A tough economy can lead to rough franchisor-franchisee relations, but parties in several high-profile battles say that this downturn is forcing them to quickly resolve disputes so they can get back to fighting the common enemy of declining sales.


Although several companies, including Quiznos, Burger King and Wendy’s, have recently made headlines related to franchisee unrest, members in all of the systems have acted to move beyond the frictions in a fashion more swift and collaborative than in the past.


“Sometimes you realize you’re stronger together than apart,” said Susan Grueneberg, a
franchise attorney with Snell &Wilmer in Los Angeles, who usually represents franchisors.



Unity by association


At Quiznos, a new franchisee association was launched in September, offering a new start of sorts for franchisees in how they relate to the corporate office in Denver.


Kevin Tackett, president of the Quiznos Franchisee Association, or QZFA, and one of the chain’s largest traditional franchisees with nine units, said macroeconomic pressures are inevitably a factor.


“At Quiznos, people didn’t mind the cost structure as long as they were making money,” he said. But once margins were squeezed to the point of unprofitability for franchisees, the mood shifted.


“When your profits are gone, the first place you look is to see who is taking the most money off you,” he said. And the answer, typically, is the franchisor.


However, with big changes at Quiznos ahead, the association has pledged to take the high road as its new relationship with the corporate office develops.


The QZFA was created under a settlement agreement in 2009 that ended a massive class-action lawsuit filed by thousands of former and current franchisees.


The litigation included charges of racketeering and corruption and complaints about food costs, supply, the use of marketing and advertising funds, and royalties owed by franchisees who bought but never opened stores.


Quiznos denied all claims and agreed to a $206 million settlement without admission of liability.


Today, Tackett said the mood is optimistic, if only because change is coming. Quiznos is looking for new ownership as it restructures finances and sets the stage for a rebranding effort in the spring. The company is seeking a debt-for-equity swap as it attempts to address a debt burden of about $875 million.


“We’re anxious to be at the table with the new controlling party at Quiznos,” Tackett said.


Meanwhile, Tackett said the group would be pushing for fundamental changes in the Quiznos business model. He said he hoped a dialogue could begin after the association board meetings this month.


“We’re pointed in the right direction, but we’re not actually heading there just yet,” he said.


Leading a new attitude


A change in management can inject new life in franchisee-franchisor relations, and some observers point to Miami-based Burger King as an example.


The burger chain was acquired by private-equity firm 3G Capital last year, and the new owners have been making sweeping changes to management and marketing.


In April Burger King settled a lawsuit filed by its franchisee association challenging a $1 double cheeseburger promotion in 2009. The settlement came just days after the company’s co-chair and former chief executive John Chidsey resigned.


In that lawsuit, franchisees argued that they were losing a dime or more on the sandwich, which they were required to sell for $1 from October 2009 to April 2010.


With the settlement, Burger King agreed to change how new items are added to the chain’s value menu, allowing franchisees more of a voice.


Tony Versaci, chairman of the Burger King National Franchisee Association, said there has been a “quantum shift in the level of engagement and synergy” between the corporation and the franchise community at the 12,250-unit chain — largely as a result of the company’s new top leadership.


“They have been very transparent and inclusive,” he said of the franchisor. “We’ve really developed a sense of cooperation and working in unison.”


Fueling the optimism is a makeover of Burger King’s menu aimed at broadening the brand’s appeal. New offerings this year have included the rollout of oatmeal, new soft-serve ice creams and shakes, and the test of fruit smoothies, specialty coffees and salads.


Questioning new costs


Upgrades to drive traffic during tough economic times, however, also can be a source of tension in franchisor-franchisee relations.


Dublin, Ohio-based The Wendy’s Co., for example, earlier this year sued its largest franchisee, WendPartners Franchise Group, after the operator balked at installing new toasters needed for the rollout of the brand’s new Dave’s Hot ‘N Juicy Cheeseburger, an initiative the company said would help restore same-store sales growth for the chain.


WendPartners, a consortium of franchise groups that operate 329 Wendy’s locations in 20 states, initially declined to participate in the project, though it was approved by the 6,500-unit chain’s Franchise Advisory Council.


In late September, however, the standoff ended with a settlement agreement, under which WendPartners agreed to install the necessary equipment.


It’s not clear what made the franchise group change its mind, but the company said in court filings that tests of the new burgers increased same-store sales between 2 percent and 3 percent.


Need for cooperation


A lawsuit at Louisville, Ky.-based KFC involved upgrade issues of a different sort.


After the fried-chicken chain introduced its new grilled-chicken line in 2009, the KFC National Council and Advertising Cooperative, or NCAC, objected to the company’s sole control of the brand’s advertising strategy.


Representing about 650 franchisees, NCAC argued that it had the authority to develop advertising strategies and set the calendar, even if it involved changes to KFC Corp.’s plan.


Though the judge in that case ruled in favor of the franchisee group, he insisted that the NCAC would need KFC Corp.’s input to succeed in its strategies.


The judge even waxed a bit philosophical as he admonished the franchisor and franchisee to find a way to work together.


While the settlement didn’t answer every aspect of the dispute, he wrote, “that reality itself, however, should induce greater, not lesser, cooperation — unless the franchisees have been sniffing the secret spice blend in closed spaces.”



Declining margins


While that one battle appears over, at least in court, KFC parent Yum! Brands Inc. may have other domestic franchisee issues to address as it focuses efforts internationally. 


A Goldman Sachs report in August said the almost 20,000 units Yum has in the U.S. — about 80 percent of which are franchised — have seen profits declining at a double-digit pace, and an increasing number of franchisees are expected to close their doors in coming years.


“Since Yum’s U.S. same-store sales have averaged just 0.8 percent over the past decade, while inflation has averaged 2-3 percent over that period, U.S. restaurant margins have declined from 15.1 percent in 2001 to [an estimated] 10.7 percent in 2011,” the report said. “As this is the average restaurant margin, roughly 50 percent of stores are going to be below this figure, and an increasing number are going to be cash flow negative. These restaurants are likely to continue to be closed by franchisees.”


Last month, Yum sold its secondary Long John Silver’s and A&W Restaurants subsidiaries to two groups of franchisees of those brands and investors, saying they did not fit with Yum’s long-term growth strategy. 


In making the announcement, Yum officials reiterated their pledge to sharpen their long-term growth on international expansion, but they also said they would focus on improving the U.S. brand positions for KFC, Pizza Hut and Taco Bell. 


Improving relations


Despite such powder-keg pressures of economic strain, Paul Steinberg, a franchise attorney in New York who typically represents franchisees, said he sees franchisor and franchisee relations in general as less litigious than they were 10 years ago.


Some restaurant franchise systems tend to have disproportionately more dysfunction than others, he said. And, with an arbitration-friendly Supreme Court these days, most disputes don’t even make it to the courtroom.


Grueneberg argued that it is more likely an unwillingness to pay attorneys’ fees that brings such disputes to settlements these days.


She agreed, however, that the litigious climate between franchisor and franchisee, and vice versa, is less than she expected going into the recession.


BK franchisee Versaci said: “Now everybody is just trying to find the better screwdriver and silver bullet. In the end, we’re all after the same prize.” n



Contact Lisa Jennings at lisa.jennings@penton.com.