taylor linfoot & holmes Commercial Lawyers

ABN 86 511 387 355 Partners: Godfrey Taylor Andrew Linfoot

ACCC Marcus Holmes 1 5 JAN 2009 Level 6/89 St George's Terrace PERTH GPO Box 2586 PERTH WA 6000 PERTH WA 6001

Telephone: (08) 9486 9197 Facsimile: (08) 9486 9198 International: +61 8 9486 9197 Email: gtavlor~taylorlinfoot.com.au

Our ref. GET:LG:AROC0813

15 January 2009 . -

Adjudication Branch Australian Competition and Consumer Commission 3rd Floor East Point Plaza 233 Adelaide Terrace PERTH WA 6000

DELIVERY BY HAND

Dear Sir/Madam

FORM G NOTIFICATION AND SUBMISSIONS LODGED BY DRYANDRA PTY LTD (AROMA CAFE)

We act for Dryandra Pty Ltd, trading as the franchisor Aroma Cafe.

In accordance with our recent discussion, we enclose ow client's Form G Notification, Submissions and our cheque for the filing fee.

Please contact us if you have any queries or require any further information.

Yours sincerely

T ~ L i i i i o h L i ' w

Enc

AROCOO8 13 Ltr to ACCC 13.01.09.doc

ACCC

1 5 JAN 2009

PERTH

Form G Commonwealth of Australia

Trade Practices Act 1974 - subsection 93 (1) NOTIFICATION OF EXCLUSIVE DEALING

To the Australian Competition and Consumer Commission:

Notice is hereby given, in accordance with subsection 93 (1) of the Trade Practices Act 1974, of particulars of conduct or of proposed conduct of a kind referred to subsections 47 (2), (3), (4), (9, (6), (7), (8) or (9) of that Act in which the person giving notice engages or proposes to engage.

PLEASE FOLLOW DIRECTIONS ON BACK OF THIS FORM

1. Applicant

(a) Name of person giving notice: (Refer to direction 2)

Dryandra Pty Ltd ACN 069 982 172 1\14374-2

(b) Short description of business carried on by that person: (Refer to direction 3)

Dryandra ......................... Pty Ltd grants franchises to third parties to operate Aroma cafes, -. ...........................

in Australia ............... .......

(c) Address in Australia for service of documents on that person:

C/- Taylor Linfoot & Holmes ....................

6/89 St G e o ~ e s Terrace Perth 6000 ......................... 2 ..................

Phone: 9486 9197 Facsimile: 08 9486 9198 ..-.... ...-...-..

Email: gtaylor@taylorlinfoot.com.au - ...........................................................

2. Notified arrangement

(a) Description of the goods or services in relation to the supply or acquisition of which this notice relates:

Franchises to operate Aroma Cafe franchises including licensing of trade .............................

mark, sub-licensing of cafe premises, and goods and services relating to the - ................

opening and operation of the franchised cafe, as set out in the attached .................................................................................................

Page 1 of 5

.................

Submissions

(b) Description of the conduct or proposed conduct:

Dryandra will grant Aroma Cafe franchises on condition that the franchisee -- .......... ........................

acquire some food consumables from third party suppliers who are pre- ...................... .- ............................................. ..........

approved by ............. Aroma, or proposed by franchisees and subsequently approved ........................... .................

by Aroma as set out in the attached Submissions. ...-. ....... ...................

....... (Refer to direction 4)

3. Persons, or classes of persons, affected or likely to be affected by the notified conduct

(a) Class or classes of persons to which the conduct relates: (Refer to direction 5)

Franchisees of Aroma Cafes in Australia .--. ....................

(b) Number of those persons:

(i) At present time:

38

(ii) Estimated within the next year: (Refer to direction 6)

Possible another 4 ................. ...............

(c) Where number of persons stated in item 3 (b) (i) is less than 50, their names and addresses:

Forwarded herewith --

4. Public benefit claims

(a) Arguments in support of notification: (Refer to direction 7)

Please see paragraph ..... 6 of the attached Submissions

(b) Facts and evidence relied upon in support of these claims:

Please see paragraph 6 of the attached Submissions ...................................................

5. Market definition

Provide a description of the market(s) in which the goods or services described at 2 (a) are supplied or acquired and other affected markets including: significant suppliers and acquirers; substitutes available for the relevant goods or services; any restriction on the supply or acquisition of the relevant goods or services (for example geographic or legal restrictions): (R@r to direction 8)

Please see paragraphs 3 ,5 and 6 of the attached Submissions. ,- ................................

