The Franchisor’s Wheels Keep on Churning

This article submitted by a founding VCSFA member.

It’s really quite disturbing and addresses a term called ‘churning’.  The idea behind ‘churning’ is that a failing franchise can be taken back by the franchisor, or a firesale can occur with hopes that the new owner can make it break even.

This just perpetuates the system that has become akin to urban business slavery.   The customer sees the chain as successful because the stores never seem to close, yet the reality is is that the pain is merely passed on to the next franchisee all the while the franchisor gets some money during the purchase and sale of the existing store and always gets their royalty.

This article is worth reading and considering if you are thinking about buying a coffee shop franchise.

 

Wikid Franchise dot Org – A Possible Ouch for Franchisors

I suppose the VCSFA has become to many coffee shop franchisors in Vancouver the proverbial thorn in their side.  Word is getting out that we exist and that our purpose is to educate the public about franchising – coffee shop franchising to be specific – and that the relationship between the franchisor  and franchisee must be one of both give and take.  It must be one of both speaking and listening.  It must be one of democracy and fairness.

This video is painful to watch because its creator was obviously part of a franchise where such necessary components of the relationships were absent.  During the video the characters gave reference to a website that we had not yet stumbled upon – WikidFranchise.org – the ‘wikileaks of franchising‘ it seems.

We have not verified yet the quality or accuracy of the posts found within, but it is certainly a goldmine of ‘internet information’ that may contain truthful information posted anonymously – a franchisor’s worst nightmare and a great blessing for the purchaser of a franchise.

Call us old fashioned, but we still really believe that the franchise model could be a very profitable and amicable one.  There are surely such franchises out there.  Until they are all superb in their business dealings, it is necessary for organizations like ours to make sure that the public is aware of what’s out there.

Corporate vs Franchise vs Independent Business Model

I just thought it would be interesting to share this video by a proactive and clearly unhappy barista. Running a coffee shop in today’s market can be particularly difficult and being able to control labour costs while keeping happy employees whilst providing a quality and reasonably ethical drink is far from easy.

Like many people, I was under the impression that only a company of this size of these ‘green guys’ would be able to succeed in all categories.  To my surprise, though, it appears that in all categories even they are struggling – apparently even worse than I thought.

So then, what is the best business model for a coffee shop?  There are really only three options – independent, franchise and corporate.

An independent is a ‘mom & pop’ operation where the value of the brand is typically built around the owners (the people themselves) and the fact that they are not either a frachise or corporate chain.

A franchise is an independent store that has decided to ‘partner’ with other owners to run their brand under their rulebook.

A corporate model is an independent that has decided to open multiple stores but with managers employed to run the stores under their rulebook.

With the corporate model, you gain complete control over the whole operation.  If one store does poorly, you can just shut it down and share the loss across the other hopefully better performing stores.  You can introduce large benefit programs because insurers will typically give you a better rate with more people in the system.  You can compete with yourself because the more stores the merrier.  In Vancouver there used to be two locations of a major coffee shop chain right across from each other at Robson and Seymour.  That just changed, by the way, but it often confused the customers because many people thought the green guys was a franchise model.  With a corporate model you have the flexibility of simply replacing a manager if things aren’t looking good.  In a franchise, all of the above is slightly more difficult or complicated.  Plus, all of these advantages above are not necessarily taking place as we could see from this employees video.

With a franchise model you have an ‘owner’ who is responsible for the four walls of that location.  As long as the franchisee believes that their franchisor is truly a partner who cares about them and their family and truly has their success in mind, the franchise model has the potential of being a great one. In theory, as long as the hand-crafted franchisee agreement doesn’t remove the right – the franchisees should participate in the savings that the chain wide volume provides.  They should also, in theory be able to enjoy most of the other benefits of the corporate model like group benefit plans. All things fall apart, though, when the trust of one or more franchisees is breached.  At this point, they can’t just remove the unruly manager, because that manager is also the owner of that location and has certain rights according to the franchisee agreement. In order to get rid of this jaded rebel, the store must be sold as any other independent business would be – not necessarily fast or smooth.

