File photo by Simphiwe Mbokazi
File photo by Simphiwe Mbokazi

Woolies ‘will shut franchise stores’

By Ann Crotty Time of article published Dec 10, 2010

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The Woolworths Franchise Association (WFA) has told the Competition Commission that Woolworths’ proposed acquisition of its franchise stores will have significant adverse effects on jobs and local communities and has called on the commission to instruct Woolworths to seek its approval for each acquisition.

In terms of the Competition Act approval must only be sought when the acquired firm has turnover of more than R80 million.

A number of franchisees have also raised concerns about the low buyout price. “Woolworths is trading at a 17 price:earnings rating (p:e), but they are only offering us a 5 p:e and our stores are growing faster,” one franchisee noted.

In a presentation to the commission last month, Dennis Hamer, the secretary of the WFA, alleged that Woolworths would close down a number of the acquired franchise stores to the detriment of local communities and poorer consumers.

He also said that the buyout proposal had been partly motivated by a bid to avoid the implications of the Consumer Protection Act (CPA). Article 14 of the CPA prevents suppliers (Woolworths) from unilaterally ending fixed-term contracts.

However, John Fraser, Woolworths’ head of franchising, countered that the company decided to stop franchising because it had become increasingly complex and expensive to operate a separate franchise business model. “The introduction of the CPA was not the reason and we are unaware of any provision in the act that would have a significant effect on our franchise business,” he said.

Hamer made a presentation to the commission after discovering that in early November the commission had granted Woolworths unconditional approval for the acquisition of the Middelburg Cluster of five franchise stores.

A spokesman for the commission said that the WFA had raised a number of interesting issues and confirmed that the commission would soon be asked to consider the acquisition of the Newcastle Cluster of five franchise stores.

Hamer argued that Woolworths’ proven inability to run a store with an annual turnover of less than R20m combined with the fact that regional shopping centres were being built on the outskirts of many of the towns serviced by the franchisees meant that many of the franchise stores would be bought and then closed.

At the time of going to press Woolworths had not responded to Hamer’s contentions relating to possible closures.

“Woolworths’ history of closing CBD stores in preference for regional shopping centres in places such as Kempton Park, Vanderbijlpark, Vredenberg, Brits and Potchefstrom combined with its inability to profitably run smaller stores ensures that many of the stores it acquires will be closed soon after acquisition,” said Hamer.

He said between 30 percent and 60 percent of turnover at most of the franchise stores came from lay-bys. Hamer argues that it is feasible to maintain both a CBD franchise store and a store run by Woolworths in an adjacent regional shopping centre. He also argues that the closure of CBD stores in small towns not only hastens the decline of some of these towns but also creates difficulties for poorer, often black consumers.

These consumers are not only deprived of the ability to buy through lay-bys but are obliged to spend as much as R10 on taxi fares to the regional shopping centres generally located to suit wealthy shoppers.

Hamer contended that four of the five stores in the Newcastle cluster would be closed within 24 months. The store in Newcastle city centre would be closed down when the regional shopping mall opened.

“At Vryheid, Dundee and Piet Retief turnover is less than R15m and so is not sustainable under Woolworths’ corporate management,” said Hamer.

The WFA has called on the commission to impose conditions on any further acquisitions of franchise operations. - Business Report

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