Video nasty on shelf of opportunity

By SIMON HENDERY

After years working in the pressure-cooker world of advertising, Darryl and Valerie Kirby decided it was time to unwind.

The Auckland couple thought they had found the ultimate low-stress business a franchised Whangaparaoa video store they were told would turn over $10,000 a week.

But their dream of leading the good life turned into a business nightmare. The Kirby's United Video store, which they began running in July 1998, never met the turnover forecasts claimed by the company's business manager.

Weekly revenue never even topped $5000, let alone reach $10,000, and the Kirbys found themselves working long hours in the shop, unable to afford a store manager as they had intended. They closed the store in August last year, after raking up considerable losses.

The couple took United Video Franchising to the High Court claiming damages under the Contractual Remedies Act and the Fair Trading Act.

In what franchising experts are hailing as a landmark case, Justice Tony Randerson last month awarded the couple more than $550,000 and slammed United Video for its "material misrepresentation as to the turnover and profitability of the business".

The judgment included $256,000 for trading losses, $203,000 for lost profits and $94,000 for the time the Kirbys spent running the business. The company must also pay interest and costs, which have yet to be finalised.

United Video Franchising owner Brian Simcox said he could not comment on the case for legal reasons. United Video has about 80 stores nationwide.

The Kirbys also declined to comment, saying through their barrister, Anthony Grant, that after the long legal battle, they did not want to dwell on the issue.

The United Video case aside, the Franchise Association says its latest annual survey shows franchising is booming, and continues to offer thousands of people low-risk business opportunities.

After polling 111 of the country's estimated 300 franchise systems, the association guesstimates the industry turns over $10 billion a year (up from $6 billion last year) and employs 70,000 people through 14,000 business units.

The number of systems, individual outlets, and employees is increasing by 20 per cent a year, the survey found, and 77 per cent of systems originated in New Zealand.

Win Robinson, former chairman of the 160-member association, says the survey results reflect a growing international trend towards franchising.

"New Zealand certainly has a well-established [franchising] industry. The successful results are there for everyone to see and others are climbing on the bandwagon."

The survey found the failure rate for franchise units was less than 6 per cent over a three-year period.

Mr Robinson says larger businesses are increasingly embracing the franchise model, which they recognise as more effective and efficient than the traditional top-heavy corporate structure.

The survey also shows a continued trend towards more service-oriented franchise systems (now making up 56 per cent of the pie) at the expense of retail-based businesses (34 per cent).

Mr Robinson says problems like the United Video case are rare. The survey showed fewer than 1 per cent of franchisees had complaints about their franchisor companies.

United Video is an association member and although the contract with the Kirbys predates the introduction of its code of practice, the case will likely be discussed at the next association board meeting.

Misconduct by a member can result in expulsion from the association a significant penalty, Mr Robinson argues, because membership, and the associated compliance with the code of practice, helped establish credibility with potential franchises.

Franchise advisers generally tell potential franchisees that a company's membership of the association provides them with "a level of comfort" about the business they are considering buying into.

A notable name missing from the association's membership list is McDonald's, which is eager to join but has not been prepared to sign up to the code's dispute resolution clauses.

McDonald's wants to be able to take its disputes direct to litigation, but Mr Robinson says the company and the association have made progress resolving the issue in recent months.

Franchising lawyer Stewart Germann, who acted as the Kirbys' instructing solicitor, said the United Video case sent a clear message to franchisors that they could not misrepresent what they were selling to franchisees.

In 1999 King Pie franchisor Dirk Verbeek was ordered by the High Court to pay more than $570,000 to three franchisees who bought into the chain, and whose businesses later failed.

The court found Mr Verbeek had misrepresented the potential of the business, and had omitted to mention that the chain's Australian operation and its three New Zealand stores were experiencing difficulties.

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