Health care views cause clash between restaurant companies, franchisees

Schisms are appearing between franchisors and franchisees as restaurant operators become more vocal with their views on the looming health care act after presidential election results took its possible repeal off the table.

The Patient Protection and Affordable Care Act impacts the restaurant industry more than most, said Chris O’Cull, senior restaurant analyst with KeyBanc Capital Markets, in a report last week. “Restaurants have a disadvantage to non-service businesses when it comes to penalties because of the high number of part-time and low-wage employees,” he said.

As a result, restaurant operators have begun to consider various options to deal with possible increased costs associated with the act, some of which have created tension between brand executives and the franchise operators.

Immediately after the general election, Zane Tankel, chairman and chief executive of Apple-Metro, a 40-unit Applebee franchisee for the New York City area, appeared on Fox television and said the Affordable Care Act would cost his company millions of dollars, and he hinted that it would stifle expansion and reduce hiring.

Mike Archer, president of Applebee’s, followed up with a statement from the corporation, saying: “Because final regulations and guidance are still pending from government agencies regarding the Affordable Care Act, exactly how our franchisees will implement the law when it takes effect in 2014 is still uncertain.

“However, we do know that our franchisees will comply fully with the law and take every measure possible to continue doing right by their employees,” Archer continued.

The Affordable Care contretemps at Applebee’s was echoed at Denny’s, as well. Last week, John Metz of RREMC Restaurants LLC of West Palm Beach, Fla., which operates Denny’s and Dairy Queen franchises, told the Huffington Post that he was considering adding a 5-percent surcharge to checks and letting guests decide whether to reduce the waiter tips by that amount.

In reaction to the comments from Metz, John Miller, Denny’s chief executive, put wide distance between the corporation and the franchisee in a statement issued late on Friday.

“While we respect the decision of an independent business owner to speak out on this or other topics and express their personal views,” Miller said, “his statements do not capture the respect by Denny’s, the Denny’s Franchisee Association or our franchise community at large for our hardworking employees or for our valued customers.”

Miller also acknowledged that the Florida franchisee’s stance could be confused with the entire system. “Unfortunately, the comments of this franchisee, who represents less than 1 percent of our system and who owns restaurants in other concepts, has been portrayed as reflective of the entire Denny’s brand,” Miller said.

Then on Monday, Metz issued a retraction. "We regret that the statements we made may have been interpreted as representative of the Denny’s brand or of other franchisees, which they are not,” he said in a statement.

“Our stores do not have a 5-percent surcharge,” Metz continued. “Despite recent media coverage, RREMC Restaurants is committed to exploring viable and effective ways to deal with the changing economic climate, including the implementation of the Affordable Care Act. We have always been and will continue to be 100-percent dedicated to our employees and customers and will work tirelessly to find solutions that are in their best interests. It is our intention is to fully comply with the law." 

His public relations firm said Metz would not give any more interviews.

Changing the message

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Franchisors and franchisees should be concerned about the effect that their reactions to the health care act have on current employees, said Matthew Mabel, president of Surrender Inc., a Dallas-based hospitality and management consulting firm.

“Hospitality and anger do not coexist in the same space,” Mabel said. “No restaurant company can survive without good will from their employees and guests. Operators who voice their frustration risk alienating the people who make their businesses succeed every day on every shift.  Why would you want to start your day by aggravating the 50 percent of your guests who voted for Obama?”

Mabel added that even U.S. House Speaker John Boehner, after the general election, said that “Obamacare is the law of the land.”

Roz Mallet, the chairman of the National Restaurant Association who spoke at the recent People Report Best Practices Conference in Richardson, Texas, said that the restaurant industry had to stop being the “industry of no.”

“We’ve been hoping for the years that health care would go away,” she said. “Well, not gonna happen.”

O’Cull of KeyBanc said some restaurant brands, especially those in the fast-casual segment, are better situated to deal with the costs associated with the health-care laws.

“These chains typically require less labor hours for the amount of sales produced and are able to raise menu prices,” O’Cull said, adding that he’s more cautious of brands in family dining, pizza, labor-intensive fine-dining restaurants and company-owned chains that will need to increase administrative support to meet the act’s requirements.

Mabel said that even if burdened with higher costs, restaurants can communicate an affirmative message — that they're ensuring their associates have access to health care. "It is time to get out of victim mode and focus on making the best of a difficult situation," he said. "When [restaurants] eventually pass along the cost of Obamacare their guests will feel a lot better about contributing to restaurant workers’ health care, than to joining a protest movement, paying a tax or an ‘Obamacare Surcharge.’”

Mabel said he even sees a silver lining. “Once there is near-universal health care,” he said, “many of the best independent operators in our industry will not lose out on the chance to employ some great people who have had to seek jobs elsewhere in pursuit of any or better health care coverage. Restaurateurs would be wise to talk about that.”

Sarah Lockyer contributed to this story.

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