Franchisees fear footing Tim Hortons takeover bill, Marian Strauss

…leaves the door open for the new owner to charge more for supplies, ranging from coffee to paper cups. That could be significant because the cost of goods can consume more than 30 per cent of a franchisee’s sales, according to some estimates… As a result, Mr. Fisher believes the new merged entity will eventually combine distribution to gain economies of scale.

The Globe and Mail
September 18, 2014

Franchisees fear footing Tim Hortons takeover bill
Marian Strauss


A Tim Hortons franchise stands next to a Burger King outlet in a Toronto food court on Aug. 25, 2014. (Chris Young For The Globe and Mail)

Some of Tim Hortons Inc.’s franchise holders are concerned about Burger King Worldwide Inc.’s $12.5-billion bid for the doughnut chain, fearing the new debt-laden owner will find ways to squeeze them.

In a regulatory filing this week, Miami-based Burger King committed to keeping Tim Hortons’ headquarters in Canada with a “meaningful” number of Canadian-based executives. It also said the merged entity will continue to help finance franchisees’ renovations and refrain from raising their rents and royalties for five years.

Archibald Jollymore, a former franchisee and Tim Hortons executive, said while the agreement shields franchisees more than some had expected, it leaves the door open for the new owner to charge more for supplies, ranging from coffee to paper cups. That could be significant because the cost of goods can consume more than 30 per cent of a franchisee’s sales, according to some estimates.

3G Capital, the Brazilian private equity firm that controls Burger King, is known for wringing costs out of companies it acquires, said Mr. Jollymore. He added that the firm will likely feel the heat to pay down heavy debts following the takeover.

“No doubt there are operational and administrative changes that could improve efficiencies and reduce cost – that could be positive,” Mr. Jollymore, whose wife Anne is a franchisee, said in an interview about the proposed acquisition. “But 3G will control the pricing paid by its franchisees – that is the biggest stress felt by franchisees.”

The stakes are high for Tim Hortons’ franchisees as they prepare for a new era under Burger King in a tightening fast-food war that has made it tougher to snag customers. While the coffee and donut chain got commitments from Burger King that it will protect franchisees’ operations to some extent, they face the risk that 3G will still look to them for savings to bolster its bottom line.

Tim Hortons and Burger King executives are moving quickly to assuage franchisees’ worries, scheduling a series of town hall meetings starting this week in Oakville, Ont.

Tim Hortons spokesman Scott Bonikowsky said in an e-mail the company “will continue to operate as an independent standalone brand managed in Oakville and 3G Capital has made it clear they have tremendous respect for the strength of the brand and how the business is managed, and our strong collaboration and partnership with our restaurant owners will continue in the future.”

But some franchisees, who asked not to be named for fear of repercussions, said they are anxious that the deal will benefit the new owner and shareholders at their expense. Some industry observers agreed.

“Burger King can ratchet up their costs to franchisees,” said Douglas Fisher, president of food service consultancy FHG International. “Burger King – or 3G, really – is a strip-your-assets type of company.”

Mr. Fisher said he found it worrisome that Burger King has set a limit of five years for not increasing Tim Hortons franchisee rents and royalties, raising the question of whether it will move to hike those rates after that period. That’s because Tim Hortons has not increased rents and royalties for a long time. In a regulatory filing this week, Burger King said it has “no current plans” to raise rents and royalties after five years.

Tim Hortons’ Mr. Bonikowsky said he wasn’t aware when rents and royalties had been changed last “as it has been this way for so long.” Those rates have been consistently at 13 per cent of franchisee sales, with a typical model at 8.5 per cent for rent and 4.5 per cent for royalties, he said.

Still, some franchisees are concerned. “I feel we will be nickeled and dimed,” said one franchisee. Said another: “They’re saying all the right things … But at the end of the day, this is all about money. It’s not about the franchisees.”

Mr. Jollymore, a cousin of Tim Hortons’ co-founder Ron Joyce, has a wealth of knowledge about the chain, having started there in 1977 as one of its first executives. He was a franchisee for 20 years until January when his contract wasn’t renewed.

Several years ago, he and his wife Anne unsuccessfully tried to launch a $2-billion class-action lawsuit against Tim Hortons over its decision in the early 2000s to introduce its “Always Fresh” flash-freezing baking, rather than baking from scratch. The Jollymores had argued that the company was unfairly ringing up profits at the expense of franchisees.

