Franchisees Battle Mergers By Seeking Concessions

The trade group, dominated by franchise chains, for years has been chided by outlet owners who consider the code a joke and say the IFA hasn't acted against its members over mistreatment of outlet owners.

The Wall Street Journal
July 1, 2000

Franchisees Battle Mergers By Seeking Concessions
Dan Morse

Franchisees are getting friskier.

From diet centers to ice-cream sellers, franchisees are battling a wave of mergers and acquisitions in the franchising world by seeking concessions from acquiring firms in return for peaceful coexistence.

The latest example: A group of Weight Watchers International franchisees filed arbitration claims last year when the chain was owned by H.J. Heinz Co. of Pittsburgh. At the time, Heinz was negotiating a sale of the chain. The franchisees were concerned about advertising support, an increase in the amount they were charged for mailing lists, and the practice of charging interest on amounts owed by the franchisees, according to Michael Dady, an attorney for the Weight Watchers franchisees.

Negotiations are continuing — even as Weight Watchers has a new owner, Artal Luxembourg SA, a European private-investment company. "The new owner recognizes that peace in the system is good for everyone," Mr. Dady says. Artal's investment adviser, Invus Group Ltd., New York, couldn't be reached for comment.

Other industries are seeing outlet owners fret over the reputation of the new owner or possible changes to their tightly worded franchise contracts. Among the topics of concern: having their outlets closed, quality control throughout the chain and exclusive-territory agreements.

Trouble also looms at Ben & Jerry's Homemade Inc., which is facing takeover overtures from Unilever NV and others. Franchisees at the ice-cream chain, a heretofore content lot, worry that if Ben & Jerry's is acquired, a new owner might force them to change the "socially responsible" spirit of their shops. Thus far, the franchisees have concentrated their efforts on shaping public opinion by holding rallies outside their shops, among other initiatives.

To be sure, advocates for the outlet owners say the new owners usually get their way. So the outlet owners look for the bully pulpit — and it sometimes works. To avoid disputes, acquiring chains are cutting deals.

The case of Great American Cookie Co. illustrates the point. When Mrs. Fields' Original Cookies proposed buying it, the Great American outlet owners were alarmed. After all, for years they had been telling customers that theirs was the better cookie. Now, they feared, they would be second tier when it came to national advertising and store locations or worse, would be forced to surrender their name. So, the Great American Cookie franchisees sued.

To settle the case before trial, the franchisees were granted assurances that they could keep their brand names and were given a chance to cash out.

***

OUT TO LUNCH: Dot-coms sack fast-food ads at the Super Bowl.

For 13 years, Robert Purvin, chairman of the American Association of Franchisees and Dealers, has tracked Super Bowl commercials. He says food is getting squeezed out by Internet companies.

"Where was McDonald's? Where was Taco Bell? Where was Burger King?" he asks. "I think they were all frightened away by the prices."

The rates for ads did jump, an average of $2.2 million for 30 seconds, compared with $1.6 million the year before. The study, to be released today, shows there were only two fast-food ads, Pizza Hut and Jack-in-the-Box, out of 154 Super Bowl commercials. By contrast, there were 36 Internet company ads, up from six in 1999.

Mr. Purvin says the percentage of all franchise-related ads slipped, which he sees as another example of the Internet's threat to the traditional marketing and distribution systems of franchising.

***

BREAKING THE CODE: A franchiser group moves to rewrite its ethics rules.

The International Franchise Association wants to scrap its eight-year-old "Code of Principles and Standards of Conduct" in favor of a more general "aspirational code," expected to be finalized over the next several months.

The trade group, dominated by franchise chains, for years has been chided by outlet owners who consider the code a joke and say the IFA hasn't acted against its members over mistreatment of outlet owners. "It's had absolutely no effect on the behavior of franchisers," says Susan Kezios, president of the American Franchisee Association, an outlet-owner group.

Under current terms, complaints can be lodged against franchisers or franchisees. After several steps, complaints can go all the way to the IFA's board, which has the power to cancel the offending party's membership. But in eight years, a complaint has never gotten to the board level, says Matthew Shay, the IFA's legal counsel.

He stresses that the code has had its benefits, that in a "handful" of cases companies have been denied membership, or had their membership suspended, based on initial inquiries of code violations. Mr. Shay declines to identify the companies.

But the densely worded four-page document duplicates many items covered in franchise contracts and government regulations, and is subject to legal hairsplitting.

So the IFA is working with the Ethics Resources Center, Washington, D.C., a nonprofit organization that helps trade associations establish a uniform set of standards. The IFA also plans to promote peaceful systems, and is looking to set up an ombudsman program to help settle issues in those systems that aren't so peaceful.

Mr. Shay says the IFA's new code will spell out a model of ethical conduct in "plain English" that people will pay more heed.


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