Caltex boss Julian Segal queries franchise model

Caltex chief executive Julian Segal has raised questions about the future of the franchise model in Australia.

Julian Segal says Caltex is looking at a new business model. Picture: Hollie Adams

Caltex chief executive Julian Segal has raised questions about the future of the franchise model in Australia.

“We need to recognise that there is an expectation of the community that the franchisor makes sure the franchisee pays the wages, but does it stop there?” he said in an interview with The Australian.

“Does the franchisor also have to make sure the franchisee pays its taxes? Does it also have to make sure that the franchisee employs people who are allowed to work?”

Mr Segal’s comments come as Caltex is moving away from the franchise model for its petrol stations, moving to bring the 810 Caltex retail outlets under its direct control by mid-2020.

He outlines his strategy in an interview in The Deal magazine in today’s Australian. The franchise model has come under increasing criticism in Australia following reports that some 7-Eleven franchisees underpaid their ­workers.

Mr Segal said Caltex’s plan to take full control of its service stations, which was announced during its full-year profit release in February, was part of its freedom of convenience strategy, where the fuel company is looking to boost the retail side of its ­business.

With the long-term market for petrol set to decline as vehicles become more energy-efficient and move towards electric power, Caltex is launching its upmarket Foodary outlets to generate more income from pure retailing. The first store was opened in the inner western Sydney suburb of Concord last year, the first of 26 over the year.

The company plans to open another 50-60 this year and plans to roll out more around the country as it refines the ­business.

While most of these will be at Caltex petrol stations, some will be stand-alone retail outlets. The company this year restructured into two divisions: one focused on fuel and infrastructure and ­another focused on convenience retailing, headed by former Coles Express director Richard Pearson.

“We are moving to a different business model,” Mr Segal said.

“Convenience retailing has become a core business rather than a franchise.

“So it was a critical decision for us, in the context of our strategy, to take over all our sites over the next couple of years.

“When you are building a totally new business, you have to have significant innovation where you are going to go through some trial and error.

“It is a significant transformation.

“You have to be in control of the business. You can’t let other people do it for you.”

Mr Segal said the future of the franchise model in Australia would depend on the nature of each model as well as community expectations of how much the franchisor was responsible for the operations of its franchisees.

He rejected suggestions that Caltex had moved to take control of all its outlets in the wake of a recent audit by the Fair Work Ombudsman of conditions at 25 Caltex service stations.

The FWO found breaches of workplace laws in 75 per cent of the stations audited.

Mr Segal said it was “total baloney” that the move was in reaction to the Fair Work Ombudsman review.

“Caltex is well known for its transparency. Two and a half years ago we told the market where we were going with our convenience retail strategy.”

He said Caltex had taken 18 months to come to a decision on closing its refinery in Kurnell, which was an example of its long-term approach to major business decisions.

He said Caltex started to review its petrol franchisees in the wake of the controversy over the 7-Eleven stores in 2015.

“There was no inkling of franchisee issues at the time,” he said.

“But we started to think then about whether we could run our business through franchisees. Could we have a different franchise model? Could the business be different?”

He said Caltex’s franchise model was different to the arrangements for the 7-Eleven stores and it did have responsibility for the payrolls of each franchisee.

After the 7-Eleven controversy, Mr Segal wrote to all Caltex franchisees asking them to confirm that they complied with workplace laws and conditions.

When several would not reply, the company began investigating further and found some franchisees were underpaying workers.

“It took us by surprise,” he said. “We have a very clear contract about what our duties are and what the franchisee’s duties are.”

He said the internal audit had discovered fraud by some franchisees against Caltex. This had led to the company taking over 193 outlets and setting up a $20m assistance fund to help some employees who had been underpaid.

Mr Segal predicted that income from convenience retailing would eventually overtake income from petrol and fuel sales.

The company currently generates more than $21bn a year, mostly from its fuel sales and the earnings from its refinery in Lytton in Brisbane.

“In about 10 to 15 years the fuel income will start to peter out,” he said. “And the revenue from convenience retailing is going to increase. There is going to be significant growth in the business over the next five years.”

Mr Segal said Caltex’s long-term strategy included expanding its business offshore.

It recently bought the Gull service station chain in New Zealand for $329m and a 20 per cent stake in SeaOil of The ­Philippines.

Mr Segal said the New Zealand business could “leverage” off Caltex’s fuel-buying operation in Singapore.

Set up in the wake of Caltex’s decision to close down its refining business in Sydney’s Kurnell, the Singapore office now has a staff of 55 people in the fuel sourcing business.

“The Gull acquisition, which was our first acquisition outside Australia, was not just a deal to say we are outside of Australia,” he said. “It leverages our supply capability in Singapore.”

Mr Segal said there were long-term plans for the SeaOil business to have a retail capacity.