This article is a good one to consider, especially if one needed to pursue a Franchisor legally. Every Franchisee should read this and prepare their behaviour accordingly for their own protection.
This article is a good one to consider, especially if one needed to pursue a Franchisor legally. Every Franchisee should read this and prepare their behaviour accordingly for their own protection.
If you haven’t read all about it, a recent article spoke of a group of well-meaning folk in Halifax would like to create a union of coffee shop employees. Yep, you read that correctly – baristas – your daily latte slingers.
Unions all started with a good purpose – employees were getting abused and treated unfairly. These kind of things still happen today. The people trying to create this niche union feel things could be better.
The Vancouver Coffee Shop Franchisees Association formulated for similar reasons – we saw acts of injustice taking place towards Franchisees of popular coffee shop chains by their Franchisors. The Franchisees were in a position of vulnerability and subject to gross abuse by means of hand-crafted contracts by skilled lawyers – especially in BC where there is currently no franchise legislation. In a sense, the VCSFA is a kind of ‘union’ of like-minded people.
Do the baristas need to actually unionize, though?
It was notable to us that Second Cup was mentioned on several occasions as a possible inspiration for the union. Second Cup is a coffee shop Franchise well known in Canada, specifically around Ontario. Second Cup has few locations (possibly just one?) in BC and operates primarily in the other provinces, so we are not yet entirely familiar with their specific Franchisor-Franchisee relationship. That said, we know how the relationships between staff and Franchisee can be strained as a result of financial pressures from operating a franchised coffee shop. Perhaps this trickled down to the staff? Perhaps the Franchisees were locked into tricky contracts that pummelled their finances and they started viewing their staff as expenses rather than prized assets? One can only speculate but it’s important to understand both sides of this story.
The coffee shop business, with it’s high operating costs and usually severe competition, is not well suited for providing high paid jobs – at least not many of them at the same location. The argument against this position – and it’s valid – is that you can attract ‘talent’ by paying more and offering benefits. In the coffee business, much like the restaurant business, there is a threshold where eventually paying more is not an option. Hence the gradual acceptance of the tip jar (usually an old stained mug to be precise). In many of the coffee shops we know, a good barista will earn no less than an average of $2/hour extra just from that old stained mug.
If the customer is willing to pay more for their drink there is no reason why a unionized labour force wouldn’t work but we are not convinced that the current market will allow for such a price hike. One can look towards Australia where tipping is not part of the culture. Word has it that a barista makes between $12 and $16/hr. Accordingly, word also has it that the drinks in Australia are priced higher and the volume per cup is much less.
The coffee shop needs to remain a very flexible job as it serves a very unique employment position in our country. If the Union of Professional Baristas (or whatever they decide to call themselves) is willing to work reasonably with the owners of both franchised and independent cafes, it *could* work but we think issues can still be worked out between the owner and the barista.
Most people think that you only need a business plan if you are going to start an independent cafe. Think again. Some coffee shop franchises don’t have your best interests in mind, don’t properly spend their marketing money for your store, or have systems that are archaic or even useless.
You should have a business plan for your cafe before you buy it. If you have already bought one, it’s not too late.
This article someone forwarded to us has a bunch of good concepts. We don’t agree with all of their ideas but it’s a good start.
So, whether you are a franchised coffee shop or an independent, you should be considering the concepts of a business plan. Otherwise, you will not run your shop – it will run you.
Franchising is a business model developed by entrepreneurs for entrepreneurs. To be successful in the long run, the model must offer both the franchisor and franchisee the ability to make more money than if the franchisee was to go it alone.
For a franchisor, the sources of income are typically derived through a franchise fee, management fee, royalties, rebates and advertising fees. For this article, we will be discussing the question of confidential rebates and cost of goods sold to a franchisee.
“Approved Vendors.” Consistent quality goods, volume purchasing power, adherence to contractual agreements and conformance to industry standards and regulations. All good reasons to have approved vendors.
Suppliers will offer franchisors financial incentives (rebates) based on franchisee purchases. And often, franchisors include a clause that states a ”franchisee may only purchase supplies from the approved vendor list” and that “the franchisee agrees to give up any benefits of the volume buying power of the chain to the franchisor”.
