News Column

Fast-food Franchisees Feel the Heat

September 3, 2014

Candice Choi, AP Food Industry Writer

Some franchisees feel powerless and afraid to speak up (AP)
Some franchisees feel powerless and afraid to speak up (AP)

NEW YORK (AP) — Behind those Big Macs and Whoppers is a hidden drama over corporate control.

The fast-food industry is underpinned by an often tense relationship between companies like McDonald's and Burger King and the franchisees who run their restaurants. Few customers think about it when scarfing down burgers, but the power dynamic has been bubbling to the surface.

Around the country, union organizers are pushing to make McDonald's take responsibility for how workers are treated at its franchised restaurants. And in California, a bill could soon give all franchisees greater protections, including stricter rules on when companies can decide to terminate their agreements.

The moves highlight the tensions in a business model that has long been considered an attractive way to start a business. In exchange for an upfront investment and ongoing fees, aspiring business owners get to capitalize on popular brands people trust. To protect their images, companies dictate terms like kitchen equipment, worker uniforms and menu offerings.

The problem, franchisee advocates say, is that companies can strip franchisees of their livelihoods for violating any contract terms, even if minor. That can leave franchisees feeling powerless and afraid to speak up.

"It's scary. People are kowtowed and they're worried," said Peter Lagarias, a lawyer in San Rafael, California, who represents franchisees.

GROWING TENSIONS

The bill in California would amend a law to require companies to show there was a "substantial and material" breach before terminating a contract. Existing state law allows termination for "good cause," which can be any violation of the contract.

It would also require companies to give a franchisee back their business or compensate them for its value if a contract was wrongfully terminated. As it stands, companies only have to pay franchisees for store inventory, which would be a fraction of that amount.

Gov. Jerry Brown has not indicated whether he plans to sign the bill, which was passed by California's senate and assembly. He has until the end of September to act.

The International Franchise Association, which is backed by companies including McDonald's, says the bill would result in "countless frivolous lawsuits" and is unnecessary because franchisees can sue if they feel they've been treated unfairly. It notes franchisees are given 30 days to fix violations before a contract can be terminated.

McDonald's, which owns 19 percent of its more than 35,000 restaurants around the world and around 10 percent of those in the U.S., says the California bill could weaken a franchiser's ability to enforce standards.

Kathryn Slater-Carter, a McDonald's owner in California, says she spearheaded the bill after McDonald's decided not to renew the franchise agreement and lease on one of her two restaurants. Slater-Carter said McDonald's cited her husband's failure to attend meetings for not renewing the agreement, even though only she was required to attend. That left her unable to sell the business, which she estimates was worth $2 million.

"If they can do this to me, they can do this to anyone," she said.

McDonald's spokeswoman Lisa McComb said Slater-Carter's agreement and lease simply expired and that the company was not able to reach an agreement on a new lease with the landlord.

While the California bill hinges largely on a franchiser's right to enforce standards, companies are seeking to maintain a line of separation with their franchisees on another front. Labor organizers are pushing to hold McDonald's accountable for working conditions at restaurants, citing the control the company exerts over franchisees. Both McDonald's and its franchisees have been named in lawsuits on behalf of workers.

Last month, union organizers won a victory when the National Labor Relations Board said McDonald's could be named as a joint employer in charges filed on behalf of workers over unfair labor practices. McDonald's said it will fight the decision and that it has no control over employment decisions at franchised restaurants.

The Service Employees International Union is also backing the franchisee bill in California.

THE POWER STRUCTURE

Franchising is prevalent in many industries, such as retail and personal services. Restaurants, though, are most widely associated with the model, with about 190,000 franchised eateries in the U.S.

Many states have no laws regarding the termination of franchisee agreements, and the ones that do vary in the protections they provide. That can leave franchisees at the mercy of contracts, which often put all the power in the hands of companies, franchisee advocates say.

Corporate cultures vary, of course, with some companies exerting more control than others, said Robert Purvin, CEO of the American Association of Franchisees and Dealers in Palm Desert, California. At Subway, for instance, franchisees are in charge of buying supplies, so they know the company isn't marking up prices for cold cuts and lettuce.

Companies also often have advisory councils to give franchisees a voice. Still, there are bound to be disagreements given the nature of the business model. Value menus are a good example.

Franchisers like Wendy's get a percentage of restaurant sales no matter what. Franchisees, by contrast, have to think about ingredient costs and worry low prices can eat into their profits. The friction can lead to disputes that land in court.

In 2009, Burger King franchisees sued the company over a $1 double cheeseburger they said they were losing money on. The suit was settled after 3G Capital bought the chain and worked to mend fractured relations with franchisees. The price of the burger has since gone up.

In other cases, franchisees have leeway on corporate decisions.

Don Sniegowski, who runs the franchisee site BlueMauMau.com, recalled a plan by Dunkin' Donuts two summers ago to sell bananas by cash registers to create a more healthful image. Not all franchisees liked the idea, noting bananas could attract flies and drive up costs. The company went ahead with it anyway.

A Dunkin' Donuts spokeswoman, Tessa Lueth, declined to say how many locations have adopted the program, but said bananas are seen in "a large and growing number" of stores.

In general, franchisees are better at running restaurants than companies since they have more invested in the business, said Jonathan Maze, editor of Restaurant Finance Monitor. Sometimes companies sell restaurants back to franchisees to boost their own performance.

Burger King, for instance, has been refranchising its company-owned restaurants to reduce costs and create a more stable revenue stream from franchisee fees. It's also striking franchising deals to open more locations around the world. The strategy helped Burger King nearly double its profit last year, even though sales rose just 0.5 percent at established locations.

Follow Candice Choi at www.twitter.com/candicechoi

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Original headline: Behind Big Macs, a drama over corporate control


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