6. Public detriments

(a) Detriments to the public resulting or likely to result from the notification, in particular the likely effect of the notified conduct on the prices of the goods or services described at 2 (a) above and the prices of goods or services in other affected markets: (Refer to direction 9)

Aroma submits that there are no detriments to the public resulting or likely ........................................................ ...

to result from the notification. Refer to paragraph 7 of the attached ...............................................

Submissions. .

Page 3 of 5

(b) Facts and evidence relevant to these detriments:

Refer to paragraph 7 of the attached Submissions - .....................................................................

........................

7. Further information

(a) Name, postal address and contact telephone details of the person authorised to provide additional information in relation to this notification:

CI- Taylor Linfoot & Holmes .......................................................

6/89 St Georges Terrace, Perth 6000 ........................... ...............

Facsimile: 08 9486 9198 ........

Email: gta~lor(iitavlorlinfoot.com.au .... ....................................................

Contact Person: Godfrey Taylor - ........................................

Dated A

ACCC

1 5 JAN 2009

PERTH

G. Taylor, ......... Taylor Linfoot & Holmes (Full Name)

Solicitors f m a n d r a Pty Ltd, the qpkcant -- . (Organisation)

Partner ............. (Position in Organisation)

Page 4 of 5

DIRECTIONS

1. In lodging this form, applicants must include all information, including supporting evidence that they wish the Commission to take into account in assessing their notification.

Where there is insufficient space on this form to furnish the required information, the information is to be shown on separate sheets, numbered consecutively and signed by or on behalf of the applicant.

2. If the notice is given by or on behalf of a corporation, the name of the corporation is to be inserted in item 1 (a), not the name of the person signing the notice, and the notice is to be signed by a person authorised by the corporation to do so.

3. Describe that part of the business of the person giving the notice in the course of the which the conduct is engaged in.

4. If particulars of a condition or of a reason of the type referred to in section 47 of the Trade Practices Act 1974 have been reduced in whole or in part to writing, a copy of the writing is to be provided with the notice.

5. Describe the business or consumers likely to be affected by the conduct.

6. State an estimate of the highest number of persons with whom the entity giving the notice is likely to deal in the course of engaging in the conduct at any time during the next year.

7. Provide details of those public benefits claimed to result or to be likely to result from the proposed conduct including quantification of those benefits where possible.

8. Provide details of the market@) likely to be affected by the notified conduct, in particular having regard to goods or services that may be substitutes for the good or service that is the subject matter of the notification.

9. Provide details of the detriments to the public which may result from the proposed conduct including quantification of those detriments where possible.

Page 5 of 5

. .

. , Dryandra Pty Ltd trading as Aroma Cafe Submissions for Exclusive Dealing Notification

1. NOTIFICATION

1.1 These submissions are annexed to and form part of the Dryandra Pty Ltd ACN 069 982 172 ("Aroma") Form G Notification to the Australian Competition and Consumer Commission ("ACCC").

1.2 Aroma can provide additional information in relation to this notice if required by the ACCC. Please contact Taylor Linfoot & Holmes, Level 6, 89 St George's Terrace, Perth, 9486 9197 (fax: 9486 9198).

2. CONFIDENTIALITY

2.1 The relevant conduct consists of franchising arrangements between Aroma and its franchisees as detailed below. The relevant clause of the Aroma Franchise Deed is provided with these Submissions.

2.2 This clause of the Franchise Deed is commercially sensitive. It refers in detail to a critical aspect of the nature of the relationship between Aroma and its franchisees; their obligations in relation to the stock to be sold by the business; and the mode of sourcing and providing of the food products of the business.

2.3 The list of the proprietors of the franchised cafes is also enclosed. This information is also very commercially sensitive, as it discloses the details of all of the franchisees of Dryandra Pty Ltd and the physical areas serviced by Aroma cafes.

2.4 Aroma therefore requests that the ACCC consider the enclosed clause of the Franchise Deed and the list of the cafes as confidential documents and that they be excluded from the public register on confidentiality grounds.

3. THE AROMA CAFE BUSINESS

3.1 Dryandra Pty Ltd operates its business as a franchisor of cafes under the trademark "Aroma Cafe".

3.2 All of the cafes in the chain use the same name style as follows "Aroma Cafe LOCATION". Thus for example the cafe at Karrinyup is known as "Aroma Cafe Karrinyup".

3.3 During the time that Dryandra Pty Ltd has been developing and expanding the business, it has expended significant effort and monies on ensuring quality control and name recognition for the cafe chain, by maintaining a standardised high quality image for all of its cafes, and maintaining high quality of food products and services.