A good franchisor understands their responsibility to their franchisees with respect to approved vendors. A good franchisor will disclose confidential rebates received and explain how they intend to apply them. A good franchisor also would not compel a franchisee to deal with approved vendors if they cannot show that this is absolutely necessary to protect the brand or delivers other benefits.
But what happens in real life? Here is a true story. Bill (not his real name) buys an existing coffee shop franchise. In the second month, he realizes he needs a new coffee brewer, so he gets a quote from the approved vendor. He is amazed at the very high price and decides to comparison shop, but there is no competition, since the approved vendor is also the sole distributor. So, he informs his franchisor that he would like to buy a different less expensive and superior machine. The franchisor flatly rejects his request and points him back to the approved vendor; no explanations. The sad franchisee accepts his fate and buys the approved machine. A few months go by, and the valves need to be changed and the other equipment needs to be checked. A service technician does ‘some work’ on the machines resulting in a fried circuit board. The angry franchisee asks the technician to fix it, but the technician blames the franchisee’s staff. To make things worse, the technician not only forced the owner to sign to authorize the work and make payment immediately. A few months later, the franchisee he needs basic maintenance on his expensive espresso machine so he calls Vendor B to fix it. Vendor B sadly informs him that they are not able to help him because the part they need can only be obtained from Vendor A, the approved vendor of the franchise! The moral of the story – don’t deal with a poor franchisor? Why does a franchisor approve and force upon the franchisees a vendor that provides poor service and overcharges? Why couldn’t the franchisor provide any justification for using that supplier? What financial arrangements were in place that caused the prices to be inflated? Did the franchisor receive rebates, or free servicing, or free machines?
A great franchisor would share the confidential rebates with their franchisees or allocate those payments received to mutually agreed projects. Sadly, in B.C., we have no such legislation that compels franchisors to do the right thing for their franchisees. It is no wonder so many coffee shop franchisees have pained looks on their faces when you mention “approved vendors”.
The VCSFA recommends all potential buyers steer clear from a franchisor that promotes business practices that force the franchisees to accept approved vendors that do not supply clear demonstrated benefits: better/faster service for the same price as the competition, lower pricing, superior products, etc. Ask what existing franchisees pay for their core supplies (milk, coffee, bottled drinks, sandwiches, etc) against an independent cafe. If the franchisor avoids talking about this, or even acknowledging that they receive rebates, then run away. The franchisor is receiving a financial benefit, and they don’t want you to know. And if you cannot trust the franchisor on the most basic questions, how can you trust them with the more complicated questions?
And a last thought: what happens when a franchisor decides to make money on approved vendors that do not relate to supplies? What if a franchisor wants to be the SOLE supplier of EVERYTHING related to the franchisee operation: renovations, equipment, supplies. And naturally, make money on each of those aspects?
As always, do not hesitate to email us with any questions or comments.
We apologize for the low image quality but it was taken by someone in the public who thought we’d be interested in covering it. Here is what the text on the sign reads:
DEAR VALUED CUSTOMERS
In recent weeks we have received many “Customer Comments” regarding “Waves” never having seats available and some customers staying for long periods of time without purchasing anything.
To ensure more customers have a chance to enjoy our facility, there is now a $2.50 per hour, per seat minimum charge
Thank you for your continuous support!
No one understands this Waves Coffee location franchisee (owner) more than the members of the VCSFA do. It’s the message behind the sign that most people out there will never understand. Within the lines of the text of this sign is found the foundation of the VCSFA.
If this sign were found at an independent cafe, it would be understandable. The customer would think “Mario is having a hard time with cheap, abusive college students in his cafe so he’s going to get rid of these freeloaders with a butt-cheek penalty – ingenious!” In fact, he’d probably get a lot of positive press for that.
But this isn’t an independent. It’s a franchise – And a big one in Vancouver.
Customers of this location will look at the sign and say to themselves “That’s weird. I’ve been to many other Waves and I haven’t seen this rule before.” Or, “McDonalds is a franchise and they don’t do this.” And they will leave thinking somewhat less about the brand because of this inconsistency, even if it’s subconscious. They will start thinking of this location more of an independent than a chain.
But what drives this inconsistency? Why would this franchisee feel strongly enough to put this kind of sign up? You can be sure the franchisor does not know about this yet. It would not be there if they did.
Profit. They aren’t making enough. It’s that simple.
