7 Issues that Threaten the Franchisor and Franchisee Relationship

7 Issues that Threaten the Franchisor and Franchisee Relationship
AJ Beltis

By AJ Beltis

Table of Contents

    A strong franchisor-franchisee relationship can be a thing of beauty. Clever marketing and strong branding from a restaurant’s corporate offices can boost sales for franchised restaurants. In turn, this gives franchisors more money from royalty fees, which creates a mutually beneficial cycle for restaurant success.

    However, with the highs usually come the lows.

    Here are seven major issues impacting the restaurant franchisor-franchisee relationship and what you can do to address them.

    Why Problems Arise

    There’s often a shared fear of failure among franchisees and franchisors—especially in the volatile restaurant industry. Franchisors can feel skeptical that their franchisees will not meet their agreed-upon sales numbers, which can make franchisees feel stressed and unsupported.

    A lack of trust and communication between both parties worsens this cycle, with franchisees of worldwide restaurants like McDonald’s, Dominos, and Subway having very public disputes with their franchisors.

    All of these issues spur franchisor-franchisee issues that can hinder potential success. Therefore, it’s worth facing these problems professionally and head-on to ensure a healthy business relationship for many years.

    Issue #1: A Lack of Communication

    Whether you own one or one hundred restaurant franchises, you know how difficult it can be to establish and maintain communication with your franchisor.

    A lack of communication can take a serious toll on franchise owners, particularly in the realm of finances. Changes can trickle down from a corporate level to individual restaurant owners without clear communication to or feedback from those owners, restricting franchisees’ abilities to voice concerns and providing limited time to make necessary adjustments to the menu, sales forecasts, and operations.

    Example: Quizno’s

    In 2009, Quizno’s decided to go head-to-head with Subway’s “Five Dollar Footlong” special, offering coupons to patrons for a free sandwich.

    Unfortunately, franchisees' concerns were not heard, which caused owners to reject these coupons. In a heated competition between Subway and Quizno’s, this fiasco angered many Quizno’s customers, effectively costing Quizno’s their path to victory in this sandwich war. Quizno’s—the business once boasting more than 4,500 locations—now has fewer than 400.

    How to Address This Issue

    Establish both formal and informal communication channels between the franchisor and franchisee. Both parties should have a direct phone number and email address for on-the-spot questions, while more formal communication should be sent down from corporate in the form of email newsletters or scheduled debriefings on need-to-know information. Franchisors should also actively source franchisee input on new initiatives and ongoing issues, while franchisees should utilize this privilege and share concerns as they arise.

    Issue #2: Franchisees Taking the Fall

    With a restaurant group large enough to be franchised, mistakes and times of controversy run the risk of instant scrutinization by the media and the public. It’s not uncommon for the mistake or decision of one store to impact several others, but it’s worse when the change comes straight from corporate.

    Restaurants that franchise tend not to own many locations as a company. Take McDonald’s, for example, which owns around 5% of all its locations. As a result, franchisors and corporate employees will often make decisions that, if made from someone with daily exposure to the restaurant, might have been made differently. These decisions can have a strong impact on franchisees, for better or worse.

    Example: KFC

    In 2018, about two-thirds of KFCs in the United Kingdom had to temporarily close due to an inventory issue. KFC utilized a supplier with a single location, and deliveries were compromised when problems arose at that spot.

    The result? No chicken at hundreds of KFCs across the United Kingdom.

    That’s right. No chicken at Kentucky Fried Chicken.

    Mistakes happen in restaurants. However, this incident with KFC’s supplier—an incident that franchisees had no control over—impacted KFC’s reputation across an entire country, threatening to permanently damage the livelihood of every KFC franchisee.

    How to Address This Issue

    Be like KFC and do the right thing: own your mistakes as a franchisor.

    To respond to the chicken shortage, KFC took out a full-page ad in multiple publications, apologizing to their customers.

    Franchisees shouldn’t have to pay for mistakes they’re not responsible for. Ensure you have a franchisor-franchisee relationship where everyone owns their mistakes and steps up to make it right for themselves, their business partners, and (of course) their customers.