Mr. Jollymore said this week Tim Hortons’ distribution is its “ace up the sleeve … They can engineer franchisees profits to whatever level they deem to be okay through distribution pricing. Corporate profits can be bolstered during slow growth by simply jacking up prices. The unknown is what is the critical point that pushes stores over the brink.”

Mr. Fisher said both Burger King and Tim Hortons depend heavily for their income on the franchisees’ distribution and royalty payments. As a result, Mr. Fisher believes the new merged entity will eventually combine distribution to gain economies of scale. “Given that most of the food at both Burger King and Tims are manufactured and flash frozen, mass production is easier, products are all frozen making storage and distribution very easy, and as a result, the supply line is very valuable,” he said.

But Mr. Bonikowsky said in a follow-up e-mail that “both companies will continue to be managed as independent, standalone brands so the fact they may differ is somewhat irrelevant.”


1. Les Stewart MBA
Will Tim Hortons +1,000 franchisees and 96,000 staff be going down the Country Style circa 2001/2 road: "down-and-dirty CCAA"?

Will $1.8-billion of "equity" (3,600 stores) be diverted upon churning to new franchisees using federal CSBFA liar loans?

Renting someone else’s business model causes problems, especially for mom-and-pop investors. This business risk only lies dormant no matter how positive the cash flows have been in the Joyce/Wendy's era. see Taleb's Thanksgiving Turkey situation…

“Blue chip” systems can be better at papering-over the single greatest risk to franchisees: franchisor over-reaching (opportunism) which difficult to defend against because of sunk costs and few franchisee associations. For many reasons, opportunistic franchisors make a higher ROI than non-predatory ones.

Best defense?: a non-litigation, lawyer-controlled and triggered Independent Franchisee Association (see National Bread Network). Financed by the 12.

Minister Orazietti: please reverse the onus on good faith as the 1970 Grange Report and Arthur Wishart's law partner suggested in 2000.


