Fractured Franchise

Increasingly, franchisees at other chains feel the same. A growing number are forming independent associations that talk purely in franchisee-speak. Like an organized union, these groups believe there is power in numbers to compel changes at headquarters.

Restaurants and Institutions
April 1, 1998

Fractured Franchise
Jennifer Waters

Long John Silver’s franchisee Frank Cain doesn’t expect magic from the Lexington, Ky.-based corporate offices, but he does want some respect. Specifically, the 18-year owner with 39 units wants to have a say in the ailing chain’s future. Fellow franchisees do too and are joining the Association of Long John Silver’s Franchisees Inc. (ALJSF), a group Cain organized last fall.

"With our experience in this concept, our voice isn’t being heard loud enough," rues Cain.

Increasingly, franchisees at other chains feel the same. A growing number are forming independent associations that talk purely in franchisee-speak. Like an organized union, these groups believe there is power in numbers to compel changes at headquarters.

"Franchisees don’t want a lot from their franchisor," insists Susan Kezios, executive director of the American Franchisee Association in Chicago. "They truly want participation in the day-to-day activities."

But too often, the relationships turn acrimonious, fracturing even the tightest of franchise operations. At McDonald’s Corp., for example, some franchisees who publicly aligned themselves last year with The Consortium, a San Diego-based independent group of McDonald’s franchisees dissatisfied with corporate strategy, claim they were pulled off voice-mail and fax lists. Some fellow franchisees even joined in with U.S. chair Jack Greenberg’s now-famous barb that the group was nothing more than "eight people and a guy with a fax machine."

At Little Caesar Enterprises Inc., two organizations represent identical issues for franchisees of the Detroit-based pizza franchisor. Top among them is that franchisees of the more than 3,400 shops believe they can cut operating costs by purchasing food and other items from sources outside the company-owned distributor. One group, the Association of Little Caesar Franchisees, is suing the franchisor, claiming the purchasing restrictions violate antitrust laws.

The other group, the Independent Organization of Little Caesar Franchisees Inc., is taking a less contentious approach. Patrick Flanigan, the group’s vice president and owner of 29 units, insists level ground can be found.

"We seek an open, cooperative and constructive dialogue with our franchisor," he says.

Follow the Money
Ask any franchise CEO or president if he or she would like the same from franchisees and there’s unanimous accord. So why, then, do franchisees feel a need to organize? And why the sudden surge of independent groups?

The reasons are as varied as the franchise concepts themselves. Mostly, franchisees want to protect their investments and help promote the brand. A franchisee often has a better feel for what will work over the counter than do the executives in corporate ivory towers.

"They’re on the front lines," says Consortium Director Dick Adams, a former McDonald’s franchisee.

Franchisees at Manhattan Bagel Co. formed an independent association last summer to preserve the system and shore up sagging sales. Manhattan Bagel filed for Chapter 11 bankruptcy protection last fall, and now franchisees are uniting to help the company.

"We would love to see the company emerge intact," offers MBC franchisee John Mangan. "We want to make sure [emerging from Chapter 11] works for the system for a long time, not just tomorrow."

The ALJSF feels its management—the fifth new team in three years—doesn’t know the products and the customers as well as franchisees do. Shortly after Long John Silver’s Seafood Shoppes introduced "wrap" sandwiches to the heavily fried-fish platter menus, franchisees unified over what they thought was corporate’s lost perspective.

"We want to get back to the core base that we were founded on," says franchisee Cain. "It’s worked for us for a long time."

Nothing’s Perfect
To be sure, franchising is not a perfect science. Most experts concede there are few business relationships as complex as that of the franchisee and franchisor. The tie is long term, mutually dependent and financially affiliated—not a whole lot unlike a marriage.

"Managing a chain is more complicated than it looks," writes Harvard University professor Jeffrey L. Bradach in Franchise Organizations. The franchisee is both an employee and independent businessperson. They operate their own stores, but generally must adhere to stringent rules and regulations.

The franchisor is part ally, part dictator. Rigorous attention to the rule book is imperative to maintain what Bradach calls "shared identity," or 1,000 matching factories throughout the world.

In all cases, the franchisee and franchisor are business partners. Intrinsic in any business deal, profit is the goal. The franchisor makes money from franchisee and royalty fees, and an ongoing program to open new stores. The franchisee makes a living—often, a very lucrative one—from sales and well-operated restaurants.

This can be a happy set-up for many years. But it can become tenuous when the going gets tough. Difficulties usually start at the cash register.

At LJS, franchisees were willing to try wrap sandwiches, but claim the newcomers did nothing to pump up long-term sales. Besides clouding the chain’s fried-fish niche, wraps wreak havoc in the kitchens. Slapping perch, french fries and coleslaw on a hot plate takes only seconds compared to the labor-intensive time of the made-to-order wraps.

