Franchisees and executives at burger chains, hotels and
fruit-basket shops used to count on chummy relations to bolster their
businesses. Those days are over.
Stressed by the hit to business from the coronavirus
pandemic, store owners and corporate bosses at Subway, Econo Lodge and other
companies are bickering publicly as never before.
Companies are asking franchisees to buy equipment and adopt
new safety protocols, moves they say are necessary to reassure customers during
the pandemic and to grow thereafter. Franchisees are pushing back on store
upgrades, promotional discounts and fees they say are excessive and undermine
their profits. Some are agitating to replace executives or suing to change
“I get that franchising isn’t a democracy, but at the same
time, it’s not a dictatorship,” said Keith Miller, who was among Subway
franchisees resisting when the company asked operators during the summer to
offer two foot-long sandwiches for $10, a price they said was unprofitable.
Subway, incorporated as Doctor’s Associates Inc., said it
communicates with franchisees daily and has allowed them to defer or skip
royalty payments during the pandemic. It ultimately reduced the foot-long-sub
promotion to online only.
There has always been push and pull between franchisers—the
corporations that own a brand, handle its strategy and set its standards—and
the franchisees—those who own and operate the stores, hire the employees and
deal with customers. An older approach that assumed both sides would pull in
the same direction is giving way to a more combative model in which store
owners increasingly fight corporate decisions they deem unfair.
Franchisees “feel they have no choice but to accept coercive
contract terms and red tape,” said Rohit Chopra, a member of the Federal Trade
Commission, which recently held a hearing on the franchising business focused
on what operators need to know when they’re thinking about getting in.
Executives overseeing brands said franchisees often have a more narrow and
Many of the franchisees’ complaints are granular and might
seem minor. Operators say they add up over time and can drag down profits,
leaving franchisees feeling as though companies are trying to take advantage of
them, which brands deny.
A group of Econo Lodge franchisees and operators of other
lodging brands owned by Choice Hotels International Inc. said they were forced
to pay $34.50 for 10 pounds of frozen sausage links that cost $22.37 elsewhere.
In a lawsuit in federal court in the Eastern District of Pennsylvania, these
franchisees allege this was part of a “pay-to-play” supplier program that
requires vendors to make payments to Choice Hotels, the cost of which is passed
on to franchisees.
Some U.S. Tim Hortons franchisees, meanwhile, said they were
charged $104.08 more for a case of Applewood bacon than Wendy’s Co. operators
paid, and $11.92 extra for a case of plastic straws.
Some franchisees of McDonald’s Corp. said that it didn’t do
as much to defer rent and make other concessions early in the pandemic as
Dunkin’ Brands Group Inc. did, and that McDonald’s has taken too long to
develop a new spicy chicken sandwich.
Choice Hotels denied the allegations in Econo Lodge
operators’ suit and said it has worked closely with franchisees to provide aid
during the pandemic. Tim Hortons parent Restaurant Brands International Inc.
said it has made great strides in working with franchisees and called their
allegations about costs unfounded. McDonald’s said it has taken “unprecedented
actions” to help franchisees, including spending $100 million on marketing.
In recent years, franchisees have formed their own
organizations to more forcefully press their case with management teams,
raising the possibility that issues that would have been ironed out privately
in the past will spill into public view.
Rising tensions at franchised companies have implications
for a part of the economy that has grown rapidly in recent years, generating
jobs and investment in businesses ranging from hairstyling shops to
Franchisees run 55% of American hotels, according to
industry tracker STR. They operated 84% of U.S. chain restaurants last year,
according to data from restaurant strategy firm Aaron Allen & Associates.
The roughly 774,000 franchised establishments in the U.S. employed about 8.4
million people last year, according to the International Franchise Association,
a trade group.
Interest in franchising has been rising and looks set to
grow further as some of the people who have lost jobs in the pandemic strike
out on their own. Inspire Brands Inc. said laid-off workers have been asking
about starting outposts of its restaurants, which include Arby’s and Jimmy
John’s Gourmet Sandwiches.
One franchise-led chain attributed the tensions partly to
the pandemic, which has led to the temporary or permanent closing of about
33,000 franchise outlets, according to the trade association. “Franchisee
relations are 100% correlated with how things are going,” said Chief Executive
Steve Joyce of Dine Brands Global Inc., owner of the Applebee’s and IHOP
Many franchisees are small businesses and received
government support during the pandemic. A May survey by the trade association
found that 96% of 190 franchise owners polled had received federal aid under
the Paycheck Protection Program passed by Congress.
Modern franchising dates back to the use of outside sellers
in the late 19th century by the company then behind Singer sewing machines. The
contemporary model—in which head offices grant the right to sell, using
brand-specific methods, under a company name in exchange for royalties or other
revenue—took off after World War II, said Marko Grünhagen, a professor of
marketing at Eastern Illinois University in Charleston, Ill.
Franchisees pay brand owners tens of thousands of dollars, and
spend significant additional amounts in some cases, for the right to open a
franchised business. They sign multiyear contracts that spell out royalties or
other money owed to the franchiser, such as a percentage of gross revenue, and
agree to maintain the brand’s standards. Franchisees also agree to pay various
fees and typically contribute to marketing funds the brand uses to buy national
In return, franchisees gain access to customers who trust
the brand, plus training in how to operate profitably. The brand owner often
sells the franchisees supplies and services at prices it sets. These sales and
franchisers’ fees have both become points of contention in some franchise
Sam Meineke, the 89-year-old founder of his namesake
car-repair chain, was part of a generation of entrepreneurs who helped
transform the U.S. economy through legions of franchisees. He and peers such as
Ray Kroc at McDonald’s and Col. Harland Sanders at Kentucky Fried Chicken
opened opportunities for middle-class shop owners, generating devotion.