2. Winston Smith
So the deal isn't about tax inversion.

Risks: 101 ways to terminate a contract, 95 per cent of legal fees are paid by franchisors, Able to finance and sell negative cash flow franchise on crooked appraisals, Abuse of business, regulatory & political authority can destroy people, Afraid to talk, Arthur Wishart Act (Franchise Disclosure), 2000, Canada, Authority and credibility of the state used to favor a specific corporation, Bank Act, Canada, Bank won't finance deal because they know something you don't, Banks, Banks are industry cheerleaders, Blocking for the industry, Brand backlash: franchisees suffer because brand owners screw up, Breach of the covenant of good faith and fair dealing, Broken relationships, ruined lives and alienated children, Bullshit baffles brains, Canada Small Business Financing Act, Canada Small Business Financing program, Call for state to investigate their undue influence, Can’t talk to media, Canada: An unwise place to invest, Canadian competition rules a farce, Canadian Franchise Association, CFA, Can't buy local producers' products, Can't buy lower priced products, Can't talk to politicians, Cat's-paw: being used unwittingly to do another’s bidding, Churning (serial reselling), Class-action dead end, Close store if staff unionizes, Comments on article are interesting, Co-branding forces untried/loser business model onto existing franchisees, Commercially reasonable exercise of discretion, Company man, Competence, Confidentiality agreements mask opportunism, Contempt for democracy, Courts extremely picky about shoddy disclosure practices, Cross-default provisions (lose one store, you lose them all), Cruellest lies are often told in silence, Current franchisees can’t talk freely, Deceptive business practices, Defrauding the public, Deny expansion because of media, political or association involvement, Disclosure document must disclose all material facts, Disclosure document is so deficient it is ruled no disclosure, Disclosure documents never given, Discount programs destroy retail margins but boost wholesale profits, Dissent, Divide and conquer, Divorce, Dog and Pony show, Encroachment (too many outlets put in territory), Expropriation without compensation, Externalities: cheap business decision when someone else pays, Feaer, Forced to spend on renovations, Franchise agreements are so complex, they are breached the moment they're signed, Franchise investors deprived of information, Franchised store converted to corporate store, Franchisee-on-franchisee opportunism, Franchisees not the only ones at risk, Franchising is the most lucrative form of commercial lending, Franchisor controls both wholesale costs and retail prices, Franchisor has right to buy outlet before anyone else, Franchisor must approve new buyer, Franchisor overcharges for required products, Franchisor picks up stores for a song, Franchisor takes store and converts to corporate, Gouging on supplies, Government as system’s ultimate liar, Government guaranteed loans, Government guaranteed loans used a great deal in franchising, Government guaranteed loans, massive loan defaults, Government guaranteed loans: program loses $1, franchisee families lose $10, Industry Canada, Gross margin controlled by franchisor, Half-truths, Happy serfs, Head lease advantage, Hidden agenda, Higher short-term ROI to franchisor when churned (versus royalties), Hubris, I own the assets but the franchisor controls them, Illusion of government oversight, Imbalance of information and power, Incompetent or predatory: for the small business investor, the outcome is the same, Jealously guarded monopoly on the provision of legal services, Joint Employer: franchisor held legally liable along with franchisee for franchisee's actions, Lease controlled by franchisor, Lease margins are an important source of franchisor revenue, Lease obligations make franchisees pay even if not in business, Lending duty, Les Stewart, Lipstick on a pig, Massive defaults, Material facts were not disclosed, Materially misleading information, Media is not interested in some stories, Mergers and acquisitions, Mergers and acquisitions: nearly half fail financially, Military pension will delay financial collapse, Military pension will subsidize the intentionally-designed deadbeat outlet, Ministry of Government and Consumer Services, Ontario, Misrepresentations, Model of de-regulated free-marketeers, Moral Hazard: a party insulated from risk behaves differently than if the full risk were present, Most lucrative form of commercial lending, franchising, Multi-tradename franchisors are often the most ruthless, Must buy only through franchisor (tied buying), Must lease, not buy, land and/or building, Must pay future royalties, even when the franchise fails (liquidated damages), Must sell business (eventually) through franchisor, Must work only as a franchisee, National cultural icon?, National press coverage, New franchisor may be nastier than the old one, New franchisor means worse deal, Next to impossible to sell any franchise, No franchisor support, Non-compete restrictions, Nothing but cold calculation, Offered much less than market value of franchise, Old-fashioned idea that politicians are relevant, On Cooling the Mark Out (Erving Goffman), Only 3 ways out: resell to next loser, independence & be sued or abandon and go bankrupt, Only offered a fraction of what business is worth, Opportunism Test: If asset ownership were reversed, would decision likely change?, Opportunism: contract creates powers which are used to strip investor value during relationship, Opportunism: self-interest with deceit, Opportunity Knocks, John Lorinc, Outstanding investigative journalism, Past the Tipping Point of public contempt for franchising, Pawns in a game they can't win, Personal assets pledged to cover business, Polishing a turd of an argument, Politicians helping their friends, Predatory franchise lending, Predatory franchising makes more money selling than operating system, Private equity, Profits from one franchise system sucked out to subsidize another one, Punished for talking to peers, Punished for talking to press, Punitive, exemplary