At corporate headquarters, however, the wraps represent a menu enhancement, not a departure. "We’re not going to walk away from our platter business," insists a company spokesman.

Growing Up
Many chains are coming of age. Independent organizations tend to emerge most frequently with older franchise concepts. Experts say that as franchise units grow in numbers, contracts change to accommodate the growth, often resulting in increased advertising or royalty fees and new covenants on territory.

The larger a franchise gets, the more unwieldy it is to manage people and stores all over the world. Oak Brook, Ill.-based McDonald’s, for example, was almost 40 years old before The Consortium appeared. The group’s first charge: to slow down aggressive plans to erect more Golden Arches in the United States, a strategy that many franchisees see as encroachment. The Consortium’s Adams contends that as a franchise matures the franchisor takes on a greater role. "The franchisor becomes big government," he says. "They have all the answers, the solutions to your problems. Send us your money, we know how to spend it better than you."

McDonald’s, he says, has become completely "Oak Brook-centric" and no longer listens to the troops. Even the recent regionalization at McDonald’s is not curing that, Adams says.

Franchisee World
But there are reasons for that too. Tops among them is insularity. Though the products may taste exactly the same and the restaurants look identical, franchisees aren’t always in touch with what goes on outside their doors. What’s more, they don’t have the resources that the mighty mother ship does.

What franchisee can afford to spend $200 million on a roll-out of a new product like McDonald’s did with the Arch Deluxe?

Hardee’s franchisees got together when CKE Restaurants Inc. bought the 3,000-unit hamburger chain and began a systemwide conversion of Hardee’s stores to the Anaheim, Calif.-based operator’s flagship Carl’s Jr. restaurants. Realizing that Hardee’s had a successful breakfast menu that most quick-service restaurants would die for, CKE envisioned incorporating it with Carl Jr.’s successful lunch and dinner menus.

"Everyone’s apprehension over the future of the [Hardee's] system was extremely high," recalls Patrick Carter, a franchise attorney representing the Hardee’s group. Franchisees, many of whom had been with the system for three decades, feared the total concept—in essence, their entire investment and livelihood—would disappear under the Carl’s Jr. name.

Since then, however, CKE has slowed down its conversion plans with an eye to preserve the Hardee’s name in certain areas. "We’re going to let the stronger system survive," says Rory Murphy, Hardee’s president-COO.

That’s heartening to Hardee’s franchisees. "CKE has gone from being very dogmatic about the conversion to being indecisive," says Carter.

It’s the Equity
Boston-based franchise attorney Eric H. Karp says virtually every franchisee-franchisor battle has one core element: money. Paraphrasing political pundit James Carville’s "It’s the economy, stupid" dirge from the 1992 Clinton campaign, Karp contends, "In this case, ‘It’s the equity.’ "

Equity also ties back in with maturing franchises, says AFA’s Kezios. As franchisees look to retire and either sell the business or hand it off to a family member, its worth is paramount.

More times than not, she contends, franchisees discover their contract is more valuable than what it may fetch. A 20-year contract under a 3% royalty fee and a 2.5% advertising contribution does not automatically transfer to a new buyer. Instead, the franchisor rewrites the contract, usually upping fee percentages. What might have been a $500,000 business drops to $350,000.

"Franchisees scream, ‘Where’s my equity?’ " she says. "In what other business is the owner not allowed to sell what they own?"

Kezios is tough on franchise operations. "The franchise relationship is fundamentally an economic one where both parties want to make some money," she says. "Nothing wrong with that. Only problem comes when one party wants to make its money from the other."

Friends for Life
To be sure, not all franchise operations run roughshod over franchisees. Many Manhattan Bagel franchisees think their budding relationship with the corporate offices is genuine.

And certainly not every McDonald’s franchisee is unhappy. Many operators of the 12,000 U.S. units refer to themselves as "proud McDonald’s licensees" and jump at the chance to defend the Golden Arches. At annual meetings, it is clear the franchisees who attend have a fond affinity to the management team.

Is a franchisor-franchisee love-fest possible then? Attorney Karp thinks so.

"If franchisors act in a way that’s open and cooperative, an arm’s length, mutually respectful, balanced relationship can occur," he insists. "Relationships will improve, morale will improve … and franchisees will be willing to invest" more in the brand.

Kezios says it has to be more concrete than that. "We need laws, national laws, to protect these guys," she says. "We need consistency from state to state."

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Risks: Independent franchisee association, Susan Kezios, American Franchisee Association, AFA, Supply price gouging, Encroachment (too many outlet in area), Renewal/refusal to renew, Dissident leaders, Right to associate and right to harass, McDonald’s not so lily white, Must buy only through franchisor (tied buying), Anti-trust provisions not applied to franchising, buyer must sign current, often less favourable, contract, United States, 19980401 Fractured franchise

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