Claims of secret commission deals in NZ……..

A report in NZ’s Sunday Star Times says that long-running claims that secret commissions are rife in New Zealand’s $4.5 billion travel industry are gathering momentum, with the actions of a group of disgruntled Holiday Shoppe franchisees threatening to split apart Holiday Shoppe’s wholesaler Gullivers, a $235 million travel company owned until last year by entrepreneur Andrew Bagnall.

The first shots have been fired by about a dozen grumpy Holiday Shoppe franchisees, including some of the biggest and most powerful retailers in the chain and their lawyers have written to their new Australian owners, Stella Travel Ltd, demanding their clients be released from their franchise agreements immediately on grounds of fundamental breaches of contract.

They also want compensation and an assurance Stella will not impose any restraint of trade if they decide to remain in the travel industry.

Stella refuses to release them. Both sides are threatening to sue.

Among the franchisees’ gripes are: –

** a refusal by Stella to provide independently audited accounts for Holiday Shoppe Ltd (the umbrella company for its approximately 75 franchisees);

** a lack of management consultation;

** a failure to invest adequately in the Holiday Shoppe brand (Stella has spent $750,000 on advertising and marketing since it took over Gullivers last December compared with annual spends of $7.5m and $6m by competitors Flight Centre and House of Travel respectively); and

** the long-running sore of secret commissions – financial transparency and management consultation are legal requirements under the franchise agreements.

Stella’s New Zealand CEO Phil Turner disputes the breach of contract allegations and says he suspects the discontent within Holiday Shoppe is driven by “one person who wants to stir up the travel industry community”.

Asked why Stella didn’t simply release the dissidents from their contracts, Turner said: “We have done nothing wrong and we have not acted illegally.”  “We have a contract with them and Stella is all about growing their businesses.”  “We feel we can make it work for them.”

Since March, Turner says only one franchisee had decided not to renew his contract and in that time Stella had opened five new Holiday Shoppes.

The travel industry’s structure means commissions and incentives filter down the food chain from suppliers (airlines, hotels and rental car companies) to global distribution systems (such as Amadeus, Galileo, Sabre and Worldspan) to wholesalers (such as Gullivers) and then, at the end of the chain, to travel retailers such as Holiday Shoppe.

The payments are not illegal so long as they are properly disclosed.

“The system relies on reporting by the airline and the wholesaler to be honest,” says one franchisee.  “But the problem is that you don’t know what you don’t know.  “It’s a very complex system.”

“Unless the percentages are disclosed it’s very difficult for us to work out who’s getting what and whether the system is fair and honest or whether money is being secretly siphoned off into other pockets.”

“We’re just not seeing the incentive payments that are meant to be paid.”

“The money is not flowing down the chain to the retailers.”  “We suspect it’s being banked by the company’s owners and the wholesalers are getting very rich.”

Holiday Shoppe insiders say these benefits and incentives could run to several million dollars a year.  For example, Bagnall and Gullivers are said to have been paid a $6m “sign-up fee”, just before Gullivers listed in 2004, for switching their global distribution business from a combination of Sabre and Amadeus (two of three global reservations heavyweights) to Sabre alone.

Franchisees say they never see the benefit of group buying deals, such as bulk discount arrangements with telecom providers and travel insurers.  On the specific issue of secret commissions, as a recent example they cite an arrangement with Virgin Blue, where the airline is said to have paid 7% commission at source that was whittled down to 4% by the time it reached Holiday Shoppe retailers.

The retailers say Stella has refused to confirm the commission paid to Gullivers and other distributors.  This type of disclosure may be a requirement under the Secret Commissions Act 1910. (Turner says Stella has legal advice that the company has not breached the act).

Stella’s law firm Simpson Grierson describes the allegation of secret commissions as a “red herring”.

“It is well-known in the travel industry that Gullivers and/or Holiday Shoppe Ltd receive by way of remuneration certain override commissions and incentives in the course of negotiating contracts with wholesalers and suppliers,” Simpson Grierson wrote to the franchisees.

The disgruntled franchisees say they have no problems with commissions so long as they are disclosed in a transparent fashion and through an independently audited set of accounts.

Without this information they cannot determine whether or not money is being siphoned off illegally.

Some have stopped paying their annual $20,000-$25,000 franchise fees – an action Stella says it will not condone.

The row threatens plans by Stella’s ultimate owner MFS – an Australian investment company that earlier this year made an unsuccessful bid for Tourism Holdings – to sell 50% of Stella to a buyer identified by Business Review Weekly as private equity firm CVC Asia Pacific.

Gullivers claims the row has been engineered as an excuse to enable disaffected franchisees to quit Holiday Shoppe early so they can join a rival travel company, Flavour Travel Ltd.

Flavour, set up this year by former Holiday Shoppe general manager Digby Lawley and Paul Schoffelmeer, Gullivers’ former business development manager, is understood to be about to launch a new retail travel chain.

Several former Holiday Shoppe staff and franchisees have already been signed up.

Flavour also has gripes with Stella. The fledgling company claims it is the victim of a dirty tricks campaign by Stella executives who have threatened to pull their multimillion-dollar business from airlines, hotels and other travel distributors who agree to do business with Flavour.

Turner says he has no knowledge of any such behaviour.

Though in breach of the Commerce Act, this type of conduct is notoriously difficult to prove. And with Gullivers still the biggest wholesale travel business in New Zealand, it can pull a heavy punch.

“Air New Zealand and Qantas are scared,” said one franchisee. “Stella owns 50% of all Australasian travel.”  “That’s an awful lot of business it can shift if it wants to. “People aren’t prepared to stand up to them.”

Report by The Mole and The Sunday Star Times