The independent store has the pain of having to source all his or her low volume products which may not provide the volume discounts that franchise or corporate models may enjoy.  They must also be more hands-on because they cannot enjoy the windfall of customers just walking into their stores because of a brand name.  They must earn each customer one at a time and then find a way to get them back – a task much more difficult as an independent.  That said, they have the advantage of being able to own and operate their business the way they like – for good or for worse.  They are truly ‘owners’ where franchisees are, in effect, glorified managers with a lot of skin in the game.

This discussion barely scrapes the surface of this topic but hopefully gives a nice birds eye view of the three major categories of coffee shop business models.

 

Checklist to Evaluate a Potential Franchise with bonus VCSFA commentary

Thank you very much to our member who found this article on The Business Link website and recommended that we share it.  Indeed it is a great article and worthy of some VCSFA commentary.

It is likely a fearful thing to many franchisors that potential buyers would obtain this list and actually start asking these questions.  For many of them it would likely mean the beginning of the end of their reign of folly while for the solid ones further credibility and free word-of-mouth marketing to other potential buyers.

While all of these questions are worth finding the answers to, there are some that need further expansion.

  • Is there a franchisee association or council? Who belongs?

Comment: This is the most important question you need to answer.  All the rest of the answers can be found and worked through if there is an FAC.  If you don’t know what this is or need help starting one, we at the VCSFA are here to help.  Read this article for starters.

  • How many years has the franchisor been operating?

Comment: Do not be deceived into believing that just because an organization has been franchising for a long time and has many stores that it is healthy.  Just because a hamburger chain has thousands of locations doesn’t make the burgers healthy. It may have at one time been good and now rotten.  Do your homework.

  • How many units are corporately owned?

Comment: How many of them are there, why are they owned by corporate and if they were at one time owned by corporate or are currently, what happened to the previous franchisee?  Note that you probably want to look in much more detail at a store that has been owned by corporate especially if you find out that a previous owner just ‘disappeared’ – and they do – regularly.

  • What is the franchisor’s financial condition? Have you received its most recent audited financial statements?
  • Will the franchisor provide franchisees with a statement of the disposition advertising funds?

Comment: The VCSFA members and directors will all eat their hats if a coffee shop franchisor will provide you with this information.  They typically do not open their books even to their ‘franchise partners’.  We wish you all the best of luck with this one and please email us if they do this and we will give them front page advertising on our site for a week and all the directors can swing by for a free latte at member locations!

  • Is the franchisor a member of the Canadian Franchise Association?

Comment: You can find the search field here to check.  To our surprise we found one major Vancouver coffee shop franchisor in this list that we didn’t expect to find while its major competitor was not.  Membership in these kind of associations is a good indication but we now know that it is not a totally reliable guage.

  • Has the franchisor litigated with franchisees previously? What was the outcome of such litigation?
  • Is there any pending litigation against the franchisor? What is the nature of such litigation? The status? The likely outcome of the litigation?

Comment: You can learn how to get some fast information by reading this previous article called “Does your Franchisor Hang out at the Supreme Court” and this CANLII tool (We’ll do a separate article on this beauty soon!).  To our surprise, the big Vancouver coffee player that was a member of the Canadian Franchise Association was quite readily found in court while its competitor was not a CFA member yet absent from court documents.  Just do your own homework and consult the VCSFA for any help you need.

  • Does the franchisor have a recognition program for exceptional performance? What does it involve?

Comment: The only recognition most franchisees want is money so we would recommend asking ‘Who’s makin’ money here?” instead.

  • Does the franchisor have plans for expansion or diversification? What effect will these plans have on your dealings with the franchisor?

Comment: Very important.  We have heard rumours of one Vancouver coffee shop franchisor who is starting to consider opening tea shops.  Where will that tea come from?  Will it compete against the tea sold in their coffee franchises?  Will they merchandise it at grocery stores taking away sales from franchisees?  These questions are relevant especially in the coffee shop industry during a tough economy.

  • Has the franchisor introduced any innovations since it began its business?