    Issue #3: Costs and Royalties

    Franchisees benefit from built-in brand recognition of their restaurants, but have to (quite literally) pay the price. On top of an initial license fee, franchisees must pay regular royalty fees to franchisors. These are either percentage-based or fixed dollar costs that go to marketing and operations for the entire business.

    Naturally, the never-ending check cutting doesn’t leave every franchisee happy. When the contribution is fixed, franchisees who are slow to start or who are having a bad month may not be able to meet their agreed-upon dues. For successful franchisees, a percent-based royalty fee can seem punitive, since the more you make, the larger check you have to write to corporate.

    Example: Domino’s

    In December 2018, multiple Domino’s franchisees threatened to “declare war” on corporate and stop opening new stores if the franchise cost and profit models were not restructured.

    While not all franchisees across the industry have taken such action, it’s not a stretch to say many have at least thought about it.

    How to Address This Issue

    Franchisee costs and royalties are often tough to negotiate and tend to be consistent across all locations.

    The best solution for this issue is stronger alignment between the franchisee and franchisor on how to grow sales. Franchisees need to feel supported, and franchisors need to feel confident that each franchise can hit its goal. To aid in this, franchisors can provide best practices on how to increase sales and streamline internal operations to increase profits, while franchisees should be ready to reach out when they need help to show they’re invested and want to hit their goals.

    One way to simplify this is through integrated restaurant technology, such as POS and employee scheduling software. When franchisors have granular data on sales and staff performance, they’ll be able to offer more specific guidance on what areas need improvement from a corporate perspective and what has worked for franchisees in the past.

    Either way, when sales grow, it’s a win-win for franchisees and franchisors.

    Issue #4: Technology Woes

    Most will agree that choosing the best systems to help restaurants run smoothly is in corporate’s ballpark.

    However, some franchisees are less receptive to change than others, which complicates accounting and reporting on both the franchise level and the corporate level.

    Conversely, some franchisees are ready and willing to adopt new systems, but corporate is reluctant to change operations at their hundreds or thousands of locations.

    Example: Wendy’s

    When one of Wendy’s largest franchisees would not agree to adopt a universal POS system, Wendy’s sued the operator of the 152 locations.

    As restaurants become increasingly reliant on technology, it’s imperative that large franchises have systems in place to gain visibility into each location’s success metrics. This is true for all software—not just POS software, but online ordering, accounting, and employee scheduling software as well. Otherwise, corporate will have a huge blind spot into how to improve and grow their business.

    How to Address this Issue

    Return to the feedback loop from issue #1. Franchisors mandating massive technological changes should provide a clear rationale for the change, a list of benefits, an outline of costs, and a list of dates as to when changes should be made. Franchisees should use this time to share their thoughts and work alongside franchisors to ensure a confident and successful rollout in the requested time frame.

    The benefits of this alignment pay for themselves and benefit all parties. For example, 7shifts employee scheduling software can save managers 3% in labor costs and reduce time spent on scheduling by 80%. This alone puts more money into the franchise and improves the efficiency of managers.

    Issue #5: Assuring Franchisees Meet Corporate Standards

    We’ve been putting a bit of the onus on franchisors in this article, but there are instances where franchisees can step up to improve this business relationship.

    Franchises work in part due to consistency of brand, menu, design, and service. A variation of any of these factors from one location to another calls into question the consistency of the business, which defeats the very purpose of a franchise business model. Thus, franchisees must recognize the type of business they are operating and hold themselves accountable for meeting certain standards.

    Example: Burger King

    When Burger King Corporation noticed a 37-location franchisee was not meeting its service or cleanliness standards, they sued that franchisee.

    This was the right move for Burger King. They showed that they value their declared standards and won’t tolerate a blatant disregard for the health and safety of their customers. However, the lawsuit arguably shed even more light on the situation, and like many other issues on this list, likely impacted multiple franchisees and their revenue.

    How to Address this Issue

    Franchisors should continue to monitor brand consistency long after the restaurant’s opening day and take note when certain franchise-owned locations are starting to slack.

