And the challenges continue for the franchisee world

The model is flawed’: Endota Spa franchisee left bankrupt

Fran Forde owned and operated two Endota Spa franchises in the coastal town of Torquay, but her life fell apart when her franchises were terminated.

“I am now bankrupt, I had to sell my house, a business loan of $250,000 had to be paid out, I had to pull my kids out of their school,” she told Fairfax Media.

“Mentally, I couldn’t even put it into words.”

Forde has detailed her plight in a submission to the Senate’s inquiry into the Franchising Code of Conduct which has published 44 submissions so far, including several from distressed franchisees.

“I cannot sit by and watch more and more Endota franchisees fail and end up in the same situation as myself,” Forde says in her submission.

The franchise sector, which is set to be worth over $190 billion by 2019 is under scrutiny in the Senate inquiry with franchisors including Red Rooster, Oporto, Chicken Treats, Aussie Farmers Direct and Brumby’s all coming in for criticism in submissions from former or current franchisees.

 The brands in question have hit back defending the model, insisting that the chains rely on financially healthy franchisees to succeed. They suggest a requirement for greater due diligence on behalf of franchisees and more simple language contracts.

Booming business

Endota was founded in 2000 by school friends Melanie Gleeson and Belinda Fraser. Business boomed after the pair started franchising Endota in 2004, and the chain grew to 102 spas across Australia with a turnover of more than $60 million.

Fraser sold her 50 per cent share in 2015 to a group of private investors led by Brodie Arnhold, a former Melbourne Racing Club chief executive and Shaver Shop and iSelect board member. Gleeson remains chief executive of the business.

Endota has closed spas in Airlie Beach,  Turramurra and Warrnambool, and spas in Port Macquarie, Blackwood, St Kilda, Kiama, Canberra, Glen Waverley, Brighton, Albury and Lorne have changed ownership and, in some instances, location. A spokesperson for Endota says its network is continuing to grow with 23 new spas opening in the past two years.

Flawed model

It was this growth story that Forde bought into when she opened her Endota spa in Torquay in 2010.

Forde spent $350,000 fitting out her spa, but when the shopping centre her spa was located in was redeveloped, Forde began to struggle.

“My store was in a construction zone for 12 months,” Forde says .

She wrote to Endota asking for help but it wasn’t forthcoming and instead Forde says Endota targeted her for the appearance of her spa, requiring Forde to repaint, recarpet and install new signage amongst other things.

 

After failing to remedy these breaches, Forde says her franchises were terminated and she was locked out of both premises with Endota taking possession of all fixtures, stock and equipment.

Forde says there are systemic problems with Endota’s franchising structure.

“The Endota model is flawed and it is extremely hard, if not impossible for the majority of franchisees to operate profitably,” she says in her submission to the inquiry.

Forde says numerous Endota franchisees have been forced to shut their doors over the past two years and have just handed the keys to Endota, unable to sell their franchise because they are not profitable, but also unable to continue to operate to redeem losses because they cannot afford to.

Gift vouchers are an important income stream for Endota, with its website setting out the average split of income for franchisees being 48 per cent from treatments, 36 per cent from gift vouchers and 16 per cent from product sales.

But Forde says franchisees’ income from gift vouchers is minimal as Endota has increased its own gift voucher sales both online and through supermarket gift cards.

In the 2017 financial year Forde says she saw company presentations that described how Endota sold $27 million of gift vouchers, an 800 per cent increase in franchisor gift voucher sales over a three-year period. Endota disputes these figures, but did not provide an alternative.

“These sales negatively affected the franchisees’ own in-spa sales of gift vouchers,” says Forde.

Forde says franchisees have to redeem the vouchers sold by Endota at 70 per cent, leaving them unable to return a profit and, if redeemed on a weekend, even to cover costs.

Endota also sells product online, which Forde says franchisees are unable to do as they are not allowed to have their own websites or social media accounts.

Forde says Endota didn’t follow the process it should have in terminating her franchise.

“The Franchise Code of Conduct means jack sh-t,” she told Fairfax Media. “I never got offered mediation I just got a text saying ‘I will be down at the spa if you want to catch up’. I got told to go back there and work for free to rectify my debt.”

Promised the earth

Two other former Endota franchisees, one who wishes to remain anonymous, say they were forced to close their spas in the last year after struggling financially.

Former Endota franchisee Rob Mannix shut down his Endota spa in the Melbourne suburb of Glen Waverley last year.

Mannix says he was forced to close the spa by his landlord, Vicinity Centres, but received limited assistance from Endota.

“I was basically bullied out,” Mannix says. “Endota had a lot of spas in Vicinity Centres and didn’t want to damage its relationship. Endota could just grab the franchise back and sell it at a later day. We had to just walk away and take the hit.”

Mannix says he lost in excess of $430,000.

“I was extremely disappointed with their lack of support,” he says. “We were with Endota for 12 years and we watched it evolve from a great little company to basically a corporate giant that doesn’t care for franchisees.”

A spokesperson for Vicinity says it does not comment on individual retailers.

“We aim to work closely with each of our retailers to help drive their business success,” the spokesperson says.

The anonymous Endota franchisee says she closed her franchise after two years, $60,000 in debt.

“I had to work in the business seven days a week just to make ends meet,” she says. “They promised the earth but once again did not deliver. I was nearly going bankrupt from all the added expenses that they put on you. It’s very stressful, I have a young family, financially, it has put us in a very bad situation for the next couple of years.”

Protecting franchisees

Endota’s co-founder, Fraser, has made a submission to the Senate inquiry calling for changes to the franchise industry “to protect franchisees from franchisors that are not acting with the franchisees’ profitability at the core of their function”.

She declined to comment further to Fairfax Media.

Co-founder Melanie Gleeson retains 50 per cent ownership of Endota.
Co-founder Melanie Gleeson retains 50 per cent ownership of Endota.

Endota denies that there is a lack of support for its franchisees and the remaining founder, Gleeson, is upbeat about Endota’s future.

“I love what our team, our franchise partners and therapists have created and that we are able to treat and nurture thousands of clients across Australia,” she says.

InfinityLab seeks to provide a “safe”environment for new business founders. This article once again demonstrates the challenges in working in the franchising model which the article notes is worth some $190Bn. The article notes that some franchise disclosure agreements are 409 pages long. Due to inequities in the system, the franchise model is due to be scrutinised in Australian Senate enquiry which is currently taking submissions and will commence in June 2018.

 

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