Dunkin’ Donuts Dunked by Quebec Ruling

A 12 year franchisee-franchisor court battle (more acurately ‘battles’ plural) may finally be coming to a close in favour of the little guy as described in this recent article in the Globe and Mail.

In addition, it looks as if franchise legislation may soon become a reality in BC

But what is often not discussed in all of these positive changes is the trail of destruction that occurs leading up to these payouts.  Depression, divorce, and bankruptcies are just some of the items in the list.

In the past, the game has been quite simple for the franchisor.  They not only usually have deeper pockets than their franchisees, but they also often have their own ‘errors and omissions’ insurance which essentially allows them to pay a relatively small deductible and then let this insurance pay for a lawsuit that might be the result of an ‘error’ or an ‘omission’.

But the Franchisees do not have the liberty of purchasing ‘Protection Against Errors and Omissions Insurance’ insurance to level this field.  The Franchisee is forced to fight the battle on their own.  Yet the whole reason they are even trying to fight, is usually because they are losing or have already lost all their money!

The only option that a Franchisee can do is what the Dunkin’ Donuts team did – organize a group and/or class action lawsuit.  This way they can split the costs at least and prove that it’s not just one noisy Franchisee that is upset but the majority.

Something stinks here and change cannot come soon enough.

Do You Take This Franchise to Be Your Lawfully Wedded Spouse?

I was sitting there at 4:30am drinking a large drip coffee and thinking about my life’s direction – that’s what coffee shop franchisees do, by the way.  I started thinking to myself about how this Franchisor-Franchisee thing is way more like a marriage than any other kind of business relationship on the planet.  I thought surely someone else has written an article with this analogy so I went to a search engine and found a real gem that I wanted to share by Marilyn Sinclair of BMO in her article entitled ‘A good business partnership resembles a good marriage’.  Please take three minutes (that’s how long it took me) to read this article because it’s awesome in every way when considering any kind of business partnership.  A three minutes of your time that will save you years of possible suffering is what we like to call a good investment.

What I will do here is take Marilyn’s points of the article, use them as a structure and then angle them specifically on the Franchisor-Franchisee ‘union’ as it is a unique relationship.

The Dangers of Passion

Almost every franchisee I have spoken to our in coffee shop franchise had the same story to report – they put all logic aside during the hopeful and exciting discussions with the franchisor about ‘how good things should go when you take over your store’.  We signed franchise agreements that no sober person would ever sign because of the ‘surely-these-50-other-franchisees-can’t-possibly-be-wrong’ delusion.  Now, we are all facing the fact that we may have rushed into a ‘bad marriage’.  Make sure you have a balance of wisdom with your passion.

Pros of Taking on a Partner

1. Complimentary Skills

Do not assume that the franchisor has world class talent working at head office. Every organization will showcase their top talent but crucial areas such as marketing, accounting, vendor relations, etc, may be run by unqualified or even unethical people.  Do your homework.  Never assume just because there is a nice shiny logo on many stores than everything is kosher.

2. Sharing the Risk

It is true that the franchisor shares some risk.  If the Franchisee goes bankrupt and locks and walks, they are liable to the landlord for the lease and trying to keep the store open to look good to the public.  If the whole chain goes badly, I suppose they might suffer the risk of not being able to fund their head office operations, but that’s really about it.  The rest of the risk is yours, newlywed.  Suck it up, buttercup because you signed the marriage certificate and it’s highly weighted in favour of your new Mr. Wonderful.  Hopefully he’ll be kind after the honeymoon.

3. Shared Responsibility

We’ve learned a lot about this one over the years.  Most folks buy a franchise because they assume that their hefty royalty fee includes some kind of guarantee.  Thanks to the recent Dunkin’ Donuts case in Quebec there may now actually be some hope of providing some kind of value to the franchisee for the hard-earned royalty fee they pay.  However, at the end of the day, your franchisee agreement (the legal stuff) can probably be summed up as “We’ll give you a logo and tell you what to do, but if things don’t work out, don’t come crying to me because we didn’t promise you anything.” In this marriage most people are signing in hopes of benefiting without truly knowing with whom you will be united.  Just understand that the Franchisor may not be taking much responsibility for the success of the relationship.

Cons of Taking on a Partner

1. Accountability

Let’s keep this simple: When you enter into a Franchisor-Franchisee marriage, your spouse will be watching your every step. If you don’t like that, run the other way.

2. Compatibility

Do you even know the directors and the people with whom you’ll be dealing on a daily basis?  Likely not and it’s admittedly hard to expect to wine and dine with your Franchisor before signing.  However, you have a bunch of currently-marriage spouses (and divorced ones) all over the city.  Find them, treat them well, get to know them and milk them for every detail they have.  You will be very surprised what you will learn about your future spouse.  You may postpone the vows.

3. Sharing the Wealth

It’s true that if you are becoming wealthy with as a franchisee so is your franchisor.  What they don’t tell you in marriage counselling is that if you are losing money at your job every month your Franchisor will still be there asking for 10% of your line of credit to keep his car running.  Will he give you a break next month because of your hard times?  We haven’t seen it yet in Vancouver but we wouldn’t expect them to publish it if it has happened. What we have seen repeatedly, though, is the Franchisor roughly blaming/accusing the Franchisee for not working long enough hours or working hard enough or spending enough of their own money on local marketing initiatives –  all the while not offering any of their own resources to help.  This can create a rough marriage environment, by the way. You would also expect the Franchisor to share the wealth by means of marketing but we have also seen this offering to be quite lacking.

4. The right ‘fit’

I think we’ve beat this dead horse.  Be careful who you marry.

Have the difficult conversations before you tie the knot

We concur.  Open the franchisee agreement and take the notes and discuss them with Franchisor.  If you need a good lawyer in Vancouver with expertise in Franchises, by all means let us know and we’ll send you some contacts.

Go Slow – Don’t Rush

I’m admittedly a little envious of you, reader.  There was no VCSFA when I bought my coffee shop franchise.  There was no one to turn to except the active franchisees, lawyers and a few franchise websites.  I’m not blaming anyone and it has been a great learning experience and now you can benefit greatly.  Don’t rush is right.  Ask the right questions before you sign because once you are married, you don’t want to know how hard it is to get divorced.  In some cases, stores that have been for sale for years are not selling or their buyers have not been approved.   At least with a marriage you can move to another city and get another job while you await your divorce papers but with a coffee shop franchise, you better make sure that store stays open!  Be wise.  Seek wise counsel.

We are here to help and don’t hesitate to contact us.

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.

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.