Nine current and former Second Cup Ltd. franchisees are suing the coffee chain, alleging that it is overcharging them for many of their supplies while the quality of the food suffers amid product shortages.
In a joint document filed this month in Quebec Superior Court, the franchisees say Second Cup has enjoyed some improved results in its turnaround efforts but at the expense of struggling coffee-shop owners.
“Second Cup, when negotiating with suppliers, benefits from a large purchasing power without allowing its franchisees to take advantage of its economies of scale," the filing says.
The legal fight comes as Second Cup embarks on a strategic business review after years of declining sales, management shakeups and café makeovers to help take on increasingly heated competition.
While making progress this year, the chain has also grappled in the past several years with other legal battles involving a number of its franchisees who have said that they couldn’t afford costly renovations and high rents.
The latest case started this spring when Second Cup went to court seeking $100,000 from franchisee Line Hébert for unpaid rent and royalties, Hugo Beaulieu, a lawyer for the franchisees, said in an interview. This month, the other eight franchisees asked to join in, outlining a myriad of complaints and seeking about $2.4-million from the company, he said. The grievances range from Second Cup pushing excessive costs onto franchisees; to it not using franchisee ad-fund money effectively; and encouraging franchisees to invest in new equipment and renovation programs with unrealistically ambitious business goals.
But Second Cup argues in a document filed last week that the court should only deal with issues tied to Ms. Hébert and not the other franchisees, whose situations are all different, said lawyer David Banon, who represents Second Cup. Company officials declined to comment further, noting that the matter is in its early stages before the court.
Second Cup franchisees are not the only restaurant owners battling their company. Some Tim Hortons franchisees, who formed an association last year, backed two Canadian lawsuits seeking class-action status against the company. They allege that Tim Hortons is overcharging them for supplies, misusing their ad funds and squeezing their bottom line. Parent company Restaurant Brands International Inc. has denied the allegations and has bought out two of the key franchisee activists, who have left the company.
At Second Cup, the Mississauga-based chain is slowly making financial gains while planning to convert some coffee shops into cannabis stores. It posted a third-quarter profit of $766,000 compared with a loss of $2.96-million a year earlier. Revenues climbed to $5.9-million from $5.3-million, helped by the addition of Pinkberry frozen yogurt and new delivery services.
Still, Robert Carter, executive director at market researcher NPD Group, said Second Cup continues to struggle to carve out a niche in a café landscape in which U.S. giants Starbucks Corp. and McDonald’s Corp. are nabbing customers.
He said Second Cup, whose third-quarter sales at existing shops increased by 0.3 per cent, is under-performing the overall coffee market. Specialty coffee sales in restaurants perked up by about 4 per cent in the year ended Sept. 30 while brewed coffee sales rose by about 2 per cent in that same period, NPD data show. And Second Cup hasn’t attracted enough younger customers, Mr. Carter said.
In the latest court battle, Second Cup franchisees are counting on achieving the success of their counterparts at Dunkin’ Donuts in Quebec. Former Dunkin’ Donuts franchisees won a legal tussle in 2016 after saying that the company failed to live up to its obligation to promote the U.S. doughnut chain’s brand as it faced growing competition from Tim Hortons.
Second Cup franchisees say in filings that the company failed to live up to its obligations. They say franchisees pay Second Cup up to 3 per cent of their sales to tout the brand but “to their knowledge, Second Cup doesn’t use that money adequately.”
Second Cup has lowered some franchisee royalty fees to 7.5 per cent from 9 per cent of revenues but the franchisees say those who needed the help the most weren’t eligible for the reductions. They say others have been disqualified for such “peccadillos” as not having “bought the right cream cheese” or having purchased garbage bags from an unauthorized supplier.
And they say that Second Cup often overcharges them for supplies that they have to buy from the company while negotiating lease rates that are higher than those in the market.
“Finally, the quality of the food sold, imposed by Second Cup, has long been problematic,” the filing says, adding there have been supply shortages because of vendor changes.