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.

 

Dunkin’ Donuts Franchisees gets paid for Franchisor’s Failings

Perhaps one of the most recent and relevant cases to any coffee shop franchisee or franchisor is where the Dunkin’ Donuts franchisees of Quebec took on their franchisor claiming that they did nothing to block the round-house kick of Tim Horton’s.  As a personal aside, I think a kudos should be given to ol’ Timmy’s for being able to create this phenomenon and all you Timmy Ho franchisees should send a “Thanks, Mum!” card to your franchisor for doing something useful with your money!

But back to our Dunkin’ Donuts franchisees who apparently got smitten by the double-double upper cut to the solar plexus.

Here is the Canada.com article which nicely summarizes the situation.  Take also a minute or two to read this Globe and Mail article called “Should Franchisors be Obligated to Protect Strength of Brand?”

The key points are these:

  • The Franchisor promised spend  40 million buckeroonies and didn’t
  • The Franchisor forced expensive renovations on the franchisees with expectations of 15% sales increase (which didn’t happen)
  • The advertising campaign that was promised to work, didn’t

In the latter article, unless I missed it, I didn’t actually catch the author’s conclusion to the question in the title so let me answer it for him more clearly:

YES.

THE FRANCHISOR SHOULD BE OBLIGATED TO

PROTECT STRENGTH OF BRAND.

And there you have it.  No grey zones here.

Bloody right they should be obligated.  Why else under the sun would anyone hand over up to 8% of their bottom line?  This isn’t a charitable organization, folks. Thankfully in the case of the Dunkin’ Dudes they obtained tangible promises with failed results – they could successfully quantify their failings.  Regrettably, most coffee shop franchises roll the safe road and simply don’t make promises at all and operate with a very closed-book style of operations.

In the case of one currently popular specialty coffee franchise in Vancouver, it was told me by a franchisee (who wishes to remain unnamed) that they have never, in over four years of paying into the advertising pool (2% of their entire bottom line paid monthly) received a detailed report of where that money went or where it is going. When I asked this person what value they got for their money, they simply replied “I could use their name and they send out these posters once in a while.”  I then started thinking about marketing in the traditional sense of the word. This particular chain was absolutely not present on radio, TV, or other standard forms of media – yet their main competitor was.  I immediately thought about the Dunkin’ Dudes and recommended to this chap that he immediately sign up as a VCSFA member, read the articles and contact an expert for advice.

Not having a Marketing Pool Report is lamentable for so many reasons, but here are just a few that come to mind:

  • No report means that the franchisor could be using the marketing pool for whatever they deem as ‘marketing’ – zero accountability to the stakeholders (franchisees) – “Let’s meet at Gotham’s Steakhouse so I can explain the great drinks we have at our coffee chain, Bill.”
  • No written plans for the future spending of the pool means that the franchisor cannot be held liable for their failed results because, well, they didn’t promise anything that can be quantified. “Hey. We didn’t say your sales would grow when we spent your money on Girl Guide cookies!”

So, if you are a coffee shop franchisee and plan to learn from the Dunkin’ School of Hard Knocks (DSHK) it’s paramount that you commence at least the following action items:

  1. Get those marketing pool books open ASAP (form an FAC first)
  2. Make sure your franchisor puts into writing their plans for that hard-earned marketing $moola$
  3. When an expensive renovation is commanded, ask for justification in writing and make sure the books are open.
  4. Join the VCSFA to make sure you and your crew have access to the help you need in your particular franchise.

 

Why opening your coffee shop franchise in Ontario and other places may be a better choice

If you didn’t read another post about the Arthur Wishart Act do so.

Here is a neat legal article that will help you understand why it’s so important that each province has such an act.  A disclosure statement is just one of many things that will help keep Franchisors accountable for their actions, before they begin their relationship with the Franchisee.

If they can’t get the disclosure right at the beginning, what do you think that says about how your future will go? At the very least it will show the professionalism of the Franchisor.

Please help VCSFA work towards bringing this kind of regulatory act to British Columbia and every other province while we’re at it.

Classic Case – Tim Horton’s Franchisees versus somewhat less fresh donuts

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.