Vodafone “unjustly enriched” itself at the expense of scores of vulnerable small business owners by slashing commissions to franchisees running the mobile phone group’s high street stores, according to allegations filed on Tuesday in the high court.
A group of 62 of about 150 Vodafone franchise operators – some of whom said they had had suicidal thoughts because of the pressure exerted by the telecoms group – say the resulting personal debts have prompted them to join a £120m-plus legal claim against the company. Vodafone is valued at more than £18bn on the London Stock Exchange and has just been granted regulatory approval to create the UK’s largest mobile phone operator by merging with its rival Three.
The court papers allege that Vodafone acted in “bad faith” by unilaterally cutting fees to its franchisees; imposed swingeing fines on them totalling thousands of pounds for seemingly minor administrative errors; and then cajoled them into taking out loans and government grants to keep their businesses afloat.
Many said they feared losing their livelihoods, homes or life savings after running up personal debts of more than £100,000. Some franchisees claimed that regional managers told them it was only their individual stores that were in difficulty, in messaging that some complainants allege echoes one theme in the long-running Post Office scandal.
Rikki Lear, one of the claimants who ran three Vodafone franchise stores in Kent, broke down as he told the Guardian: “They left me thinking about whether I wanted to continue to be on this earth. The only thing that kept me going was my family and my daughter.”
The Guardian has spoken to numerous other franchisees who have relayed similar stories.
Vodafone, which had not seen the legal claim when it was approached by the Guardian for comment, said: “We are sorry to any franchisee that has had a difficult experience.” It “strongly refutes” that the company “unjustly enriched” itself and said it had conducted “a number of investigations” into the allegations, which resulted in the company making “a number of improvements to our franchise partner programme”.
The group’s investigations “concluded that some actions between Vodafone and franchise partners had not always adhered to the standards we expect, however no evidence of misconduct was found”, the company said. It added it had paid back almost £5m to franchisees including the “retrospective reimbursement of fines and clawbacks”.
A franchise is a type of licence that allows a company to sell a product or service under another business’s brand name, in return for paying certain costs such as rent and wages. As part of their deals, Vodafone franchisees were paid commissions based on the handset and airtime revenues they generated from customers visiting their stores.
Vodafone launched its franchise programme in 2018 when it told applicants it was “offering entrepreneurs from within the business and outside of it the chance to franchise their own store as part of our partner agent programme.”
Hundreds of new franchisees were attracted by promises of unrestricted earnings and marketing materials from that period set out: “On average, you could earn between £45,000 and £100,000 per year depending on the number of stores you take (up to three – subject to availability). These figures are uncapped, so it’s completely in your control to earn even more.”
Commission rates were set so that the new franchisees could only make profits by improving the financial performance of existing stores, previously run by Vodafone, that they had taken on, the legal claim alleges.
Claimants interviewed by the Guardian said their franchises initially gave them a very comfortable living and were profitable, but everything changed after the mobile phone group imposed large cuts to sales commissions as the country emerged from the first Covid lockdown in the summer of 2020.
Vodafone imposed “an inexplicably drastic and patently irrational and/or arbitrary cut to the claimants’ commission” when it “very substantially [preferred] its own interests without any or any proper justification, analysis, and/or process”, the court papers allege.
While franchisees claim the cuts in commission rates pushed scores of them into the red, the pressure from Vodafone increased as the telecoms group began levying large fines for seemingly minor administrational errors, the filings further allege. The claimants argue these financial sanctions were partly designed “to increase [Vodafone’s] revenue”.
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Dan Attwal, who ran three Vodafone franchise stores in the Midlands and said he was still taking antidepressants after his experiences, said: “We appeared on a report and the cost of [our administrative mistake] to Vodafone was £7.08. I [then] sent an email to my [manager] … just to clarify that I was being fined £10,000. And I got an email back to say: ‘Yes, as per policies and procedures, this is the fine that you’ll get.’”
Vodafone did not disclose if it had made money out of the fines, but said it was not its intention to profit from them and that it has regulatory obligations in relation to the finances of franchisees, including imposing penalties.
As many of the businesses struggled during the first Covid lockdown of 2020, the claimants also allege that Vodafone sought to benefit from government financial assistance, which was specifically targeted at small businesses whose trading had been hit by the pandemic.
The claim alleges that the company collected information on government assistance given to franchisees and then reduced commission payments to them – in effect taking the value of the taxpayer funded assistance for itself.
Vodafone said that “the uptake of [government support] was at the discretion of the franchisee,” and “at no point did Vodafone UK receive government funds”.
The company, which said it was “prepared to go to mediation” with the claimants, added: “In 2022, a full assurance review was conducted into our franchise estate, taking over 400 hours. The review did find questions to be answered in relation to the franchise programme, its process and communication. It concluded with clear actions to make improvements in the areas identified. For example: we provided additional resource to support franchisees and made payments to franchisees where it was found Vodafone could have acted differently.”
The “majority of franchise partners are profitable today,” Vodafone said. It added that in a recent process to reallocate 20 franchise stores “the majority of the partners who are not considering legal action have applied to grow their store portfolios”.