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.