and/or aggravated damages, Rate of return on investment, Rebranding financed by adding more government guaranteed loan, Rebranding is a great way to raise franchisor revenue, Refranchising: corporate stores converted to franchised, Refusal to renew contract, Refuses to answer journalist's questions, Register franchisees and franchisors, Regulator already has enough power but they don't use it, Regulatory capture breeds its own incompetence, Renewal of contract contingent on franchisee waiving all legal rights, Renewing contract much tougher, Rent increases, Reputation management, Reputation risk, Resale or transfer store through franchisor to new franchisee, Resale permission unreasonably withheld, Resale value set by franchisor, Resales (after termination) seen as a profit center, Restrict gag orders, Restructuring is used to cull dealers, Retaliation, Return on investment, Reverse onus on good faith and fair dealing, Ridicule, Right of first refusal, Right to associate, Right to associate and right to harass, Right to associate means the right to collective bargaining, Royal Canadian Mounted Police, RCMP, Royalty payments withheld, Run by franchisees, for franchisees, Run the billable hour clock, Same-store sales drop, Secret kickbacks and rebates, Self-represented litigants, Selling franchises same as stocks, mutual funds, lending, and securities, Sharecropping, Shareholder activism forces franchisor action, Shills, Shocked, I tell you: just shocked, Short- or forced-shipping, Short-term profits to franchisor much higher with cannon fodder investors, Should anyone trust anything associated with franchising anymore?, Shunned, Sign away human rights and legal remedies, Sincerity, Situationism psychology: people are influenced by external factors more than internal traits, Smartest guy in the room, Social justice, Social media triggers unskilled franchisor reaction, Sold for as much as much as they can get (next-to worthless), Sold only to people with no small business experience (very naïve), Sold useless or inappropriate equipment, Solicitor-client privilege used to shield white-collar crime (self and others), Some of the nastiest predators run several tradename systems, Sophism: an argument used to deceive, Spouse can sue for losses also, Spouse dragged into negative investment, Spouse must never sign any document, Spouse needs independent legal advice, State refuses to even listen, State sanction, Stock manipulation alleged, Stock price plummets, Stopped paying royalties, Stores shuttered, Strategic lawsuit against public participation, SLAPP, Strong back and weak mind, Sue lender for failing to do their lender's due diligence, Sue the bank, Sue the lawyer, Sue the lawyer that created the disclosure document, Sunk costs, Sunk costs: franchisee's trapped capital keeps them chained to treadmill, Supplier kickbacks, Suppliers and landlords act as if they were the franchisor, Supply margins are a hidden added royalty payment, Survivability (franchisee and franchisor), Symbiotic relationships (industry, banks, lawyers), System designed to fail for franchisees, Take what I give you or abandon 100% of your investment, Take what you're given for a law or you get nothing, Talk to former franchisees, Tax subsidy, Taxpayers end up paying for private gain, Termination of franchisee, mass, Termination threats, Terrorizing franchisees, Test for franchisee, independent contractor or employee, The key is to commit crimes so confusing that police feel too stupid to even write a crime report about them, The Long Con: prick your own IPO bubble, walk and keep your mouth shut, The Toronto Star, Threatening staff, Threats against franchisee advocates, Threats against supporters of franchisee association, Threats of lawsuits, Threats toward politicians by franchisors, Tied contracting, Tier 2 lawyers, Time delays makes collection of future court awards impossible, Tobacco industry-type defence, token gesture, Tony Martin, Tougher to sell franchises, Towers of gold, feet of clay, Trade association fronts and defends best and worst franchisors, Trade association membership a bogus "Good Housekeeping Seal of Approval", Trade association tells elected officials how to do their job, Trap for the trusting, Trial decision always appealed, U.S. expansion is graveyard for many Canadian businesses, U.S. Small Business Administration, SBA, Uncharacteristically shy with media requests, Undue influence, Uniform Franchise Offering Circular, UFOC (FDD), Unilateral changes in business model drive franchisees' profits down, Unilateral fines, Unionization, Unions hold management accountable, Unreasonably withholds consent, Unrelated franchisor investment sinks franchise system, Unsafe at any Brand?, Unskilled and unaware bias (Dunning–Kruger effect), Unsophisticated buyers, Uttering threats, Vacuum of information favours dominant party, Veil of secrecy, Vendor incentives, Veterans Transition Franchise Initiative, VetFran, VetFran has lots of predatory systems, VetFran: fish in a barrel, Waiver of legal rights, Wanted: sheep, Watchdog fails to bark, We will bankrupt you, Wealth is meant to be re-distributed (not created), Were in default for some time: why terminate now?, What does the independent franchisee association say?, When fraud is alleged, politician turns to group that represents perpetrators, When the franchisor tanks, so does the franchisee, Who selected these allegedly moron franchisees in the first place?, Why franchisors sublease to franchisees, Why should we care? It's not our money.,, Wiki: a franchisee-created wiki made from your franchisor's documents, Wild West of the business world, Wilful blindness, Will work even when Variable costs > than Selling price, Withholding fees is extremely hazardous, Wives free to sue franchisor, Won't get fooled again, Workplace bullying, Workplace violence, Would you advise anyone to buy into your system?, You get what you pay for as a franchisee, You may not be the 1st but you could be the next, You'll sign anything to get 15% of what you put into it back, Canada, 20140918 Franchisees fear

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License