3.4 The Aroma system comprises a distinctive and standardised business format and method for the operation of the business, utilising Aroma's registered trademark and business names, and other intellectual property. It includes a distinctive shopfront design, shop presentation, exterior decoration and decor, standardised appearance of fixtures and fittings and signage, and standardised colour scheme, style of presentation, dress styles of employees, and general appearance of the presentation of the various products.

. 3.5 The Aroma system also comprises trade secrets and know-how, including requirements

., , for the production and presentation of the various items of food stuffs, and other information concerning food production, maintenance of freshness of food, and maintenance of the appearance of the food products. These matters enhance the appeal of the products to the public, and ensure delivery of safe and competitive food items to the public, at competitive pricing.

3.6 The Aroma system also comprises a standard Operations Manuals and procedures for operating an Aroma cafe, including systems for computer software, advertising, sales techniques, promotional materials, personnel management, control systems, bookkeeping and accounting methods.

3.7 The Aroma system also comprises training of new franchisees, and also training of staff.

3.8 The Aroma system also comprises periodic visiting from the franchisor, and periodic advice and updating of training.

3.9 Most of the business is providing lunches and other light snacks during the day in heavy density centres such as the central city or large shopping centres.

3.10 Retail competition in supplying such products is very high in the dense population areas in which the business operates. It is essential to the franchisors' business, and to the individual franchised cafes, that the cafes maintain high quality consumer products, and high quality presentation of those products.

3.1 1 It is important that each cafe is maintained at that high quality. If a cafe allows its quality of food products or presentation to deteriorate, then this will impact adversely on the profitability and well being of that cafe and also of the other cafes in the chain.

3.12 As the cafes operate in a very competitive retail market, it is also essential that the business delivers the food to the consumer at a competitive price, in addition to being of high quality. The franchisor strives to ensure that the franchisees are purchasing consumables at a price which is competitive in the market place, as well as maintaining high quality.

3.13 The business would succumb to competition if either quality or pricing became non- competitive.

4. GOODS AND CONDUCT

4.1 Form G paragraph 2(a): Goods or Services

(a) Franchises to operate Aroma Cafes including licences of the trade mark "Aroma Cafe" and disclosure of information in relation to the Aroma System;

(b) Arrangements for premises to be used as an Aroma franchised store, often by way of a sub-licence;

(c) Services in relation to opening and managing an Aroma Cafe such as assistance with commencement of business, shop fitting training, staffing, customer relations, and insurances, in accordance with the Aroma Operating Manual;

(d) Arrangements for provision of high quality food and products including food handling, presentation, and service, according to the Aroma Menu;

(e) Advertising and promotions material and services.

4.2 Form G paragraph 2(b): Conduct

(a) Aroma grants Aroma franchises on condition that the franchisees acquire some of the consumables from third party suppliers who are either pre-approved by Aroma, or proposed by franchisees and subsequently approved by Aroma.

It may be arguable that this conduct may constitute exclusive dealing within the meaning of section 47(6) of the Trade Practices Act 1974 (Cth) ("Act") and therefore may be prohibited under section 47(1) of the Act.

(b) Aroma or a company associated with it sometimes enters into a Lease over the premises from which Aroma franchises are operated and, in turn, grants a sub- licence to the franchisee. The sub-licence is made at approximately the same time as entering a Franchise Deed to establish a new franchise. It may be arguable that the entry of the sub-licence is granted on condition that the franchisee enters the Franchise Deed which contains the purchasing obligations referred to above in section 4.2(a).

If so, it may be arguable that this conduct may constitute exclusive dealing within the meaning of section 47(8)(c) of the Act, and therefore may be prohibited under section 47(1) of the Act.

4.3 Aroma does not admit that its present or proposed future conduct under the Franchise Deed is exclusive dealing within the meaning of section 47(6) or section 47(8)(c) of the Act, and Aroma does not admit that section 51(3) of the Act does not exempt its conduct. Nevertheless, Aroma is filing this Notification.

5. HIGH QUALITY OPERATIONS AND IMAGE

5.1 In establishing and operating the franchising operation, which is essentially the supply of food to the public, Aroma has a substantial investment in its name and reputation. Therefore it is a commercial imperative that the franchisor is able to place certain obligations on franchisees. Where all franchisees comply with these obligations, the franchising operation as a whole will maintain a consistent high quality image and service. Without a consistent operation of all stores in a franchising operation, consistent product range and high quality, and consistent service and business methods, the consumer will not be confident of returning to the cafe or in entering another franchised Aroma cafe. Valuable goodwill would be lost, and the franchising operation would become uncompetitive, deteriorate, and perhaps fail.

