Franchisor leaves travel agents stranded

“Unfortunately,” said Pepper, “when head office fails, the franchisees are wiped out.”

The Toronto Star
February 10, 2000

Franchisor leaves travel agents stranded
Franchisees say Loblaw left them at mercy of new bosses
John Deverell

TravelCounter.jpg

PLANS CHANGED: Hercules Pilato lost his travel agency at Loblaw's Queen's Quay when Travel Counter went broke.

Galen Weston says the Loblaw grocery chain may soon launch the powerful President’s Choice brand into Canada’s retail travel business.

Hercules Pilato and Bruce Bradley might have some tart insider advice for grocery billionaire Weston, who’s Loblaw chairman.

Last year the two men were owners and operators of Travel Counter agencies on Loblaw premises, Pilato at Loblaw’s Queen’s Quay flagship store and Bradley at Zehr’s in Niagara Falls.

When Loblaw’s chosen franchisor, Travel Counter, failed and had its licence lifted in January, 1999, each of the franchisees lost a $60,000 investment and a lot of unpaid labour.

Pilato, Bradley and several others were ruined as Travel Counter, led by Toronto’s Benjamin Estreicher, ran out of cash.

Estreicher has told The Star that Travel Counter was “a great idea,” but refused to discuss any aspect of its failure.

The Travel Counter franchisees, required to deposit their sales revenue to bank accounts controlled by Estreicher, were by late 1998 facing customers who became anxious and angry because plans for which they had paid were unconfirmed and in jeopardy.

The franchisees turned for help to Loblaw Cos., which leased to Estreicher, and to the Travel Industry Council of Ontario. They found no help in either quarter.

Loblaw Cos. said it was a landlord with no responsibility for the financial practices and management failures of Travel Counter.

Behind the scenes, said Bradley, Loblaw executives were greatly worried about the negative impact that might arise from the impending travel agency failure. While they worked toward a “corporate solution” they urged Travel Counter franchisees to spend their own money maintaining “seamless” service so the travel plans of Loblaw shoppers wouldn’t be disrupted.

Bradley maintains that Loblaw executives told him and other franchisees that they would be “looked after.” Loblaw did eventually reimburse Bradley for some of the expense of protecting customer trips during the crisis.

The “corporate solution,” however, turned out to be an agreement with another franchisor, Time Zone, which immediately demanded a new round of franchise payments and higher royalty fees from the tapped out Travel Counter franchisees.

Like Bradley and Pilato, most have chosen eviction rather than paying twice for what turned out to be a difficult business opportunity.

Michael Pepper, head of the Travel Industry Council of Ontario, said an investigation in January, 1999, revealed that Estreicher had sold 75 per cent ownership to another investor, Stephen Mernick, in a deal carried off without the legally required notification and consent of the Travel Industry Council.

Mernick, now 44, is a wannabe high flier who was declared bankrupt by an Ontario court in 1994 with unsatisfied debts of $43 million.

The court grounded Mernick, who declared taxable income of just $600 a year in the mid-1980s, after a string of underfinanced business deals including the purchase of a Firestone plant in Hamilton, a garbage dump near Barrie, a $65 million bid for the real estate holdings of defrocked evangelist Jim Bakker’s PTL corporation and unsuccessful real estate forays in Innisfil, Belleville and Napanee.

The council investigation of Travel Counter showed, aside from the unreported change of ownership, that Estreicher and Mernick were mingling money from travellers’ ticket purchases with general operating funds instead of keeping it in a separate trust account as required by Ontario’s Travel Industry Act.

Pepper suspended Travel Counter’s licence to operate a travel agency on Jan. 27, 1999. There were no charges.

Despite the illegal financial practices, Pepper said there was no evidence of fraud and very few travellers were inconvenienced before the shut-down. Travel Counter’s $10,000 security deposit with the council was sufficient to cover all claims from unpaid travel wholesalers, Pepper said.

The only obvious victims of the failure were the franchisees.

“It is not our job to monitor franchise agreements,” Pepper said.

People should go into such deals knowing that if the franchisor messes up, the subordinate franchisees automatically suffer.

“Unfortunately,” said Pepper, “when head office fails, the franchisees are wiped out.”

Loblaw Cos. vice-president Geoff Wilson would not discuss details of Loblaw’s role in the franchising fiasco.

He said there were some problems and they have been fixed.

In hindsight, Bradley and Pilato said, they placed far too much faith in what they took to be Loblaw’s apparent endorsement of Travel Counter. Then, as Estreicher and Mernick faltered, the franchisees used their own money to keep the travel customers happy. Each hoped by doing so to sustain the business and establish a direct business relationship with Loblaw Cos.

Instead they were ordered to sign on with Time Zone on its terms or get off Loblaw property.

“I had dreams for that store,” said Pilato, an immigrant from Greece, who has since reopened as Lakeshore Travel on Yonge St.

“Instead I lost a lot of money.”

Said Bradley: “My mistake was to believe Loblaw would be careful in its choice of franchisor and would not write us off.”

Travel Counter, the tenant Loblaw chose, was not a member of the Canadian Franchise Association.

Time Zone, whose principals are majority owner Fania Borok, president Felix Hung, and acquisitions director Richard Breslin, is a member in good standing of the CFA.

The Travel Council’s Pepper said linking franchised travel agencies to mass retailers can be good business, as evidenced by successful travel shops at Sears and Wal-Mart.

“The approach needs the right financing and management,” he said.

Franchisees should recognize that most franchise agreements give them “no say whatsoever” in the main aspects of the business.

It’s also dangerous for franchisees to overlook the squeeze on travel agency sales, commissions and margins created by Internet and direct-to-consumer selling, Pepper warned.


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