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In 2014, the franchisor of the Pizza Hut system in Australia
devised a new "value strategy", first to reduce the
number of pizza ranges on offer from four to two and secondly, to
reduce the price of one range from $9.95 to $4.95 and the other
from $11.95 to $8.50. The strategy was devised in the wake of
similar measures introduced by rival pizza chain, Dominos, and on
the back of several years of declining sales at Pizza Hut.
The franchisor undertook some testing of the value strategy in
the ACT market, with promising results, and determined to implement
the strategy Australia-wide. Franchisees were required to adopt the
strategy because the franchise agreements they had signed gave the
franchisor the discretion to change the product range at their
outlets and to set maximum prices.
Franchisees bring class action against pizza franchisor
Unfortunately, the value strategy was a failure. Some Pizza Hut
franchisees saw their businesses collapse and others incurred
substantial losses. Consequently, a group of 190 franchisees
brought a class action against the franchisor in the Federal Court
seeking to recover their losses.
The franchisees claimed that the franchisor had been negligent
in its design of the value strategy, had breached the franchise
agreement by requiring them to adopt it and had otherwise engaged
in conduct that was unconscionable in breach of the Australian
Consumer Law. The franchisor rejected these claims.
case a - The case for the franchisees
case b - The case for the franchisor
The aim of the franchise agreement is to generate profits, so
when the franchisor sets a new pricing structure it must act
reasonably and in good faith toward helping franchisees achieve
that aim.
On the contrary, the value strategy ruined our
profitability.
The evidence establishes a lack of any reasoned or considered
case for implementation of the strategy. It was negligently
designed, and no reasonable business person would have required us
to implement it.
The value strategy was also unfair. The franchisor stood to
gain far more from it than we ever did, while we took all the
risk.
In setting the new prices, the franchisor did not properly
consult with us and did not have proper regard to the impact the
strategy would have on us.
We have suffered significant losses and should be compensated
by the franchisor.
The franchise agreement requires that franchisees aim to
develop their businesses and increase revenues. However, there is
no term in the agreement – express or implied – that
requires us to make decisions that produce a profit for each
franchisee.
The profitability of individual franchisees is unknown to us
and outside our control. Trying to set prices to ensure profits at
every store would be commercially unworkable because every store is
in a different position.
Uniform pricing is a key element of the national Pizza Hut
system and the franchisees knew this when they signed the franchise
agreement. It's not for the court to change the commercial
bargain between the parties in the franchise agreement.
As participants in a competitive market we must be free to
respond to price competition, which is a matter for business
judgment. We did consult with franchisees and we exercised our
judgment properly and in the genuine belief that the strategy would
increase sales for both the franchisees and the overall
business.
Any loss suffered by the franchisees is due to competition and
is not our fault.
So, which case won?
Cast your judgment below to find out
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