Operating a franchise is as much about relationships as it is about selling burgers. And lately, it’s seemed, an awful lot of those relationships are rocky.
To wit: Last week, the North American Association of Subway Franchisees announced it was hiring attorney Robert Zarco, a move designed to highlight a more aggressive stance on dealing with its franchisor.
That followed the lawsuit filed by Bojangles franchisee association, also represented by Zarco, over disclosures regarding the company’s marketing fund.
To be sure, franchise tension and lawsuits are part of the business. Franchisors and franchisees sometimes have disparate priorities, which can lead to controversy. And if a brand isn’t frustrating its operators on occasion, it’s probably not doing its job.
But the recent run of brand-franchisee issues is a sign of the challenging environment coming out of the pandemic.
During quarantine, many franchisors stepped up to make things easy on their operators, largely out of necessity. Franchisees, many of which have amassed substantial amounts of debt to fund expansion or remodels, were in legitimate danger of closing. And, indeed, many of them did. But it necessitated a coordinated effort to keep stores afloat.
These days, however, the environment is ripe for the sort of tension we’re seeing in some major brands right now, be they mid-sized chains like Bojangles or major concepts like Subway and McDonald’s.
In the post-pandemic environment, restaurants were hit with generationally high inflation for just about everything. Labor costs took off. Food costs soared. Construction costs were insane. The cost of debt also increased because the Fed was hell-bent on fixing those other problems.
As such, franchisees have raised prices to combat this inflation. Fast-food prices are up nearly 30% since February 2020.
That has run into franchisor concern about traffic. Many quick-service brands lost lower-income consumers, a group that includes younger diners that many companies covet.
That tension has emerged in recent months as brands have expressed concern about this group or have taken steps to offer discounts. Subway franchisees, for instance, have pushed back against that company’s new rule that operators accept all digital coupons.
At McDonald’s, many franchisees we’ve spoken with were frustrated over CEO Chris Kempczinski’s comments that grocery prices look “much more affordable” right now. Grocery prices have increased roughly on par with restaurant prices dating back four years.
Remodel requirements or requests at a time like this also heighten tension, particularly given the higher cost of construction. And the California situation isn’t helping matters. Many franchisees feel burned by the agreement that led to the $20 fast food wage, given that the industry agreed to the deal in part to avoid a joint employer-style rule in the state that would have hurt brands more than operators.
Tension between franchisors and franchisees typically emerges over franchisors’ need for revenue growth compared with franchisees’ need for profits. That’s a false choice: Franchisee profits are always key in a franchise’s growth because profitable franchisees are better able to remodel units or build new ones or fund new equipment. Store unit economics should always drive brand decisions.
Yet the current environment is particularly difficult because restaurant chains do need traffic and pricing decisions over the past few years have erased many companies’ value scores among consumers.
Balancing that need won’t be easy for restaurant chains.