The Trouble with Franchises

We’ve talked a lot in this space about franchise business units, and the obvious advantages they have both for the parent company and also for the entrepreneur who wants to break into a specific industry but doesn’t want to have to re-invent the product or compete with the leaders of that industry. The drawbacks for the company selling the franchises (the franchisor) are that you may be giving away a huge amount of business in return for a relatively tiny franchise fee (and/or a small percentage of the action), and of course that you’re trusting every one of your franchise purchasers (franchisees) to not do anything to make a mockery of your brand, your image, and the company reputation you have spent so much to develop. The drawback to the franchisee, of course, is that the parent company may require you to do things that are in their best interest but not yours, and may manipulate you and/or your contract to do so…

An article that turned up this week in the Advertising Age online report talks about how our old friends at Burger King are trying to get all of their franchisees to go along with a four-month $1 double cheeseburger promotion. There’s no doubt that the promotion would bring people into the Burger King locations; it would be the industry’s lowest price on one of the better-ranked products in its class. In fact, it would be such a good price that the franchise holders would lose money on every sandwich they sold, and since the promotion has no limits on the number a customer can purchase, the whole thing turns into a gigantic loss-leader, with the franchisees footing the entire cost of the promotion. Needless to say, the franchise holders mostly voted a resounding “no!” on this promotion, and some of them are saying that they will refuse to honor it…

In response, the company is demanding a re-vote, saying they will count all of the previous “yes” votes as still being yeses, and anyone who does not vote in the insultingly short time-window will also be counted as a “yes.” In return, the company is promising to tone down several of its ad campaigns that the franchise holders seem to collectively feel are problematic. You might expect that this would mean the widely-disliked “Freaky King” spots, but in fact it refers to some of the more suggestive imagery used in things like this print ad for the “BK Super Seven Incher”. Personally, I think this ad is one of the most ridiculously blatant attempts to sell junk food using sex since Carl’s Junior made use of a television spot showing Paris Hilton washing a car in a barely-there swimsuit while eating one of their larger burgers (and one of the most ridiculous in general), but that’s not really the point…

When you sign a franchise agreement, you are effectively contracting with your franchisor to provide services that would be impossible for a small business to afford on its own, such as national advertising and low-cost raw materials purchased in bulk. In return, you are paying a fee to the franchisor, and usually giving them a cut of your business, as well. If they then use their contractual relationship with you as leverage to require you to pay for their promotional items (the loss-leader burger, in this example) or refuse to provide you with the marketing support you need to be successful, then in my opinion they are in breach of the spirit of the agreement, even if they stay within the letter of your contract. It’s effectively negotiation in bad faith, as well as bad management practice and bad business, and I really hope somebody somewhere challenges all of this in court and takes the parent company to the cleaners…

Alternately, I hope that when the story of these practices gets out, the price people are willing to pay for a Burger King franchise drops through the floor. Which it might, if enough of us keep talking about it…