5.2 Aroma designed the Aroma System as a comprehensive business format and method with which all franchisees must comply, in the interest of all of the franchisees, and also in the interest of their customers. The Aroma System ensures a consistent Aroma store appearance, product range, quality standard and service experience which establishes and maintains competitive pricing of the consumer product, safety and high quality of the product and thus consumer goodwill.

5.3 The Aroma System enables Aroma to monitor and control such issues as health and safety, cleanliness and hygiene in food preparation, food ingredients and sources, nutritional values, and other aspects of a food preparation business that are essential for effective operation. This enhances consumers' perception of Aroma as a trustworthy

brand, maximising both the ability of Aroma franchisees to compete effectively in the market, and the ability of Aroma to attract further franchisees.

5.4 Under the Aroma System, the Aroma franchisee is not restricted to acquisition from suppliers pre-approved by Aroma, but can apply to Aroma for approval of alternative suppliers. Aroma makes the necessary inquiries, in order to ascertain whether the alternate supplier can meet Aroma's necessary specifications and standards, and can consistently and reliably supply the relevant good or services. If satisfied that the supplier can better meet Aroma's criteria, Aroma will approve the supplier.

5.5 The approval mechanism in the Aroma System strikes a reasonable and appropriate balance. It preserves Aroma's business and public safety imperatives by maintaining the competitiveness of the consumer product, and the consistency and safety of its franchised operations, and at the same time allows the franchisee an opportunity to use alternative suppliers.

6. PUBLIC BENEFITS (Form G, paragraph 4)

Fostering business efficiency

6.1 By making a list of approved suppliers available, Aroma reduces the transaction costs for its franchisees who would otherwise need to do their own investigations for each requirement and to engage new suppliers on a trial and error basis, ie. without knowing whether the supplier would meet its commitments. The use of approved suppliers thus enhances business eficiencies and benefits the public by ensuring delivery of a high quality and safe product, at a competitive price.

6.2 In relation to the purchase of consumer goods from approved suppliers selected by Aroma, significant business efficiencies in the form of reduced transaction costs flow on to the franchisees from this arrangement. Without a mechanism of pre-approved suppliers, franchisees would be forced to shop around and investigate whether the goods:

(a) were from a reliable and cost effective supply source;

(b) were safe, and complied with health and safety requirements;

(c) are nutritionally sound and will conform with Aroma's product nutrition standards;

(d) carried the necessary warranties regarding processing and production of the ingredients, to enable Aroma and its franchisees to adequately inform customers of the nature of ingredients;

(e) will conform with Aroma's product recipe requirements;

(f) are of a consistently high quality so as not to prejudice the Aroma Cafe brand.

The use of approved suppliers reduces such transaction costs and allows a reduction of input costs.

6.3 The use of approved suppliers also provides a further public safety benefit in that it allows Aroma and its franchisees to quickly deal with the supply source of any defective or unreliable product and thus quickly and effectively resolve the problem.

6.4 The approval mechanism, in addition to the suppliers who already are approved, allows franchisees to seek out further business efficiencies perhaps offered by alternative suppliers and to propose them to Aroma for its consideration and approval, thus constantly providing a methodology for surveillance of the marketplace by all the franchisees, as well as by Aroma.

6.5 Aroma ensures at all times that the prices at which the franchisees can obtain the products are at least as competitive as could be obtained by them from any supplier.

Improving product quality

6.6 As submitted above, success of the Aroma franchising operation depends in large part on consistently producing high quality products and offering the same range in every Aroma cafe. The mechanism by which franchisees are required to obtain goods from suppliers either pre-approved by Aroma, or as proposed by franchisees and then approved by Aroma, enables these consistency and quality objective to be attained.

6.7 The quality control of the approved mechanism allows Aroma to ensure the continued viability of its registered trade mark, which is to the benefit of the franchisor and the franchisees.

6.8 It is important for Aroma to ensure it can monitor the quality of inputs, ingredients, consumables, overall shop and employee presentation and other aspects of a franchisees' business that operates under the Aroma trade mark. The approval mechanism is the best way of doing this, in conjunction with other in-store quality control measures.

Promoting competition in relevant markets

6.9 While Aroma maintains a list of approved suppliers, Aroma does not grant exclusive rights to suppliers in relation to Aroma requirements. Alternate, or additional, suppliers c& be proposed and approved. suppliers-are therefore not foreclosed from supplying franchisees' requirements. The franchisees thus are able to constantly review the marketplace for potential suppliers and if they believe they have located a better supplier, they can require consideration of that supplier by Aroma.

6.10 Further, from time to time Aroma's approved suppliers are subject to a competitive analysis by Aroma in the ordinary course. This ensures that approved suppliers continue to provide Aroma franchisees with competitive terms and prices, and allows Aroma the opportunity to consider whether other suppliers should be trialled, and, if successful, added as an approved supplier.

