations will provide the potential franchisee with disclosure documents, however part of the burden rests on the franchisee to make the appropriate inquiries to the franchisor to ensure the best start to their business and to maximise its performance.
If you are contemplating purchasing a franchise and seek advice on the right questions to ask, contact:
Racha Abboud, Senior Associate
Phone: +61 9895 9283