Caltex Announces Its Exit From The Franchise Business

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Caltex’s announcement to leave the franchise business made earlier this week has caused mixed reactions in the business environment. The oil and petroleum guru announced that it was planning to buy back all of its franchises by the year 2020. The company currently has 433 stores that are run by 237 franchisees. It aims to spend between $100 million and $120 million in buying back these franchises.

Speculations have been raised by different parties over the influence of the wage fraud scandal that rocked the brand in December 2015. Caltex franchises were accused of underpaying their worker with some paying rates as low as $13 per hour. The results of these allegations were the creation of a $20 million compensation kitty and the investigation of a number of franchisees by Caltex and Fairfax. The chief executive officer of Caltex Australia, however, defended this move to reclaim the franchises under company control as a strategic one and one that had nothing to do with the fraud allegations.

The move will see Caltex focus on a more retail-oriented business approach with heavy emphasis on the non-fuel related sales. An internal review of their strategy that commenced in 2015 has seen the company shift from a primarily fuel oriented business with the addition of a convenience store. It has carved out a niche for itself in the retail world as it maintains its hold in the fuel industry. The company seems to have been test-running its company-owned model over the years as it increased its company-owned stores by 95 stores between 2016 and 2017, this has put into question hoe the company management was handled.

The sum total of $120 million set aside to cater for the entire transition process will be directed towards transition and implementation costs, franchisee compensations, and the opportunity costs of the downtime the stores are bound to face during this transition. Caltex has also said it is ready to offer the franchisee’s employees employment under the new business model. Franchisees have the option of opting out of the franchise agreement and receive compensation or ride out their contract and receive payment for unsold goods at the end of their tenure as well as any equipment they invested in.

Caltex is also contemplating the preferred method of ownership for some of its other assets that are either co-owned or operating under alternative ownership models. According to Mr. Simon Hepworth, Caltex’s chief financial officer, the ownership options currently being contemplated by the company for its real estate and other assets included continued ownership, the sale of the assets or proactive management of the assets.

In embarking on this aggressive move to buy back its franchises, Caltex seems to be coming to the realization that consumer’s dependence on fuel is dwindling translating to the declining trend in fuel price and consumption. The company is, therefore, looking to cash in on the growth evident in the retail market and expand the reach of its brands such as Foodary and Nashi. Different player in the market are keenly watching to see if the company will be able to sustain the company-owned model or shall it revert to the franchise model.