Caltex Australia to spend AUD 120 million to buy out franchisees

After a two-year review of its franchise model, Caltex Australia has determined that controlling its core business is the best way to achieve its retail growth ambitions.

Caltex Australia said it will spend up to AUD 120 million (USD 94 million) to take control of the 433 remaining franchise stores in its service station network, operated by 237 franchisees, under company control by 2020.

The decision is the biggest shake-up in Australia’s franchising industry in decades. Franchise Council of Australia Deputy Chairman Jason Gerhke said Caltex’s network-wide franchise buyback is one of the largest he had seen in 25 years.

However, the potential remains for some franchisees to resist buyout if their agreement expires beyond 2020.

Caltex Australia CEO Julian Segal said the decision had nothing to do with widespread wage fraud in its franchise network, which led to Caltex Australia issuing a statement in November 2016 that it had terminated five franchisees.

“Deciding to take over the operations into Caltex has nothing to do with the underpayment issues, but with our strategy, as we didn’t want to have a Kodak moment, or a Nokia moment, or a Blackberry moment,” Segal said.

Caltex Australia began its internal strategic review in 2015, a move which later saw the business split into two streams.

Caltex Australia also created an AUD 20 million (USD 15 million) compensation fund for underpaid workers.

Caltex Australia has been increasing the number of company-run stores over recent years, from just 138 in June 2016 to 233 in June 2017. Latest figures indicated 352 of 810 petrol stations were operated by Caltex Australia, with 433 owned by franchisees and 25 sub-leased.

“Caltex appreciates that this is a significant decision and it will affect many of our franchisees. Caltex will work with our franchisees to manage the impact of this change, including by offering franchisees transition support and offering employment to all franchisee employees,” the company said.

The company is also reviewing other assets within the group, including real estate and infrastructure, such as 417 freehold petrol station sites, 65 fuel depots, 18 terminals and 5 pipelines.

“Caltex acknowledges that alternative ownership and operating models exist for its assets, including the real estate and infrastructure assets, and that there are different perspectives of how long-term shareholder value is generated,” Segal said. “Caltex is well progressed in its review of the preferred ownership model, and is working through all options to determine which outcome will deliver the most long-term value for shareholders.”

A decision is expected to be announced by the end of the second quarter.

The restructuring comes as Caltex accelerates the rollout of its new pilot stores, branded The Foodary. A further 50 to 60 Foodary sites will be launched this year as well as five to 10 Nashi high street convenience sites that are not linked to fuel sales. The rollout is expected to cost about AUD 100 million (USD 78 million).