If there was one theme that ran throughout the recent DDIFO National Conference held at Foxwoods Resort Casino, it was “Be vigilant.” The theme framed discussions on franchising, government relations, Dunkin’ Brands’ new franchise agreement and the competitive landscape facing QSRs like Dunkin’ Donuts. And while some speakers presented the theme in more desperate terms than others, there was no doubt that franchisees who attended the annual conference returned home with a sense that the franchising industry in general, and their business units in particular, are facing great challenges in the coming new year.
The Franchising business
As a successful multi-unit franchise owner, the chairman of the International Franchise Association (IFA) – and now the head of a private equity firm that buys franchised brands – Aziz Hashim has a broad and insightful view of the industry. He started his career in franchising in 1996 with one QSR location and has built a network of restaurants with brands like Popeye’s, Domino’s and KFC to become one of the top 200 franchise operators in the country.
“We’re business people. Our job is to make money, whether there is good [economic] news or bad news,” he told the assembled crowd in the Grand Pequot Ballroom. During Hashim’s hour-long presentation, he warned franchisees they need to be prepared for an economic slowdown. He cited comments from experts like Morgan Stanley Chief Economist Ellen Zentner, who said, “We seem to be moving into the late phase of business expansion with credit issues, earnings under pressure and job growth slowing.” Echoing the voices of experts on both sides of the political spectrum, Hashim said a recession could be five or seven years away. His point was that franchisees should be vigilant and understand how to take advantage of the economic cycles that have repeated throughout history.
“We, as business people, have to read the tea leaves,” he said. “We are professional risk-takers, so how do we take advantage of what could be a potentially down cycle?”
He cited three important steps to be ready not just for a downturn, but also for the inevitable recovery: 1) Sell low-quality assets at premium prices; 2) consolidate, simplify and refinance holdings; 3) remove personal guarantees and cross-collaterals.
“Money is made [at the bottom] because you buy stuff cheap and you get rid of it [at the top].”
Underscored throughout Hashim’s National Conference Keynote Address Monday morning was the idea that “You have to do your homework,” because the threats from economic slowdowns and government overreach, from customers who don’t understand franchising and from franchisors that don’t always have the best interests of franchisees in mind, are all real. But, so are the opportunities.
“You do your homework, you figure out where you want to be. And afterwards, you upgrade your holdings. Because when it turns around, guess what? Good assets are a little bit cheaper,” Hashim explained. “During the downturn, the price gets just low enough to where it’s possible to buy.”
Hashim is an example of someone who does his homework—not just in his business as a franchise owner. In a presentation to the National Conference on Tuesday, Hashim made the pitch to franchisees that they should be franchisors as well, through the private equity fund he runs, which buys undervalued brands like Frisch’s Big Boy and Fuzzy’s Taco Shop, and has franchisee partners operate the businesses, then get paid from both sides of the ledger. Clearly it’s why Hashim says franchising is “perhaps the best business invention ever, so we are in the right business.”
Vigilance Closer to Home
DDIFO General Counsel Carl B. Lisa learned years ago that vigilance was an important tool for engaging with Dunkin’ Brands. Vigilance paid off in 2011 when Dunkin’ Brands agreed to a new process of negotiating changes to the franchise agreement. He’s called 2011 “a watershed moment,” because there was a general understanding that franchisees would have opportunities to review any material changes before they became the rule.
That changed this year when Dunkin’ Brands filed a new franchise agreement, which Lisa characterized as a “step backwards,” and he used the platform of the National Conference to lay out some of the reasons why. Even though Dunkin’ rescinded the changes for the remainder of 2016, Lisa said there is no telling what might be included in a 2017 version, which is being drafted now.
Among the more notable changes included in the brand’s 2016 agreement were those resulting from the National Labor Relations Board’s Joint Employer decision. For example, the brand wrote that franchisees now “have the sole right and responsibility to exercise day-to-day control over your franchised business,” and added specific terms like training, disciplining and scheduling of employees in order to “distance itself from liability of the acts of franchisees,” Lisa said.
In addition, the brand wrote into the 2016 agreement important specific changes that gave it much broader rights of first refusal around transfers involving franchisee ownership, whether through sales of stock or through gifts to family members.
Lisa was quick to remind National Conference attendees that his law firm reviewed the changes at the behest of DDIFO and characterized membership in the organization as valuable because it is focused entirely on the well-being of its franchisees.