This franchisee of this location isn’t making as much money as he or she feels they ought. If the money was flowing in, they wouldn’t be too worried about the freeloaders. If you don’t believe us, go and test us it for yourself and ask.
So, from the street the cafe looks full – so full that there aren’t enough seats. Yet the franchisee had to put this sign up?
Waves Coffee has a particularly punishing business model which you will soon see more and more franchisees rebelling against. They would like all their stores to be open 24/7 and have unlimited and free WIFI for their ‘customers’. Does anyone see the flaw in this business model yet? Maybe the sign above in the photo might shine some light on it. At least with Blenz they ask their franchisees to use a non-free but fairly innovative system of marketing that’s attached to the WIFI system which gives the franchisee some control over the length of connection.
But Blenz has its own questionable ‘programs’ for their franchisees. One such example is their ‘Free Birthday Drink’ that they desperately try to get their new franchisees to adopt. It sounds great from the customers side but… oops! They forgot to force a minimum order with this free drink (and this ain’t just a regular drip coffee – it’s ANY drink!) so the franchisee soon learns that if they participate they are buying free drinks for every Tom, Dick and Harry around town. You read that right! Just walk in, say ‘it’s my birthday’ and walk out with a drink paid for by the owner of that Blenz because head office doesn’t offer any compensation to the franchisee when they do this for the sake of the brand – straight loss of goods out the door. Needless to say that participation in this program has not had great success across the chain. If you want to try this out for yourself, we recommend the Library Square location – the operators of this location always give it away for free with a smile.
So then what can a franchisee do? The franchisor should have been there to help this franchisee address their issues and support them to come up with a system to overcome these challenges so that it doesn’t appear to the customer as a brand inconsistency. Since this franchisee is not a member of the VCSFA, they wouldn’t have access to our vast resources and may not even know that a WIFI system exists out there that could help them overcome this. WIFI and freeloaders is a commonly discussed topic amongst our members and innovative idea sharing has lead to improvement in this area.
Where is the franchisor? Why is the franchisee forced to seek outside of their chain to stop the bleeding? Where are the ears to hear and the hands to help? Why are they spending over 7% of their revenue on royalties only to end up running their shop like an independent and having the public look at it that way? Franchisees expect a certain amount of support for this royalty yet in many cases they are left to figure it out on their own.
We hope that this Waves owner has great success with their butt-cheek-penalty program. I’m sure every VCSFA member would love to institute it themselves! We hope the freeloaders go abuse someone else, as well. But more importantly, we hope that this franchisee will join the VCSFA and dozens of others who also had nowhere else to turn and need that edge of support to better their future.
Until then, I think I just used $5 worth of butt-space writing this so I better sign off.
Well here is the $200,000 + article that I wish I read. Part of our goal here at the VCSFA is to educate the public about some of what goes on behind the scenes in Vancouver because we do not have government legislation to help. If you are reading this before you buy a coffee shop franchise, make sure that you go over each one of these points and make sure you understand their implications. If you don’t understand, always feel free to email us and we’ll offer our help. If you already own one, you should immediately become a member of VCSFA and work with us to help fix some of these issues that bring such a dark cloud over the franchise business model – we believe at the VCSFA that it could and should be a very win-win industry. We hope that someone will benefit from this and please feel free to send us donations. This advice has come at a price tag of literally millions of lost dollars. Give generously to the VCSFA and it will always come back to benefit society.
1. The Franchisor can and does mark up the product before it reaches the store
The franchisor is always very quick to teach the following basic business concept to its new franchisees (you have probably heard it already yourselves):
It’s easier to get more money out of your existing customers than finding a new one.
But… Who would expect that the Franchisor would perform the very same thing on its Franchisees (partners) the whole time?
Most people think that the franchise owner enjoys the benefit of group buying power from all those stores out there and thus receives better prices so they can make more money. Wrong. Written in many Franchisee agreements is a clause that looks somewhat like this
“The Franchisor has the right to take that group buying discount and keep it for themselves and you agree that this is ok.”
