Skip to content

Franchising fundamentals can improve restaurant franchise relationships

At a time of franchisor-franchisee discord, experts go back to the start

The restaurant franchising relationship should be a mutually-beneficial endeavor given so many potential rewards and benefits. The franchisor has created a brand that can be easily replicated and managed, and brings the resources to market it across many geographies. The franchisee is able to realize a dream, invest in a brand that is already established, and get a leg up on operating a restaurant, especially compared to starting a concept and business from scratch.

This hasn’t appeared to be the case, most recently, with big-name chains contending with franchisee revolts and lawsuits and being accused of neglect and poor management.

Public disputes between franchisors, franchisees in spotlight

These disputes are being aired out in the public domain for customers and fellow restaurateurs alike to witness. Jack in the Box and Tim Hortons are two big quick-service chains facing the ire of franchisees, according to reports by QSR Magazine. Aiming to change the structure of leases across its system and assigning leases to a subsidiary, Jack in the Box has been dealt a blow by franchisees with a lawsuit challenging the move. Franchisees are concerned the reassignment of leases to a non-franchisor subsidiary could threaten their leases in which they currently sublease. Furthermore, franchisees are seeking transparency as to how rent payments are being used.

Tim Hortons franchisees challenged Restaurant Brands International, the chain’s parent, in its use of advertising funds—namely how those funds are distributed and the extent to which the franchisor could raise the allocations they charge franchisees, while prohibiting them from raising prices to pay for them.

Restaurant franchisees must have confidence in brand leadership and their vision,” says Paul Segreto, president of Franchise Success Group and Franchise Foundry. Very public restaurant franchisor-franchisee disputes indicate there is a breakdown of communication as nearly all decisions are made top-down by restaurant franchisors. Communication and participation with franchisees is key.

Jack in the Box is in a dispute with franchisees over lease assignments
Jack in the Box had a dispute with franchisees over lease assignments. Photo by Jack in the Box.

“We must have back and forth communication of what is going on in the trenches,” says Samuel Stanovich, president, Stanovich Hospitality Inc. and area representative, Northern Illinois Northwest Indiana Firehouse Subs. “Although we are all selling the same menu, the same look and feel, challenges and opportunities are different in each economic market. Only through communication can we stay on top of the action and be forward thinking.”

Communication, integration and participation

Stanovich values the Firehouse Subs system, in which franchisees are a critical voice in operational processes and where communication lines are kept open. “We recently rolled out several operational changes that were presented from franchisees, “ he says. “In addition, the idea of a donation for our Pickle Buckets, instead of throwing them away, for the Firehouse Subs Public Safety Foundation, was an idea generated and communicated from the field.”

Communication between franchisors and franchisees may be undervalued in today’s fast-moving restaurant deal market, especially with heightened pressure from activists. It certainly could be useful when dealing with crises, whether from food safety or due to tensions.

“Understand the organization you are building a relationship with and the boundaries of creativity, Depending on your style, you may or may not mesh with certain brands.”

Samuel Stanovich, president, Stanovich Hospitality Inc. and area representative, Northern Illinois Northwest Indiana Firehouse Subs

Many are all too familiar with the Papa John’s chain dispute with its founder, John Schnatter, who it displaced as the spokesperson after several untimely PR debacles. Schnatter has claimed Papa John’s executives have displayed overreach and usurpation of control. Each has sued the other and franchisees have been left on the sidelines, feeling the negative impact of bad press. Stores in urban markets, notes Forbes, have seen steep declines. As a result, Papa John’s executives pledged $15M in reduced royalty fees in Q3 and Q4 of 2018.

Regarding the broader topic of crises, Segreto says that franchisees should seek to work with franchisors that have a crisis plan and leadership succession plan in place. “Understand the organization you are building a relationship with and the boundaries of creativity,” says Stanovich. “Depending on your style, you may or may not mesh with certain brands.”

Also, both Segreto and Stanovich believe bad relationships can be traced back to the origin of the franchise agreement. Under such a perspective, questions that now might reasonably be contemplated include: “Did all Papa John’s franchisees that were impacted by the current crisis fully understand the brand and the extent to which its founder controlled communications and impacted marketing?” and “Were they familiar with some of his belief systems?” Stanovich also recommends that franchisees review all franchising agreements carefully, even though they are often quite lengthy.

Going back to the start

Pressure from investors and chain consolidation have played a big factor in many disputes in which franchisors are quickly moving to extract more profit from the franchising relationship in response to investors or due to mergers and acquisitions. Fast-paced deals and actions may leave restaurant franchisees spinning their heads. Franchisee organizations are responding and displaying a heightened amount of activism in response, leading to many public disputes and calls for more transparency.

“Investigate how the communication channels work with the franchisor and what are the protocols,” Stanovich adds. Restaurant franchisees may not be able to stop large franchisors from acting in their own best interest at the expense of franchisees, but they can find ones that are more in line with what they are looking for in a restaurant system and brand. Segreto says, “Due diligence should focus on speaking with current franchisees—Are they happy? Would they sign again?—and also contacting former franchisees. Why did they leave the system? What is the one thing they wish they knew before signing on the dotted line?”

Additionally, he says multi-unit franchisees can also be a big resource. Prospective franchisees should ask these multi-unit operators what made them stay with the franchisor and what the deciding factor was in choosing to open a second and third location. Franchisees should be keen on searching news stories, says Segreto, in addition to sites that market the franchisee or franchising directories. News stories can offer up both good and bad news about the franchisor.

“Positively memorable experiences are not just essential for the customer relationship. Strive to make the franchise relationship positively memorable at all times, as well.”

Paul Segreto, president, Franchise Success Group and Franchise Foundry

As for franchisors, Segreto offers three key rules:

  • Develop a sales system that acts as a barometer to how well the franchisee can fit into the restaurant’s franchise system.
  • Find franchisees that believe in delivering memorable experiences to customers.
  • Turn the tables, and offer a positive experience to franchisees—deliver open and transparent communications at all times.

“Positively memorable experiences are not just essential for the customer relationship. Strive to make the franchise relationship positively memorable at all times, as well.”

When prospecting a franchise system, franchisees can be more proactive and get a clearer picture of the franchise system, while reactively, they can demand more communication and participation in decision making. This can be done when expressing their voice and ideas with the operational and training leaders of the franchisor and through their franchisee associations. Franchisors in turn, can develop a better system, and one that is not combative by improving the matchmaking process and committing to principles of openness and transparency.

This story was originally published in the winter issue of Restaurant C-Suite Magazine. Eatery Pulse Streem and Restaurant C-Suite are part of the Eatery Pulse Network.

Photo credit: Jack in the Box

Advertisements