FRANCHISING: a love affair gone sour

While admitting that some franchisors have been too quick to accept a franchisee who has the cash, the outspoken Druxerman does not have a high opinion of franchisees: “They’re greedy as hell…they just want to get their hands on a business and make a million bucks.”

Foodservice and Hospitality
February 1994

FRANCHISING: a love affair gone sour
The success story of the ‘80s has turned into the war zone of the ‘90s. But there are signs that some franchisors and franchisees are making up
Deborah McKay-Stokes

The whirlwind romance between franchisors and franchisees is in ruins, and everyone involved is fumbling for answers. Franchising was the foodservice success story of the ‘80s: for franchisors, it was an easy means of expansion, and for franchisees, it was a low-risk formula for launching a business. Today, bitter disputes are rocking the industry, such as Pizza Pizza’s battle with a group of its Ontario franchisees. “I bet 90 per cent of franchise organizations have been sued by franchisees in the last two years,” says industry consultant Doug Fisher, president, Fisher Hospitality Group Inc., Toronto.

Finally, the franchisors are facing the fact that their businesses are in turmoil. Two years ago, unrest in the ranks was dismissed by the Canadian Franchise Association (CFA) as the grumbling of a few malcontents. But in a dramatic about-face, the exclusive franchisors’ club has turned self-appointed industry watchdog, bent on bridging the gulf between franchisors and franchisees. The CFA still excludes franchisees from its membership, but has extended its umbrella of services to them. “We’ll even sit down with a potential franchisee and go over their agreement,” says president Richard Cunningham. “We are trying to bend over backwards for the group that goes out and buys a franchise.”

What happened? Foodservice franchisees, with their front-line vulnerability, have been booted around by a bad economy. But opinions differ on the role of the economy. “We got this way because everyone started losing money,” says Fisher. “All of a sudden franchisees were getting less, still paying royalties, and ending up in the negative. And everyone started hating each other.” Others argue the recession merely opened up the cracks in the system. “Economics has not changed anything,” says John Sotos, a franchise lawyer with the Toronto firm Sotos, Karvanis. “The franchise experiencing difficulty was structurally unsound to begin with.”

Sotos is representing the Southern Ontario Pizza Alliance, the group of franchisees battling Pizza Pizza. Currently in mediation, this emotionally charged dispute is the ultimate example of the end of the honeymoon. While neither side would comment on specifics, allegations in the Toronto Star of abuses by the franchisor ranged from unexplained fee increases to intimidation tactics. (Pizza Pizza has launched a $50-million libel suit against the Star, and Lorn Austin, executive vice-president of the chain, has added a personal suit for $10 million in damages.)

Austin insists the case is a matter of a handful of disgruntled franchisees being battered by the recession. “It’s all economics,” he says. “Franchisees are turning to franchisors and franchisors are experiencing the same recession.” Pizza Pizza refuses to officially recognize the group, which Austin says represents 38 franchisees out of a chain of 260. “The rest of the franchisees are very happy and can’t figure out what this smaller group is doing to ruin their stores,” he comments.

David Michael, president of the alliance and owner of a Pizza Pizza store in Orillia, Ont., claims the dispute is about fair business practices. “I think when someone invests their life savings and devotes their time and life to the business, you can’t have the rules of the game changed in mid-stream.”

Franchisors and franchisees must work together, stresses Cunningham. “The franchise relationship is a partnership. Franchisees cannot expect the franchisor to make them successful – they have to do that themselves. The franchisor must make sure the franchisee has the basic skills, and must teach him or her the rest. The day is past when a franchisor can say, ‘you bought the store, you are responsible,’ and then walk away.”

During bad times, the franchisors have a greater obligation to their partners, says Toronto franchise consultant Karen Castelane. “There should be more cooperation, more communication and more support for franchisees. Because if the franchisee is successful, the franchisor will be successful. And franchisees shouldn’t be putting up with less, or they should go into business for themselves.”

But at Druxy’s Famous Deli, an Ontario-based chain which resolved a dispute in its system last year, president Bruce Druxerman says franchisees expect too much. “Franchisees somehow feel when they buy a franchise it’s like a savings bond, a guaranteed income for life. And that’s their fault. They have to be smart enough to analyse the information, get expert advice and make a business decision as opposed to an emotional one.” While admitting that some franchisors have been too quick to accept a franchisee who has the cash, the outspoken Druxerman does not have a high opinion of franchisees: “They’re greedy as hell…they just want to get their hands on a business and make a million bucks.”

Whatever the reasons for the problems, there may be a positive effect: people are now choosing partners with their eyes open. Jack Hertzberg, franchise specialist and partner, Harris & Partners Chartered Accountants, Richmond Hill, Ontario, says if most franchisors are honest, they’ll admit they made mistakes with their first 10 franchises, because there were no established criteria for selecting franchisees. “There is no margin for error in the choice of a franchisee,” says Hertzberg.

Even the best system can run into problems if communication is poor. As franchisors restructure to meet today’s market, if changes aren’t properly communicated through the system, or if the store’s bottom line is affected, franchisees will resist. “The strong ones in the system might say, ‘yes, we have to change or lose market share.’ But the weak ones can become quite militant,” says Hertzberg.

Toronto’s Second Cup Ltd. is a 175 unit franchised chain. CEO Michael Bregman is unusual among franchisors in his attitude towards franchisees: “It’s very important to remember that a franchisee has decided to own a business… They pay us a lot of money and we owe them a service for that. And when somebody is paying me $30,000 to $40,000 a year, if they want to nag a little, we let them nag.”

With franchising in turmoil, there’s a tendency for franchisees within a system to form alliances. Sharp franchisors have sidestepped this action by establishing working franchisee committees. But there are signs of some settling in the relationship when those groups raised out of unrest are seeking solutions. “In many cases, the franchisors weren’t held ransom” says Castelane. “The franchisees are telling them they are an integral part of the system. And the franchisors are now sitting up and listening.”

A Turnaround at Burger King
Ron Goswell calls the Burger King story one of the most amazing turnarounds in Canadian franchising. And he should know. The business professor at Laurentian University in Sudbury, Ont. also owns four Burger King franchises, and over the past three years he has watched his $2-million franchise investment return from the brink of bankruptcy to steady, double-digit sales growth.

“We are in ecstasy – we still have the ‘pinch me’ syndrome,” says Goswell, who is also a representative on Burger King’s three-year-old franchisee Business Planning Council. While everyone else was making money in the ‘80s, the Burger King system went through four years of free-fall sales, he says. “We lost 20 per cent of our store base. There were wall-to-wall bankruptcies and lawsuits. The system was in chaos. We were all frightened for our net worth.”

The reversal of fortune came with the arrival of a new regime at Burger King’s Toronto headquarters. Led by a new president from the U.S., Alain Germain, the franchisor dismantled a force-fed national program in favor of a locally based one and brought the franchisees back into the fold. Initiatives such as the Business Planning Council were started, and when it came to advertising and promotion, local stores finally had a say.

Germain also brought discipline back into the system. “It was, ‘if you can’t meet the standards or pay the bills, get out,’” says Goswell. “He has empowered the managers and franchisees and said, ‘ this is what you are accountable for.’ Before, nobody was listening to us.”

Drew Sansom, director of marketing for Burger King, says the franchise is now a joint effort. “Our job is to provide the tools. The planning is done at the local store level.” The company is low-key on the turnaround. “I guess we are bucking the trend a little,” says Sansom. “But there’s no magic there. It’s been all discipline and consistency. And we haven’t strayed far from what we are. We sell hamburgers – that’s what we do.”

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