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Franchisee tensions bubble to the surface

McDonald’s and Jack in the Box show operators’ growing discontent amid weak sales and high costs, says RB’s The Bottom Line.
Photograph courtesy of Tim Hortons

The Bottom Line

Earlier this week, Jack in the Box’s franchisee association revealed a vote of “no confidence” in the company’s current management and asked that it replace CEO Lenny Comma, an extraordinary move for a group of operators that rarely get into executive demands so publicly.

One day later, McDonald’s operators, including some of the system’s largest franchisees, held a meeting in Orlando, Fla., to discuss forming an independent operators’ group. The meeting was described as “positive,” and appears to have put the company on track to form its first independent association in the chain’s long and storied history.

The two situations, though different, demonstrate what is a sudden, growing trend in the restaurant space: tensions between franchisors and franchisees bubbling to the surface.

The two brands are not alone. Relations between Tim Hortons and its franchisees have been strained for a while. Subway franchisees late last year went into an open revolt over a plan to sell footlong subs for $4.99.

Then there’s the ongoing legal drama between Applebee’s and a franchisee that filed for bankruptcy, plus mass terminations and closures in the Dickey’s Barbecue Pit system.

There is always some tension in the franchisor-franchisee relationship. Franchisors rely on royalties, which come from sales, while franchisees are the ones having to make a profit. As the operating environment grows more difficult, that tension naturally increases. And the current operating market is difficult.

Traffic at many chains has been weak. It is no coincidence, for example, that Subway, McDonald’s, Jack in the Box and Tim Hortons are dealing with consistent sales or traffic challenges or both.

Nothing fixes franchisee problems quite like profitable sales growth. If franchisees make money and profits, they won’t complain. If they don’t, they will. It’s pretty simple stuff.

On top of that, labor is a major challenge. Franchisees in many markets and in many systems are raising wages dramatically. They struggle to find good workers, often to their detriment. Many operators complain about finding employees. Certainly, good employees.

The shortage of good help is forcing franchisees to pay higher wages, which of course hurts their profits.

But it’s the franchisors’ own strategies that have increasingly generated tension within systems. One interesting development, for instance, is operators’ complaints about cuts in general and administrative spending, or corporate overhead.

These cuts are central tenets in the Jack in the Box and Tim Hortons disputes, where operators complain about receiving less support from the franchisor.

But there is a growing sense that the modern strategy of franchising—refranchising locations and making brutal cuts in corporate overhead—is taking a toll. Many franchisees believe that Wall Street is hurting the franchise relationship.

Robert Zarco, a franchisee attorney out of Miami who is representing the Jack in the Box operators, said that many investment firms that are buying restaurant chains are looking to quickly increase earnings and take shortcuts in the process.

“The fastest way to do that is to cut costs quickly and drastically,” he said. “An increase in sales is more of a slow process than an abrupt cut in expenses. It’s a problem I’m seeing over and over again.”

Another point of contention is the numerous demands operators are making on many franchisees.

That’s a major issue at McDonald’s, where franchisees have had to remodel locations to add kiosks, start serving fresh beef made to order, add new coffee beverages and start a new discount program. That came on the heels of all-day breakfast.

If those efforts aren’t yielding fruit, that could put some stress on franchisee relations at the brand.

And while none of the issues at least thus far have mentioned it, I remain convinced that delivery will be a point of contention over time.

Many brands are pushing delivery, and operators are frequently the ones that have to pay the fee for those deliveries. As that service starts replacing existing traffic—and it will—that poses yet another threat to the profitability of the operator and could also be a source of tension.

Regardless, it seems as if the industry is entering a new era of franchisee relations, one in which operators are growing more restless over performance.

One more good example: Earlier this week I provided three examples of good franchising. I should add one more: Papa John’s.

Granted, the chain is facing some major difficulties at the moment. But the brand should be lauded for its response this summer to operators who are facing financial challenges after a year of poor sales that were no fault of their own.

Papa John’s took the rare step of giving operators breaks on royalties and other incentives in a bid to keep struggling franchisees afloat. To be sure, there’s good reason for that: Closing restaurants would be bad for Papa John’s.

But that’s the point. Struggling franchisees are not good for brands. They should do everything they can to make sure they’re not struggling.

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