As franchisee profits were declining, brand leaders initiated cost-cutting moves to help bolster its earnings—ignoring a plea from its independent franchisee association to get together and talk about the issues that were crippling the company. This was the climate at Jack in the Box in July 2018 when its independent franchisee association, the JIB-NFA (National Jack in the Box Franchisee Association), began publicly calling for the brand’s CEO to be replaced.
In a statement to QSR Magazine, JIB-NFA President Rabi Viswanath said, “We feel it is time to advise Jack in the Box’s other stakeholders, its investors and employees, so they gain an understanding of the gravity of the situation currently existing in the Jack in the Box system and why sales and transactions are on the decline, and perhaps they can offer suggestions on how to help solve these problems.”
The squabble was widely reported, and in December 2018, JACK stock had lost 18 percent of its value. The company began talking about a sale to maximize its shareholder value, but that still hasn’t materialized. The stock has hovered slightly about $80 a share since February.
Tabitha Burke is executive director of the JIB-NFA, which was formed in 1995 in response to the outbreak of e-coli bacteria at Jack in the Box restaurants two years earlier. That outbreak infected over 700 people and killed four children. Burke says there was a time when the JIB independent association worked closely and collaboratively with corporate leadership, calling the relationship “intermingled.” But more recently, as problems arose, the relationship has strained.
“Franchisees felt the company was listening, but nothing was happening,” Burke says. The “deaf ears” are what finally prompted association leadership to vote no confidence in CEO Lenny Comma.
As franchising grows and well-capitalized franchisees invest millions into expanding major food and service brands, franchisee associations are having more impact than ever. Just last year McDonald’s created an independent body, the National Owners Association (NOA), to ensure “owners have net cash flow growth, financial viability and are immune from intimidation and retribution,” according to the association website. Same store sales have softened at McDonald’s and the franchisees are spending heavily on renovations, remodels and new technology like ordering kiosks. As investors, franchisees have an expectation that their voices should be part of the conversations that guide the company. As representatives of those investors, independent franchisee associations are making their voices heard.
“Like franchising, independent franchisee associations have grown more sophisticated over time. Today, they are willing and able to step up and take action when members feel they are not being treated properly or fairly by their brands,” says DDIFO Executive Director Ed Shanahan. “They are the ones with skin in the game.”
It has been nearly 10 years since DDIFO invited renowned franchise attorney Robert Zarco to address Dunkin’s practice in the early 2000s of suing franchisees to churn them from the system. DDIFO also invited a reporter from The Boston Globe to attend the meeting and talk with franchisees. As the Globe reported it, Dunkin’ was “aggressively targeting shop owners in an effort to terminate store agreements and collect hefty penalties for alleged contract violations.”
The incident marked a low in the relationship between Dunkin’ franchisees and their franchisor—but it facilitated a change of leadership in Canton. New company chief Nigel Travis reorganized the C-suite and General Counsel Steve Horn left the company. Throughout Travis’s tenure, and now under CEO Dave Hoffmann, Dunkin’ has worked more collaboratively with its franchisees. All would agree the result is a stronger brand.
“Franchisees are there to grow the brand. If you don’t have happy franchisees, they’re not building, developing and rehabbing. If they are not happy with the brand, they are not growing the brand. Building the relationship helps grow the brand,” according to Burke.
But in an industry that is responsible for six percent of the nation’s gross domestic product, fairness is not always the guide for how franchisors and franchisees divide the profits. Keith Miller, a Subway franchisee and former president of the CFA, characterized it this way in testimony on Capitol Hill this summer, “Here is the problem in the industry: Far too many profit from the sale of a franchise, yet far too few, if any, are held accountable for the success of the franchise purchaser.”
Miller was among a group of franchisee advocates appearing before the Senate Committee on Banking, Housing and Urban Affairs on July 17. Weeks later, Sen. Catherine Cortez Masto (D-Nev.), the ranking minority member on the Subcommittee on Economic Policy, filed legislation to boost accountability.
Her bill, the SBA Franchise Loan Transparency Act of 2019, would compel franchisors to provide accurate and complete revenue and store closing data – including average and median first year revenue for all franchises, and the number of first year failures – before the franchisee could qualify for a government backed SBA loan.
Franchise owners across the spectrum often complain that the information contained in the Franchise Disclosure Documents (FDD) that companies are compelled to provide to the Federal Trade Commission is neither accurate nor transparent—a point Miller made in his testimony.
