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Pity the franchisees

The promise is that you'll be your own boss and run your own business. But as hundreds of Tim Hortons franchisees are discovering, head office has all the power—and they set the rules

When Harland Sanders decided to sell his Kentucky Fried Chicken business for $2 million (U.S.) in 1964, he worried about what might happen to the franchise operators who had played an essential role in turning his modest endeavour into one of the world's great franchising success stories. In fact, it was his first franchisee, a restaurant owner in Utah, who came up with the name and invented the cardboard bucket.

So the 74-year-old Sanders did something unheard of at the time: He urged his franchisees to band together to give themselves a say in the company's future direction. He was right to worry, because in the franchise game, it's the franchisors who set the rules and retain all the power. And in recent years, we've seen too many examples of them abusing their advantage. If we don't level the playing field, the whole model—which is looking less appealing to franchise owners every year—could be put in jeopardy.

The people who sink their savings into franchises like to think of themselves as independent small business owners. But they are not. Franchisees freely accept permanent financial obligations and restrictions on how they operate. They're told what to sell, how much to charge, when to renovate, where to get their stuff from and how much they have to pay for it.

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In exchange, the quasi-indentured shopkeeper expects certain benefits: a recognized brand backed by strong marketing, an efficient operating system, predictable costs, and access to training and advice. But when the minuses outweigh the pluses—as a result of heftier fees, more onerous rules or reduced support—the relationship can break down in a hurry.

There is no better example of this than the current turmoil at Tim Hortons, an otherwise unremarkable restaurant chain that became an iconic Canadian brand thanks to deep community-based roots and close attention to the care and feeding of its loyal franchisees. After Timmies' foreign takeover, it took more than two years before unaddressed grievances over cultural, financial and rule changes imposed by the new proprietors prompted a bunch of upset store owners to organize.

Since forming the Great White North Franchisee Association (GWNFA) last March, the disgruntled operators have discovered just how little bargaining clout they have when it comes to dealing with a management determined to slash expenses, drive more costs downstream and boost the parent's bottom line.

At Tim Hortons, the driven financial engineers running the show for 3G Capital, the Brazilian private equity powerhouse whose Burger King unit gobbled up the Canadian chain in 2014, have pursued hardball tactics in keeping with their own aggressive corporate culture. And there's not much franchisees can do about it, apart from launching lawsuits that are sure to be costly and acrimonious, if history is any guide.

When KFC's then owner, PepsiCo, sought in 1989 to hike fees and strip franchisees of rights negotiated with an earlier parent, their well-funded association responded with a U.S. federal lawsuit that took eight years to resolve. The 11 lead plaintiffs, including one operator with 250 stores, found themselves labelled "franchisees not in good standing," barred from expanding and at risk of losing their businesses.

Restaurant Brands International, 3G's franchising arm, appears to be following a similar game plan with its own dissident Tim Hortons operators. Both sides have traded vitriolic broadsides, and the legal battles have commenced.

The franchisees may have been emboldened by laws enacted in six Canadian provinces over the past few years that mandate better disclosure and fair treatment of franchisees. The regulations also ensure their right to form associations and launch collective action, even if they signed contracts prohibiting such moves. Similar laws have been passed in a slew of U.S. states and other countries, from Australia to Moldova.

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In theory, the new legislation should reduce the huge disparity between franchisees and their corporate overseers. But in practice—as the GWNFA has discovered—nothing compels the parent to recognize its existence, let alone pay any attention to the GWNFA complaints.

Sean Kelly, publisher of the Unhappy Franchisee website and a franchise consultant based in Lancaster, Pennsylvania, notes that some shrewd franchisors have actually welcomed franchisee associations, viewing them as a useful means of identifying troublemakers. They have been known to finance such groups themselves, as a way of defanging them. When it got wind that furious franchisees were launching associations, the U.S. chain Dickey's Barbecue Pit chose to financially back one of them, eventually offering the association modest marketing assistance.

A handful of large franchisee associations have even grown into profit centres in their own right. The U.S. National Coalition of Associations of 7-Eleven Franchisees, which represents owners of close to 7,000 convenience stores, peddles memberships to vendors eager to schmooze with directors of the coalition's regional associations. The group recently launched a suit against 7-Eleven Inc., charging that the franchisor had not kept its promise to treat franchisees as independent business owners and contractors.

Franchising is big business in Canada, with some 1,300 brands and close to 80,000 franchise units accounting for about 20% of all consumer spending. But failure rates are no lower than for independent small businesses. And an overbearing parent doesn't improve the odds of success.

To better safeguard their interests, franchisees shouldn't wait for darker clouds to form before organizing for collective action. Franchise owners may detest labour unions, but it might be time to organize and start behaving more like one themselves.

Meanwhile, corporate owners like 3G need to think of the consequences of making the game less appealing to their own franchisees, who did so much to build their brands in the first place. As Col. Sanders could have told them, consumer loyalty is hard won and easily lost.

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