Disputes hurt franchising’s image

"Rather than being recognized as a leader for job creation…franchising has been unfairly cast as a risky business venture an, in some instances, as the ‘wild west.’”…“Our portfolio is now comfortably over $1-billion…It’s a very low-risk portfolio. In terms of loan-loss experience, it’s peanuts.”

The Globe and Mail
November 24, 1994

Disputes hurt franchising’s image
PERCEPTION AND REALITY: The industry grew 7 per cent even during the recession and banks see it as a solid bet.
Carey French

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The franchise industry in Canada has been making headlines in the past two years, but “for all the wrong reasons,” franchisors from across the country were told in Toronto recently.

“Bad publicity, resulting from high-profile disputes involving a few franchised systems, is the obvious explanation,” said Don Schafer, president of Calgary-based Comac Food Group Inc. and chairman of the Canadian Franchise Association.

“Rather than being recognized as a leader for job creation…franchising has been unfairly cast as a risky business venture an, in some instances, as the ‘wild west.’”

And that, Mr. Schafer said, is at odds with the reality of an industry that continued to grow 7 per cent a year in Canada even during the recession years. “You can’t substantiate numbers, because governments don’t have statistics. But if we listen to what the banks tell us, franchising is $90-billion industry in Canada. About 40 cents of every dollar spent in retail today is going through a franchise chain of some sort.”

Indeed, the banks which have been criticized for sluggishness in lending to small business, view franchising as a solid bet. This year, Canadian Imperial Bank of Commerce has written a record amount of new franchise business, said Charles Scrivener, general manager of national franchising services. “Our portfolio is now comfortably over $1-billion…It’s a very low-risk portfolio. In terms of loan-loss experience, it’s peanuts.”

Mr. Schafer said 90 per cent of retail stores “today operating under a franchise system succeed as opposed to Ma and Pa’s – that start up on their own – where the failure rate is 50 to 60 per cent. Those stats come from the banks as well.”

Darkening this rosy view is concern by the 218 members of the CFA that the high-profile bad experiences of some franchisees will prompt politicians to intervene with cumbersome disclosure laws.

Two decades ago, a dispute involving a convenience store franchise system in Alberta produced legislation that the CFA says has been a bureaucratic nightmare. A poll of members, details of which are to be released next month, shows 47 per cent of respondents claiming they have chosen not to sell into Alberta or various U.S. states that have similar regulations.

The Alberta legislation, which requires all but the most blue chip of franchisors to leap through complex disclosure hoops, cost would-be registrants between $25,000 and $40,000 in lawyers’ fees, CFA members contend.

In the past three years, similar laws have been proposed in British Columbia, Manitoba and Ontario. But the trend now appears to be away from sledgehammer rules in favour of government-backed self-regulation.

Recognizing the desire of Premier Ralph Klein to distance his government from industry, franchisors in Alberta have been working to rewrite the province’s “onerous” legislation, the CFA chairman said. As a result, the franchise association has been approached by the Klein government “inviting us to begin working with the securities commission staff to investigate the possibilities of some form of government cutback with franchise legislation.”

FRANCHISES

1994 Canada U.S.
Franchisors 1,134 3,431
Franchisees 60,000 600,000

In 1993 Canadians spent four out of every 10 retail dollars at a franchise outlet. That totals more than $90-billion.

U.S. franchises employed 8 million people and had sales totaling $800-billion.
Source: Canadian Franchise Association

In Ontario, provincial consumer and commercial relations officials are working on regulations that would allow an element of self-policing by the franchising industry.

Fuelling this activity is a very public row between Pizza Pizza Ltd. of Toronto and 48 of its Southern Ontario franchisees, who claim they were taken to the cleaners by an arbitrary cost structure and “feudal-style” management.

“They went beyond anyone’s expectations of reasonableness,” said Dave Michael, an Orillia, Ont., store-owner and head of the franchisee alliance that sued Pizza Pizza. “My cartage charge went up 130 per cent over a six-month period. I was paying more in cartage than in rent.”

A court-appointed arbitrator found no evidence of fraud, but the decision – details of which are still confidential – weakens the franchisor’s power over disputed pool funds.

More importantly, perhaps, has been the decision by the CFA to expel Pizza Pizza from its rank.

Lorn Austin, executive vice-president and chief executive officer of the embattled chain, said the problems experienced by some of the company’s 260 franchisees were recession-driven. He likened the action of the CFA to a “star chamber.”

In an interview, Mr. Austin – who said he will be stepping down from the day-to-day operations of Pizza Pizza next year – charged that the expulsion was, in part, payback, for his organization’s support for an industry self-regulatory package that differed from the that espoused by the CFA. Pizza Pizza, he said, wants franchisors to be policed by industry-specific groups – in the case of pizza chains, the fast-food industry – and not the CFA.

“Our direction right now, is very aggressively towards industry self-management,’ said the CFA’s Mr. Schafer. “If we hope to have credibility, we are going to have to continue with that effort.”

Richard Cunningham, president of the franchise association, said a member is only dumped after a thorough investigation of complaints. “We go to the franchisees. If it’s widespread, it looks like a pattern and if it’s unresolved,” membership is withdrawn or denied.

Franchisees who have had bad experiences complain that the franchise association lacks teeth when dealing with bad apples. But there is a clear financial advantage to membership.

The trend toward downsizing is producing a “lot of hefty severance packages,” said the CIBC’s Mr. Scrivener. “These are the people we want to do business with.” The banker said that to protect this business, he “can’t warn would-be borrowers away from potential trouble. But “I’d tell them to phone [the CFA] and ask if there had been any complaints.”

The CFA’s Mr. Cunningham said he would warn an inquirer of unresolved complaints against a member organization. “About 10 per cent of the applicants [for membership] we receive each year are decline – that’s unique for a trade association.


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Risks: Lorn Austin, Lorne Austin, Lawrence Austin, Franchise banker, Arbitration, secret, Canadian Franchise Association, CFA, Banks, Collaborators, Survivability (franchisee and franchisor), Code of ethics, almost never enforced, Sham of self-regulation, Mask of respectability, Necessary illusions, Tobacco-industry-type defense, Banker says franchised is less risky than independent businesss, Banks as statistical source, No numbers to back up dire predictions, Fox to guard henhouse, self-regulation, Frenzied lobbying, Hefty severance packages, Most lucrative form of commercial lending, franchising, Public perception of sleaze and greed, Wild West of the business world, Canada, 19941124 Disputes hurt

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