Could Pizza Hut force franchisees to sell pizzas at a loss? Or is that unconscionable conduct? Which case won?
Pizza franchisor implements nationwide price-cutting strategy
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.