Comment: Think of Research in Motion (RIM). You can only ride on the success of your past for so long.  This is a fact, not opinion.  You need not only look at whether a coffee shop franchise has launched innovative new products but also – and maybe especially so – whether they have done any creative marketing.  Or are they just doing the same ol’ same ol’ (ie. contra advertising in the free paper and event sponsorship? We would also recommend adding a further question to this “Do these innovations help the franchisor and hurt the franchisee?”  Some ‘innovations’ are merely created to create more revenue for the franchisor at the expense of the franchisee.

  •  Is your franchise territory exclusive? If not exclusive, is there any territorial protection? Will there be other outlets opening near your territory? Does the franchisor sell its products through other channels? If so, what are these channels? How will they impact on the profitability of the franchise?

Comment: As touched upon above, be careful that the franchisor is not in the middle of diluting the brand with similar businesses or distribution channels.  As mentioned, there is one Vancouver coffee shop franchisor that is rumoured to be in the middle of opening a tea shop (or more).  This is a definitely ‘similar business’ – in fact that’s the terminology used in the franchisor’s contract with franchisee in the non-compete section.  Make sure your franchisor is not planning to compete with you in the same way that you agree not to compete with them!

  •   Questions to Ask Current Franchisees

Comment: This ENTIRE section is worth reading.  If you can get the current franchisee to open up about these questions, you’ll learn a lot – probably too much.  Don’t expect perfection from any franchisor, but it’s reasonable to expect reasonable.  Reasonable is reasonable.

  • The Contract

Comment:  This section is also important to completely read and understand.  The contract is the ‘heart of the franchisor’.  You can learn a lot about their past as well as their future plans via the franchisee agreement.  One question I did not see listed which has caused enormous amount of pain for Vancouver coffee shop franchisees is “Do I have to renovate?  When?  How much will it cost? What are the details?”  If the answers are vague, run away.  Run fast.

 

Second Cup Expands into USA

This article is interesting as it shows that Second Cup is still growing in other markets.  It’s no secret that they have not been doing so in the Vancouver area, though.  I remember when I was growing up there were many more Second Cup locations around the lower mainland.  Now Blenz (and even more recently Waves) have all but taken that market away.

I would like to reach out for some authors to do a bit of research into this topic to find out some answers to the following questions:

  • If Second Cup has such a big following (which it still does) why did they decrease in market presence here in Vancouver
  • Why did Second Cup choose to expand in the USA instead of, say, attempt to battle it out in BC again?

 

 

 

Does a Coffee Shop Franchisor Have to Do Anything for Their Royalty Cheque?

It’s a provocative title, but isn’t that the million dollar question that at least one side of the relationship is always asking?  Owning a franchise is always tricky because the franchisee (owner) would like to see more value for his/her dollar and the franchisor (their boss) always feels that their name alone is worthy of praise and since they did all the hard work establishing it – way back when Grandma and Grandpa were smooching at the drive-in –  that customers and franchisees should be lining up to dump money in their tills.

–>       Times have changed.     <–

Ask Dunkin’ Donuts in Quebec who’s bottom got tanned recently for a total neglect of their brand and for ignoring their franchisees for just a little too long.

This article by Mcarthy Tetrault walks through the situation in depth.  There is one paragraph, however, that I would like to draw the reader’s attention to as follows:

In the Franchise Agreements, the franchisor promised to protect and enhance both its reputation, and the “demand for the products of the Dunkin Donuts System” – in sum, the brand. The Court found that, despite the fact that the franchisor had assigned to itself the principal obligation of protecting and enhancing its brand, it failed over a period of a decade to protect its brand. The Court concluded that brand protection is an ongoing, continuing and “successive” obligation and that franchisees cannot succeed where the franchisor has failed to in this fundamental obligation. According to the Court, the franchisor has a duty to minimize losses and reposition itself in a changing marketplace. Although the Court made mention of the civil duty of good faith and of loyalty owed by franchisors to franchisees, no analysis was undertaken as to what that meant in these circumstances apart from a duty to work “in concert with” the franchisees in such market conditions.

The article then goes on to conclude:

Unfortunately, there is next to no guidance in the decision as to what, practically speaking, it means to protect the brand. Clearly, a franchisor cannot be content to rest on its past success. It must innovate and rejuvenate. However, beyond that, the decision is quite unhelpful.