    Franchisees should respect the benefits of owning a franchise and make it a top priority to meet the standards set by corporate. After all, this is a company that has successfully grown from one location to dozens, hundreds, or even thousands. This means giving up some autonomy and holding your staff and yourself to high standards in every aspect of running a restaurant. Otherwise, your sales—and the sales of other franchisees—could start to suffer.

    Issue #6: Disagreement on Brand and Market Positioning

    There are multiple reasons to buy one restaurant franchise over another, with some of the popular choices being the branding and concept of the restaurant.

    Unfortunately, it’s not uncommon for corporate to spot an opportunity in the market, seek to embrace change, and reposition the brand and position of the restaurant.

    This move can disrupt the franchisee’s vision for his or her business. When sales take a dip, it causes friction in the franchisor-franchisee relationship.

    Example: Pizza Hut

    Jonathan Maze of Restaurant Business Online predicts Pizza Hut’s franchisees will be facing a difficult next few years, citing a 3% same-store sales decrease in Q3 2019 as the company repositions itself from a dine-in pizzeria to a predominantly takeout and delivery restaurant.  

    Additionally, Maze notes Pizza Hut executives themselves are weary during this time of transition.

    “While we strongly believe that these are the right strategies to build the business for the longer term, these moves will introduce some uncertainty in the business performance over the short term,” says David Gibbs, president and incoming CEO of Pizza Hut’s parent company Yum Brands.

    The uncertainty that Gibbs references stems from “weak finances or high debt loads” franchisees are facing. This shift is leaving franchisees feeling less secure in the short term, with the threat of restaurant closure looming.

    How to Address this Issue

    In a situation of forced rebranding, franchisors should be more sympathetic to franchisees and realize the means come before the end. Some solutions include more leniency during the shift, in addition to adjusting royalties and fees during times of transition as each location’s market position changes.

    Issue #7: Pressure

    Just reading over the list of the past six issues threatens to raise the stress levels of franchisors and franchisees.

    Restaurants that franchise are multi-million or even multi-billion dollar companies, with constant scrutiny from consumers, stockholders, and the media. With all of that, it’s easy to see why franchisor-franchisee relationship can so quickly boil down to a purely transactional one.

    Example: McDonald’s

    McDonald’s future looks bright. New menu items, a focus on delivery and digital ordering, and a sleek new building design all support that notion.

    However, at least three-quarters of McDonald’s’ U.S. franchisees are feeling left behind in this movement. When forced to adopt changes and pay costs they weren’t enthused about, more than one thousand franchisees banded together to form the National Owners Association–a group of McDonald’s franchisees openly expressing a few of these concerns on their own behalf.

    While unprecedented, this group’s formation isn’t entirely unexplainable. New requirements from franchisees included remodeling all restaurants by 2020 (the costs of which McDonald’s pledged to pay 55% of) and increased sales numbers to qualify for lease renewal (which McDonald’s predicted up to 40% of locations may not be able to meet).

    How to Address this Issue

    How do you alleviate pressure? Look for more flexibility.

    McDonald’s is already taking steps to address the concerns of their franchisees, such as allowing remodeling to be completed dates as late as 2022 rather than 2020. This is a clear move to respect the needs and wishes of franchisees, which businesses like McDonald’s rely on to stay in business.

    In the end, it comes down to the fact that everyone involved in a franchise—the franchisor and the franchisee alike—is under immense pressure.

    There’s always an opportunity for both parties to step it up for their partner. Franchisees can focus in on improving efficiency and guest experiences, while franchisors should focus on making business-wide improvements that offer a net benefit to their franchisees.

    Improving the Franchisor-Franchisee Relationship

    Franchises are a staple of the restaurant industry, but their predominance doesn’t make the relationship that forms them any easier to navigate. With better communication, a focus on the future, and agreement on the positioning of their business, franchisors and franchisees can establish and maintain that much-needed alignment to keep the business thriving.

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    AJ Beltis
    AJ Beltis

    AJ Beltis is a freelance writer with almost a decade of experience in the restaurant industry. He currently works as a content specialist at HubSpot, and previously as a blogger at Toast.