Franchisees have little to say about ads

Companies focused on growth, for instance, tend to concentrate advertising in areas where sales are lowest, allowing franchisees in high sales brackets – who therefore make the largest contribution to the fund – to subsidize the others.

The Globe and Mail
February 15, 2000

Franchisees have little to say about ads
Paying the publicity piper. Owners must remit a portion of gross sales for promotion, but can’t control how the money is allocated. Some talk about a horror show of mismanagement.
John Southerst

JennyCraigMonicaLewinski.jpg

A group of Jenny Craig franchisees are unhappy with the company's decision to hire Monica Lewinsky as spokeswoman for the weight-loss company. Their protests haven't worked. Rose Prouser/Reuters

As a protest movement, it’s really not that shocking.

A renegade group of Jenny Craig weight-loss U.S. franchisees recently decided they didn’t want Monica Lewinsky presented as their ideal customer in nationwide advertising.

There was bound to be a debate over whether the ex-White House intern makes a worthwhile dietary role model. But the reality is that there is precious little the offended franchisees can do about the choice of their ad spokesperson.

Their only option would be to spend some more of their own money to run replacement ads in their local markets. And that doesn’t sound like a cost-effective protest.

Such are the facts of life regarding franchise advertising funds. Each month franchisees remit a portion of their gross sales to the franchiser – over and above royalties. The franchiser, such as Jenny Craig, gets to decide how to spend the money – or whether to tell franchisees about how it was spent.

A group of Jenny Craig franchisees are unhappy with the company’s decision to hire Monica Lewinsky as spokeswoman for the weight-loss company. Their protests haven’t worked.
ROSE PROUSER/Reuters

As owner of the trademark, the company has a right to control its public face. But some abuse this one-sided power, franchisees say.

“There’s no accounting, no responsibility and no recourse,” says one Toronto food franchisee who wishes to remain anonymous because he is still operating under the original franchise banner.

He and other franchisees were contributing 3 per cent of sales to an advertising fund – about $240,000 in total annually, they estimated. But besides, a few radio spots and bus advertising, they saw few actual ads. Through their franchisee association, they demanded an accounting of how the money was being spent.

The franchisees allege that they uncovered a horror show of mismanagement. The franchise company, he says, claimed 20 per cent of the fund as an administration charge off the top, although it employed no creative department, ad agency or media buyer.

Money was paid to a franchiser-owned supplier for event catering. As for the few advertising expenditures, the franchisee says many suppliers claimed they had never been paid when called for confirmation.

The franchise company simply could not account for all the expenditures, the franchisee says. “But no one wanted to continue paying lawyers to pursue it further. Many couldn’t afford it.” The original franchiser no longer controls the trademark.

While this is an extreme example, the case is typical of how advertising funds become a thorn in the relationship. And it’s not just the Lewinsky phenomenon, where franchisees dislike the campaign. What really chafes is when money collected for one purpose is spent for another.

This happens because franchise agreements almost never require that advertising funds be kept and accounted for separately from operating revenues. Some agreements even state outright that advertising funds go directly into the company’s operating accounts. “If it does,” says the Toronto franchisee, “it’s likely nothing but a slush fund.”

Franchisers can avoid this perception by treating advertising accounts as franchisees’ money that is simply held in trust for advertising purposes, says Toronto franchise lawyer John O’Donohue.

“The majority of franchisers don’t specify in their agreements that it must be dealt with in a segregated fund,” he says, “but they do it anyway. And the majority provide an annual accounting of money received and money spent.”

They also charge for administration – the cost of creating ads, analyzing the best times and places to advertise, and processing bills and payments. This is legitimate, but the levy shouldn’t be more than 15 per cent and should be based on the actual costs. “It can’t be a profit centre,” Mr. O’Donohue says. “That’s the key.”

All the accounting in the world, however, is not going to defuse a situation where franchisees are paying for advertising but seeing few ads.

Companies focused on growth, for instance, tend to concentrate advertising in areas where sales are lowest, allowing franchisees in high sales brackets – who therefore make the largest contribution to the fund – to subsidize the others.

It’s also a common strategy for franchisers to advertise aggressively in new markets where they are trying to sell franchises, a case where the advertising fund is being used more in the franchiser’s interests than in the interests of those paying the bills.

“For those franchisees, it’s a major irritant,” says Mr. O’Donohue. The answer is full accounting and a thorough explanation. “It’s just honest business,” he says. “Tell them where the money is being spent and why, what’s coming up and how they’ll benefit.” When the campaign is focusing elsewhere temporarily, he suggests telling franchisees what still needs to be done and how long it will take.

“If within a period of two years there’s not a perceived impression that franchisees are getting value for their money, it becomes a major issue.”

For prospective franchisees, a few questions about advertising funds could certainly help clarify how existing franchisees are treated. Two years of funding a company’s growth, for instance, may be hard for some franchisees to take. Maybe a call to a high-profile celebrity, such as Ms. Lewinsky, isn’t such a bad idea after all.

John Southerst is a Toronto area writer who can be reached at ac.ratsi|htuosj#ac.ratsi|htuosj.


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