“If you don’t successfully put him in business, such that he
can make it, that’s like stealing from him,” Mr. Meineke said in a September
interview, describing his approach to the franchisee.
Janet Cummings’s family opened the first muffler shop Mr.
Meineke franchised, in Houston in 1972. As her family’s Meineke outlets grew,
to a total of 18, so did her connection to the founder, who she said sent her a
wedding gift and attended her parents’ funerals.
“It was really like family,” she said.
Mr. Meineke sold the business in 1983. A private-equity firm
that became its owner stopped sending franchisees reminder notices when it was
time to renew contracts, Ms. Cummings said. That was a disadvantage because
renewing early allowed owners to roll over contracts, on terms that might be
better than those available if they had to negotiate a fresh one. Operators
pushed to get the reminders back.
“The further the owners are from the franchisees, the harder
it is for them to understand what is good for the franchisee is good for the
franchiser in the long run,” Ms. Cummings said.
A different private-equity firm, Roark Capital Group, now
controls Meineke, through a Roark-owned firm called Driven Brands. Ms. Cummings
said she wasn’t sent a renewal reminder for a long-held Meineke location.
In this case, she wasn’t planning to renew anyway, because
she is winding up her business after four decades. “If it was still more of a
family thing, we might stick it out a little while longer,” she said.
Neither Driven Brands nor Roark Capital responded to
requests for comment.
Franchisees who have formed organizations in recent years to
increase their leverage include lodging operators, owners of McDonald’s
restaurants, operators of Massage Envy studios and franchisees of Edible
Arrangements LLC fruit-basket and flower shops.
Rich Gandhi’s Quality Inn outlet in Middletown, N.J., owes
franchiser Choice Hotels fees totaling 7.75% of gross revenue, according to a
recent monthly billing statement. The statement also shows Mr. Gandhi owed
Choice Hotels $92 for a fee tied to customers who book through outside sites,
$63.98 for digital security and $586.44 for property-management technology. The
total fee rate has roughly doubled in a decade, according to Mr. Gandhi.
He is among the hotel franchisees suing Choice Hotels in
federal court in Eastern Pennsylvania, partly over costs. The suit alleges
Choice Hotels requires Quality Inn franchisees and operators of other brands to
pay multiple fees for the same services and has assessed fees for products that
are of inferior quality.
Besides calling the suit’s allegations unfounded, Choice
Hotels said it constantly reviews its fees and compares them to competitors,
Tim Shuy, vice president of owner and portfolio strategy, denied that fees have
roughly doubled over a decade but said some properties might see bigger
increases over time as they first get established in the system. Fees added
recently help operators run their businesses or attract customers, Mr. Shuy
“The vast majority of our franchisees are small-business
owners who benefit from participating in programs that give them great
purchasing power, that help them network and reduce costs,” he said.
Some executives say franchisee complaints are shortsighted.
Operators shouldn’t expect business to improve just because they joined a
franchised system, said Rajiv Trivedi, a former La Quinta executive who in the
early 2000s developed a franchising program for that hotel brand, now part of
Wyndham Hotels & Resorts Inc. “Many times, franchisees’ expectations are
unreasonable,” Mr. Trivedi said.
Franchisees have helped to secure change at the top of a few
companies. Yum Brands Inc. appointed an interim U.S. president at its Pizza Hut
division in February after franchisees complained that company promotions had
“We have to build back our relationship with our
franchisees, so we are partners in this,” said the interim U.S. president,
Kevin Hochman. A number of franchisees said they were happier under the new
The biggest Pizza Hut franchisee in the U.S., NPC
International Inc., filed for chapter 11 bankruptcy in July. Yum allowed NPC to
close 300 restaurants.
Yum chief executive David Gibbs said the company
communicates regularly with restaurant operators about their needs. “The
well-capitalized are committed to the business and they are coming out of this
stronger,” he said.
Ben Hiner owns three Kentucky franchises of Edible Arrangements,
the vendor of fruit baskets. There was a time when the parent company would fly
franchisees to “fruit summits” at its then-headquarters in Connecticut, he
recalled. Staff members distributed collared shirts for attendees to wear at
summit events, in which people talked strategy and swapped operational tips.
“I left those meetings gung-ho and ready to go,” Mr. Hiner
Now he leads a franchisee association that recently sued
Edible Arrangements. The suit alleged that an affiliate that handles online
orders raised fees for operators to 10% per order from 2.5% last year and in
2018. Filed in Superior Court of Fulton County, Ga., the suit also alleged that
franchisees were left with unexpected expenses when Edible Arrangements shipped
them chocolates from a company where its founder, Tariq Farid, sat on the
A judge dismissed the case, pointing to a contract clause
calling for arbitration. Plaintiffs will pursue their case in that avenue, said
their attorney, Robert Zarco.
Mr. Farid said Edible Arrangements has shipped items to
store operators to ensure consistent selection for customers. He said his
relationship with the chocolate supplier didn’t cross any lines.
He said the fee increases were contractually permitted and
pay for e-commerce operations that have grown during the pandemic.
“We have to evolve. We’ve been around for 20 years,” Mr.
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