6.1 1 The approval mechanism under the Franchise Deed allows Aroma and its franchisees to compete more effectively in their respective markets.

6.12 As submitted above, the approval mechanism allows Aroma to ensure the consistency of its franchise operations and thus the strength and appeal of its brand, which maximises Aroma's ability to attract further franchisees and to effectively engage in inter-brand competition in the franchising market. In turn, a strong brand maximises an Aroma franchisee's ability to attract consumers and to generate repeat business, which allows it to compete strongly on price and quality in the cafe market.

7. EFFECT ON COMPETITION (Form G, paragraph 6)

Conduct and Competitive Effect

7.1 Aroma's conduct involves supplying or offering to supply its franchise services on the condition that the franchisee acquires various products from pre-approved suppliers. The franchisee will thus refer to the list of approved suppliers when purchasing those goods. Aroma ensures that the pricing of those goods is competitive, and that the quality is high. Under the Franchise Agreement, the franchisee may propose an alternative supplier for approval by Aroma. As such, the franchisee is not restricted to dealing with only those parties on the list of approved suppliers, if there is a better supplier.

7.2 A supplier is chosen on the basis of its ability to consistently provide quality, healthy products at a competitive price, on favourable terms, and without interruption to continual supply. If a new or alternate supplier is proposed who is better able to do this, then Aroma will approve that supplier.

7.3 The Aroma approval mechanism for its suppliers of consumables therefore has no detrimental competitive impact and at the same time provides significant public benefits, as submitted in section 6 above.

Demand

7.4 Aroma does not have substantial size or market power, such as to enable it to cause any distortion in the market for franchised businesses, nor to cause any distortion in the market for the supply of various consumables or foodstuffs.

7.5 Anyone considering a franchise arrangement with Aroma has numerous alternative franchising opportunities, whether in the wider retail food market, fast food market, or cafe market, and also can always substitute for a franchising arrangement by simply choosing to set up their own business.

7.6 Nor do the suppliers of those consumables or foodstuffs have any substantial or significant market power such as to enable them to cause a distortion in the market. Those goods are widely available in the marketplace.

7.7 As Aroma does not have substantial market power, it cannot act or make its business decisions without regard for the wmpetitive condition on the market. Aroma must ensure that its own franchising system is competitive in attracting franchisees, as there is a wide range of competitive franchise systems in the market place. Aroma must also ensure that the franchised cafes are able to acquire product at competitive prices, and are able to deliver product to the consumer competitively.

7.8 The extent to which distortion may occur in the supply of products (here the consumer goods to be supplied to franchisees) can be influenced by whether there is a single nominated supplier, a number of nominated suppliers, or any supplier. The provision of one nominated supplier can potentially distort supply; the provision of a number of suppliers may be considered less anti-competitive; and a provision that a good or service may be purchased from any supplier does not distort supply at all.

7.9 The approval mechanism in the Aroma Franchise Deed is closest to the 'any supplier' stipulation, with the rider being approval by Aroma, ie. successful completion of the approval mechanism which is necessary to preserve the business's reasonable

commercial and safety interest, as set out above. The mechanism is not so narrow as to stipulate one single nominated supplier or number of suppliers with which the franchises must deal. The mechanism does not foreclose the opportunity for other suppliers to obtain the business of Aroma franchisees. Rather, it enables any supplier to be considered and approved.

7.10 There is no competitive detriment as there is open competition to become an approved supplier to Aroma cafes.

7.1 1 As the goods are widely available in the marketplace, and there are several suppliers of those goods active in the market place, the strength of competition for the supply of goods is strong.

7.12 Aroma franchisees are not forced to acquire goods at an inflated price, or of an inferior quality, from a pre-approved supplier. It would be strongly against Aroma's commercial interests to require its franchisees to purchase goods at an inflated price, or of inferior quality. Aroma's successful operation of its franchise business and its capacity to attract further franchisees is dependent on its good relationships with its franchisees, and enabling them to efficiently set up their businesses and effectively deliver competitive product in the cafe market.

8. CONCLUSION

8.1 For the reasons set out in this submission, Aroma maintains that its franchisees, and the public, benefit significantly from its franchisee arrangements under the Franchise Deed, including the use of approved suppliers and approval mechanism for alternate suppliers. Aroma submits that no detrimental competitive impact, and no public detriment, arises from these arrangements. If any detriment did occur, Aroma submits it would be heavily outweighed by the public benefits of the arrangements.

Dated

dl4 ~~~+//f-t.& vlo Linfoot & Holm

~oiiciiors for Dryandra Pty Ltd