Five Signs of Excellence in Franchising – a Must Read

This article is an absolute must read for all prospective franchisees (franchise operators) and current franchise owners.

The VCSFA completely agrees with these 5 measurements of excellence and we are excited that a reputable organization has published this.  It is backed with actual research as well, which is a great bonus.

After hearing horror stories in coffee shop franchising in Vancouver, we ran a quick check amongst our members and the ones who are suffering agree that their franchisor failed at least half of these measurements.  In fact, one chain has failed all of them.  Here is the list of five points from the article with some concrete examples of how some of our members were failed by their franchisor:

Five behaviours of credible franchisor leadership

  1. The franchisor demonstrates a clear strategy and direction for the brand (including awareness of competitive threats with a plan to deal with them).

One Vancouver franchisor has not acknowledged the sudden emergence of a competing brand, nor attempted to match their radio advertising on a local news channel.  Customers are asking the franchisees why the competing chain is advertising and they are not.  The same brand has completely different standards of ‘branding’ applied to different stores.  This is interpreted as ‘favouritism’ by the franchisees creating a poor business environment.

  2. The franchisor is fair and consistent in dealings with all franchisees (this means having clear policies and sticking to them).

This same local Vancouver coffee chain has also failed this.  Some stores are making their own sandwiches while other stores were told they would be ‘in violation’ if they did and that the stores making them are ‘special cases’.  Some stores were told they must do certain things while others were not.

  3. The franchisor shows respect by listening to franchisee ideas and concerns before making important decisions. However listening does not mean agreeing.

In the case of this same failing chain, several franchisees requested urgent meetings with the directors to discuss very important issues that affect the whole brand.  One franchisee was told to wait 3-4 weeks because ‘it was summertime’. The franchisor never got back to them and when the franchisee pointed this out, they immediately tried to remedy it but needless to say putting off an urgent meeting for 1.5 months make this person feel loved. Many of the franchisees have asked the same franchisor to address issues related to their business and the franchisor has remained silent – completely ignoring the questions.  Needless to say this entire chain is quickly approaching a crisis.

  4. The franchisor embodies the values of the brand in their own behaviour. Hypocrisy kills brand passion like nothing else.

When confronted by franchisees about expensive vendors that they were forced to use, the franchisor replied “The vendors must make money, too.”  However, when the franchisees themselves were going bankrupt, there was no support or help was given.  The chain continues to force on their franchisees the same vendors.  This chain talked endlessly about ‘the importance of brand’ yet in the same city they opened a location in a hotel lobby in prominent location with a ‘similar’ but not ‘same’ name.  The sleeves are from the chain but the cups are branded to the hotel.  Some of the drinks are the same but the entire concept is muddy and unclear.  Customers around the city have asked the franchisees ‘what is this thing?” to which they have no reply.  Hypocrisy kills the brand.  A franchisor must practice what they preach or risk losing the trust of their entire front line.

  5. The franchisor reminds franchisees that he/she and the entire support team care about franchisee profitability as much as their own.

As mentioned in some of the examples above, this same offending chain has demonstrated to their franchisees that they don’t care about their profitability as much as their own.  No offer of reduced royalty payments to struggling stores.  No offer of reduced marketing fund payments for the obvious absence of advertising.

Thankfully for the franchisees, times have changed quite a bit recently.  If you read this article we published about the Dunkin’ Donuts situation you will learn that a franchisor cannot simply continue to fail.

In addition to this 5  point health check you can now perform on your franchise or your prospective franchise, we strongly recommend you also read this article we published about Five Things You Should Know Before You Buy a Coffee Shop Franchise as well as our Checklist to Evaluate a Prospective Coffee Shop Franchise (with bonus commentary)

Don’t forget that the VCSFA is always here to help.  You are not alone and your questions are important.

In case you have not see our most up-to-date list of coffee shop franchises in Vancouver, here is a list in alphabetical order.  Let us know if we’ve missed any:

 

Bean Around the World, Blenz, BG Urban Cafe (formerly Bread Garden), Cultured Coffee and Tea, Esquires, Moka House Coffee, My Cup, Second Cup, Serious Coffee (Vancouver Island), Take Five Cafe, Tim Horton’s, Wave’s Coffee, Wired Monk

 

 

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.

 

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.

 

Sampling and other Marketing Initiatives?

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.