Of course it looks much more ‘legal’ in the real contract but that’s what it says so fool after fool signs it and while doing so signs away the lion’s share of their profit. This is a severely punishing situation. It has been reported to us that one large coffee chain in Vancouver marks up their coffee up to FORTY PERCENT before it reaches the store! On the poor Franchisees’ largest expense outside of rent and labour the Franchisor enjoys a nice income while the Franchisee pays the same as the independent shop across the road. You probably think to yourself, ‘That’s ok. In a chain like that they probably don’t charge a royalty or they charge less.’ Not so quick, Sherlock. The same aforementioned chain charges the weighty 8% royalty with another 2% marketing pool and even has the right to raise those rates over time.
It has been reported to us that some chains in Vancouver even own their own supply chain and therefore it would be even more difficult to find out what they really pay for their product. Very smart. I’m sure none of the Franchisees would complain if those prices at least felt like wholesale prices but that is rarely the case.
2. The Franchisor does not have to reveal to it’s Franchisees what they are planning to do with the lease
Imagine you buy a store with a supposed ten year lease. They call it a ‘ten year lease’ when in reality it’s usually a five year lease with a five year renewal option. And that still sounds reasonable except… the renewal option is exercised by the Franchisor, not the Franchisee! Read that last part again if it didn’t sink in. Imagine, you are on year number two. Your wife has a baby so you decide you don’t want the headaches associated with running a coffee shop franchise (and if you didn’t know there would be headaches you definitely need to get out and do some serious research!). So you call up the head office and say “I’ve decided to sell. It was so much fun working with you but my wife had a baby and I need to move on. Can you please put in writing that I have three years plus five years left on my lease so they can move forward with the purchase?” To your surprise they reply back “We’re not sure what we’re doing with your store so we can’t put that in writing.” That’s right. They completely deny your request to put in writing that they will exercise that option – and they don’t have to contractually do anything until about six months before the lease ends. So, your store now has three years left on the lease that you can guarantee to your buyer. Good luck selling that one. In some cases, we have heard rumours that a Franchisee will just walk out one day because they can’t sell their store and then magically the store is reopened a few days later by a new owner or is being run by head office complete with a nicely extended lease. Hmm…..
3. The Franchisor Can Deny Your Buyer
So, let’s say you finally got a buyer to agree to buy your store. They pull out their money from the bank and flash it in front of you to prove it. Nice. Everything’s ready to go. You sign the offer, the deposit is transferred into the trust account and all we’re waiting for is one subject to be removed from the contract: “Subject to Approval by Franchisor’
Of course, these folks always reassure you that the basis that they would deny a buyer would be on ‘reasonable’ grounds… like English level, for example. It seems reasonable that they should be able to deny on the grounds of English level because they have to communicate with their Franchisees effectively, right? Except…in one coffee shop franchise chain it is rumoured that one of the executives struggles immensely with his ability to communicate effectively in English! In fact, much of this chain’s head office staff are new immigrants and their free help (interns) as well. Not only that, but if you go around town and sample the English level of recent Franchisees, you’ll note quickly that there is some ill communication out there – some Bad English if you will. This ‘English level’ card is pulled regularly to deny legitimate buyers and much research should be done in this area to bring this to light. So, then, you might ask yourself “Who is the best kind of buyer? Who will they approve quickly?” Our answer: Your guess is as good as ours – kind of like pin-the-tail-on-the-donkey.
4. The Franchisor Profits When you Sell Your Store
How would you like to pay your Franchisor 40% more than you should for your bag of coffee, then pay them another 10% when the customer pays you for their coffee, and then, when you sell your store, pay them another 7.5% on the total sale price? Now THAT’S how you get more money out of your customers! Why bother expanding when you can keep introducing new ways to suck more out of your existing ‘Franchisee Base”? I guess that’s ‘free enterprise’, right?
5. The Franchisor May Force a Renovation Upon You
Imagine this: the economy crashes because of, say, a housing bubble. The whole economy falters and customers stop buying lattes because their local newspapers tell them to do that. Sales drop. Business is bad. Your lease is coming to an end in a few months. You go to your mailbox and what do you find? A letter from your Franchisor informing you that you will be renovating your store on your tab if you wish to continue to have the right to run this money-losing business. Golly, Beaver. I don’t have any money! That’s ok. You’ll find the money. You’ll borrow it from your family, or, if they can’t find it in their bank, you may have to take out a loan against your house. If you were a member of the VCSFA you could rally financial support to get you through it as one member did. In one case in the lower mainland, a store was reported to have done a partial renovation and then magically shut down about a year later. The owners lost their house.