I disagree that the decision is unhelpful.  I know that lawyers are always looking for black and white and would salivate if a crystal clear cookie cutter judgement would have resulted from this case for ease of use in all their upcoming  cases of a similar nature – so maybe in that case it’s not ultra-helpful for lawyers.  However, from a franchisee’s perspective, this case is monumental and has significantly contributed to the greater good of the future of the franchise system in Canada.  Now franchisees across the country can stand up with great confidence together to make sure that their franchisor is not letting their assets and life investments get eaten up while they sip martinis watching the fireworks while hooting their hardy-hars on their yacht out in Coal Harbour (you gotta be from Vancouver to real feel that one).

It allows franchisees to ask of their franchisor questions like these:

  • What is my franchisor doing to combat competition in my market?
  • Does my franchisor have any concrete plans to combat competition or do they plan on riding old systems hoping they keep working?
  • What is the value of the brand I’m paying for?
  • Is the brand I’m paying for decreasing, stagnant or increasing in value?
  • Where under the sun is my marketing pool money going?
  • Has my franchisor allowed the dilution of the brand I’m paying good money for (ie. notable inconsistencies across the brand, unclear core business, multiple direction changes that confuse the customers, etc)?
  • What kind of calibre leadership does my franchisor employ? What are their credentials? Were they hired because they are best for the job or because they grew up with the franchisor’s son’s girlfriend’s uncle?
  • Am I a member of a group like the VCSFA which facilitates the banding-together of other coffee shop franchisees to address such important things or am I an island on my own?

Now think about the franchise coffee market in Vancouver and the competition. Which brands are in competition with each other? You can go to our increasingly exhaustive list of Vancouver coffee shop franchises page called “FRANCOUVER” to run this question yourself.

At the VCSFA we have plans to conduct surveys to find out how much your brand is being affected by other competing brands.  Be sure to become a member so you can gain access and even help contribute towards these important future works.

Why franchising in BC may have a rocky future and the need for legislation

If you didn’t read our article, we started to research franchise legislation and noticed that Canada is very inconsistent.  In Ontario, for example, you have a specific and focused legislation surrounding franchising while in BC it’s left to the ‘regular courts’. It might help you understand why some franchise chains appear in some provinces while not in others.

Here is an example from a real court document where franchisee is trying to take the franchisor to court and put them in front of a jury for judgement and here was their defence:

1.         The principal question at issue is the construction of oral and written contracts; and

2.         The issues are too complex for a jury.

 

How’s that for irony, papa?

The issues in this franchisee/franchisor legal battle are ‘too complex for a jury’ because they include contracts.  If you haven’t found the irony yet, allow me to assist you.  First, answer in your mind what kind of people buy a franchise business.  Now, ask yourself what kind of people make up a jury.  Hopefully you will have come to the conclusion that they are one and the same people.

People who buy coffee shop franchises are like myself – ignorant of law, limited in business background and trust that these established brands will lead them towards a stable future.  Better make sure the people sitting in the courtroom are not simpletons like the franchisees because they might actually rule against the franchisor when they think ‘That could be me sitting there!’ I’m sure the franchisor’s lawyer is legitimately looking out for the interest of his/her client by trying to make sure it doesn’t go before a jury, however, that doesn’t remove the glaringly obvious fact that we need a system of dedicated law in BC to protect us simpletons from these contracts.

And, the franchisor’s lawyer is correct – these contracts are complex.  This discussion makes me think of a Vancouver franchise lawyer who after reading through my franchise agreement, looked across the table and said, “Did you really think this document fell out of the sky and ended up like this?  No.  This is a hand-crafted document with clear intentions.”  I don’t think he was aware of the fact that he used Vancouver coffee-shop lingo when he said ‘hand-crafted‘ but it made me pale when he said it.

The complexity of the documents in this case, however, should not prevent a jury from having a peek and what’s going on out there. It would do the franchise world a bunch of good if a few simpletons and their uncles were able to catch a glimpse of what goes on behind franchise doors and talk about it over a barbequed burger at Grandma’s place.