Franchise

Franchisee disillusionment can lead to litigation, distrust

By Kirsten McMahon, Managing Editor

In the first instalment of a two-part series exploring an uptick in franchisee disappointment, Toronto franchise lawyer Joseph Adler discusses common fracture points in the franchisor-franchisee relationship.

Recent class-action lawsuits brought against franchisors and parent companies by franchisees represent just one illustration of an overall disappointment by franchisees with the system, Toronto franchise lawyer Joseph Adler tells AdvocateDaily.com.

"There is an uptick in franchisee disappointment, and it's not only reflected in class-action lawsuits,” says Adler, partner with Hoffer Adler LLP. “Groups of franchisees are banding together and forming associations, which are becoming more active and aggressive.”

He points to several high-profile examples in the North American restaurant world.

“Franchising is not simply restaurant-based, but restaurants are probably the most well-known example of franchising,” he says, noting one U.S.-based burger chain that is experiencing growing unrest within the ranks of its franchisees.

“A group of its franchisees formed an association that recently issued a lawsuit and has been potentially successful in forcing the franchisor to sell the system to a potential suitor,” Adler says. “Franchisees were experiencing downward sales, lacklustre product development, and claim the franchisor lacks a cohesive brand strategy.”

He notes the chain wasn’t willing to engage in the value wars that some of their competitors have engaged in. The franchisor resisted reducing the price of some of its product line because it felt it would diminish the brand.

“Now they are looking at a potential sale of the entire system as a result of this disillusionment that's been going on for more than two years,” Adler says.

Closer to home, a group of Quebec franchisees is suing a Canadian coffee chain, alleging the company's actions have been detrimental to them.

“There’s a similar disappointment by Quebec franchisees of this chain,” Adler says. “They claim the franchisee-funded advertising reserve isn't being properly utilized and say the franchisor has unrealistically ambitious business goals.”

While the franchisor is doing everything possible to turn it around — including plans to sell recreational cannabis at some stores — they are being hammered by competitors.

“One of the complaints is that the franchisor entered into a licensing agreement to sell frozen desserts, which required franchisees to purchase equipment,” he says. “Another franchisee grievance is that the franchisor is not passing down the economies of scale.”

Adler says these complaints are not unique to this coffee chain.

“Common themes are allegations of advertising fund misuse or allocation, overcharging of supplies, higher product pricing, declining revenues, and forced equipment purchases,” he says.

“This leads to an overall disappointment with the franchise system as a whole and franchisees are more emboldened as of late to turn to the franchisor and say, ‘Hey, you didn't promise that we would be successful but we are counting on you, and you need to increase our chances for success.'”

Adler points to one of the world's largest restaurant chains as a more positive example.

“There's an attempt by the franchisor to upgrade more than 14,000 stores, at a cost of between $160,000 to $750,000 per restaurant,” Adler says. “Requiring a franchisee to take all of their profit and pump it back into the store to upgrade the look and feel is a big ask."

He says the franchisor has offered to help subsidize a portion of each store's upgrade and has provided financial incentive to complete it as quickly as possible.

“The franchisor has agreed to pay 55 per cent of the cost to upgrade if the franchisee can transform the store by 2020,” Adler says. “Here's an example where the franchisor is probably telling the franchisees that if they upgrade, they will see a difference in the bottom line.”

He says good franchisors are more likely to test the market on their own corporate locations before they roll it out system-wide.

“However, part of the problem is that there are so many factors at play when it comes to the success of a franchisee,” Adler says.

Stay tuned for part two where Adler will delve into franchisee disillusionment as it relates to advertising reserves.

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