Or, you could do what those other people did and just lock the door and walk away only to see your store appear open again under new management. What’s really funny to us over at the VCSFA is that the corporate owned store of one of the biggest chains in Vancouver has not been renovated since before Noah’s ark came to dry land. It would be good for all reader’s of this article to ask where the corporate store is and make sure they are staying on the cutting edge of their ‘new look’.
In conclusion, the VCSFA is here to help. Don’t hesitate to contact us.
As a coffee shop franchisee, this article about Timothy’s sampling campaign raises some questions that should be asked by any franchisee or prospective purchaser of a coffee shop franchise. Here are the questions you should ask your franchisor:
1. Will you provide the sampling team or do I have to train and hire my own?
2. If you will train and set up this sampling team, is that coming out of my marketing pool?
3. If the marketing pool is being used to fund this sampling team, can you guarantee that my little store will have an equal share of the exposure or will you only focus on the ‘high profile’ locations?
Believe it or not, but there is at least one coffee shop franchise chain in the Vancouver area that not only expects their franchisees to pay for such sampling on the streets (labour and COGS) in addition to their marketing pool, but also insists on handing out 2 for 1 coupons while doing so. When the customer comes to the till to pay (usually with a happy face which is always nice) for their one drink, the franchisee hands them two drinks and, get this, pays a royalty on the losing transaction! It’s one thing to have to take a loss in the name of marketing (standard business) but it’s something quite different to have to pay a royalty on that transaction. For non-math students out there, this equates to a bad deal for the franchisee.
If this is your situation, why not ask your franchisor to train, send out, and provide the product for your sampling program from the marketing pool? If they are not interested in this discussion, at least ask them to assure you that you will not be paying at 8-10% royalty fee right off the bottom line of the transaction!
This raises a more important discussion topic – How do you pull together a group of fellow franchisees to discuss such things? This is where your FAC (Franchisee Advisory Council) comes into play. Search this website with ‘FAC’ for more information on this important topic. The VCSFA is dedicated to helping you start your own FAC so that these kind of discussions can start to take place.
Something that most franchisees probably don’t ever think they’d need is a FAC – a Franchisee Advisory Council. Though it sounds vaguely like a dirty word, the smartest thing you could do is get yours going before it’s too late.
In a sense, the FAC operates like a restaurant health inspector and a union at the same time. In the former role, it holds the franchisor accountable to do business in an fashion that considers the well being of the customers of the restaurant (in this analogy the franchisees) while in the latter role it makes sure that the ‘voices of the people’ are heard and not suppressed.
Without a formal body to hold the franchisor accountable, there are no limits to the abuses that could occur towards the franchisee, especially considering that many purchase their franchise without any former business experience. Many franchisors know this and will simply have a lawyer write a letter to scare any franchisee that might get a little too ‘noisy’.
Without the FAC it is very easy for a franchisor to intimidate a franchisee knowing that they likely are not having quality dialogue with their fellow franchisees.
This article published by Canadian Business Franchise Magazine covers this topic and more and is definitely worth the read.
By joining as a member of the VCSFA, you will gain access to the people and tools to help form your FAC within your franchise.
In this article you can read a very important case about where the Franchisor decided to start participating more ‘closely’ in the supply and distribution. d through
One of the key things to note is that this occurred in Ontario where there is regulation to help control abuses of Franchisors towards their Franchisees.
As you read through this landmark attempted class action case, one can learn endless things about the general way that most franchises are set up. Here are some key points to learn:
-You are bound to what you sign, so if you see a clause like ‘Franchisor might not necessarily pass on savings to the franchisee’ you may want to consider fleeing quickly and don’t go back for your coat or hat
-Franchisors are considered ‘captains of the ship’ and a judge seems to allow them some liberty to make decisions where ‘the end justifies the means’ so just because you, as a franchisee are getting a fairly raw deal doesn’t mean that you will win a court battle for your losses or ‘reduction in profit’
-if you are in a province that does not have a regulatory body that insists on things like disclosure statements by franchisors, then you need to fight tooth and nail until you have one, or join VCSFA and help us grow
If you didn’t read the article above directly, I again encourage you to take the time. If your English isn’t awesome, take the time to learn this important legal vocabulary because one day you may need to use it, though we hope you won’t.