(DDIFO published details of the franchise agreement changes in the June/July 2016 issue of Independent Joe).
“Who’s watching out for this other than the DDIFO?” he asked, noting that the Brand Advisory Council didn’t spot these changes, nor did it trigger any franchisee lawyers to conduct a review.
Lisa suggested that franchise owners would be far better served if the BAC pressed Dunkin’ Brands to return to its previous practice of providing a final draft of the next year’s proposed agreement, featuring tracked changes of language from the prior agreement. Echoing the theme of vigilance, Lisa also reminded DDIFO members in attendance that, unless the BAC gets to the table with Dunkin’ in short order, the new 2017 agreement will be filed and “franchisees will have zero input.”
If you’re not at the table…
Washington insiders like Michael Layman, the VP of Regulatory Affairs for the International Franchise Association (IFA), have an expression they like to use when convincing franchisees why it’s important to develop relationship with their lawmakers. “If you’re not at the table, then you’re on the menu.”
In a year when the franchising industry is under increasing pressure to comply with challenging labor and tax regulations, franchisees have more incentive than ever to have their voices heard.
“You are a special interest and you need to start acting like one,” Subway franchisee Keith Miller said. “A congressman will always take a meeting with you and you can voice your opinion with someone who actually has a vote.”
Miller, who is also chairman of the Coalition of Franchisee Associations (CFA), was a key figure in the passage of California’s Fair Franchising legislation and remains active on issues affecting the industry. He reminded the audience that many tax and regulatory issues begin at the local level and eventually find their way to Washington, so it’s important to develop relationships with their local lawmakers.
Joe Giannino, the founder of Government Relations Group, which works with DDIFO in Dunkin’s home state of Massachusetts, said policy makers want to hear from franchisees and learn about their business. “If you don’t speak up, you forfeit the right to complain when government does what it does.”
Giannino and franchisee Rob Branca, who serves on the BAC, have worked closely to change the language of the Massachusetts state law regulating which employees are allowed to receive tips. Branca has seen firsthand how a local public servant can move into a position of influence in the government. His neighbor, Karyn Polito, served on the Board of Selectmen in their hometown of 35,000 people before going on to serve in the state legislature – she is currently the Lieutenant Governor of the Commonwealth. Branca uses the story to reinforce the point that, local business owners should have relationships with the people who make the laws that govern them.
Panelist Chirag Shah, the vice president of the Asian American Hotel Owners Association (AAHOA), which is the largest hotel association in the world, said lawmakers often don’t understand how franchisees support their local communities and assume that the brand can absorb higher labor costs and pass it down to consumers without causing any pain. That’s why it’s up to the franchisee to help educate those lawmakers.
“You have more power than the average voter because of the influence you have in your community, as an employer and a taxpayer,” which is why, Shah said, when a franchise owner meets with his state representative or mayor or congressman, he represents the interests of a great many people and can leverage that to influence the lawmaker’s understanding of an issue.
The competitive landscape
DDIFO welcomed restaurant analyst Roger Lipton on a panel with its own John Gordon and Bloomberg Intelligence reporter Michael Halen to discuss Wall Street’s perception of Dunkin’ Brands and the DNKN stock. And, while all reiterated why investors like Dunkin’s “asset light” model, where franchisees invest – and risk – their own capital, they were quick to note that Starbucks has greater national penetration and a darling CEO in Howard Schultz.
Lipton, who has written extensively about the economic factors plaguing growth in the restaurant sector, said one of the biggest challenges operators face is maintaining a strong workforce. “You are really in the adolescent training business,” he reminded the audience, prompting franchisees to be more vigilant in how they hire, train and retain workers.
And, while the panel explored how competitors like Starbucks, McDonalds and local convenience stores measure up to Dunkin’ Donuts, Gordon emphasized that Canadian coffee and donut giant Tim Hortons should be included in any conversation about Dunkin’ competition.
“Tim Hortons continues to open new restaurants in U.S. markets and expand recognition of its brand,” Gordon said.
Halen, who has researched and analyzed restaurant performance since 2011, reminded franchisees that their business model is built on an important premise. “You are selling an addictive product. People love their coffee and will continue to buy it even if the economy struggles.”
Still, he and the others reinforced the message that franchise owners need to remain vigilant if they are to ride out the competitive and economic challenges they face now and in the future.