“The franchise business model can be, and should be, a model for economic mobility and realizing the American Dream. However, leaving the industry to police itself is not working, and is destroying lives while some profit. There is no reason for this, and access to SBA money should be the model of transparency for the industry, one that ensures the best underwriting procedures to those in search of the American Dream.”
Fighting for franchisee interests
Yet, not all franchisees can even qualify for an SBA loan. The government refuses to back investors in the 7-Eleven system, even though the chain routinely scores high on Entrepreneur Magazine’s annual ranking of top franchises. (7-Eleven was No. 2 on the list in 2018, but fell to No. 10 in 2019 because of what the magazine described as “a long-¬standing and increasingly noisy confrontation with many of its franchisees.”)
“7-Eleven is unique among established franchise systems because it is easy to get in with a low investment,” says Jaspreet Dhillon, a Los Angeles area franchisee and treasurer of their independent franchisee association, the National Coalition of Associations of 7-Eleven Franchisees (NCASEF). “As a first business, it can be good, but [7-Eleven] controls everything.” Not only that. 7-Eleven franchisees have to split profits with their brand instead of paying royalties. In the new agreement 7-Eleven rolled out in 2018, the graduated gross profit split topped 54 percent for high performing stores in the chain—leaving just 46 percent for the franchisee.
When he bought his first 7-Eleven, Dhillon says, the company paid 100 percent of a store’s credit card fees and provided a 25 percent commission on the sale of gasoline. But, after the chain came out with a new franchise agreement in 2005, gas commissions fell to 1.5 cents per gallon and franchisees were responsible for 50 percent of credit card fees. Dhillon says it is emblematic of how 7-Eleven has been chipping away at franchisee profits.
“Knowing what they’ve done has made the work of National Coalition more important,” Dhillon says. “The independent association is important for any system, because we can have someone we choose looking through our agreements to make sure they are in the best interest of the franchisees.”
The National Coalition has backed a lawsuit filed by several California franchisees which asserts 7-Eleven exercises pervasive controls over nearly every single aspect of day-to-day operations of its franchised locations – treating franchisees as employees rather than independent business owners. The lawsuit was the latest high profile move franchisees have taken in the hopes of improving their relationship with the corporation, and it was on the court docket when the National Coalition’s leadership – following the lead of Jack in the Box – voted No Confidence in 7-Eleven’s CEO, Joe DePinto.
An unprecedented step
Yet, even with all the turmoil that swirls around franchising, there is one independent franchisee association that has capitalized on the collaborative and respectful relationship it has with its brand. Over the last year, the Planet Fitness Independent Franchisee Association (PFIFA) engineered a systemic change in the franchisee council structure—earning the approval of corporate leaders and the franchisee community. At its annual convention this past May, PFIFA and the Planet Fitness Franchisee Advisory Council (FAC) came together as one entity.
“We saw the opportunity to increase cooperation and collaboration, while streamlining franchisee input and consolidating resources into a single, highly structured entity [providing feedback] to the C-suite,” said PFIFA President Stanley DeMartinis Jr.
“It makes us more streamlined. We don’t have two groups trying to work through [the same issues],” Planet Fitness CEO Chris Rondeau said from the convention stage where he had traveled to help make the announcement. “These groups came together as a family and brought this idea of coming together and unifying as one group. [It] says a lot for who our franchisees are as a team. It’s not about trying to outdo each other, it’s about working together.”
“Our franchisee volunteers were very strategic and thoughtful about how to build our association’s credibility with the franchisor over the years. The franchisor came to respect that the independent franchisee association was not made up of rogue franchisees arguing about every decision, rather invested partners who truly wanted to grow the pie together,” says Kristi Hoffman, executive director of the new Planet Fitness Independent Franchisee Council (PFIFC).
“At the end of the day it was about mutual respect and trust.”
Hoffman points out that unification took time to develop and was possible only because of “effort and strong leadership, putting aside egos to focus on the larger picture.” PFIFC is currently in the process of populating new brand operating committees and will be responsible for facilitating up-to-date committee reports and follow-ups.
Whether the Planet Fitness unification leads to similar shifts in franchising remains to be seen. What we do know is that independent franchisee association efforts to stand up for their members’ interests and pressure corporations and lawmakers for more fairness and transparency are getting noticed. Just like in other industries, when the investors declare they have no confidence in corporate leadership, changes are right around the corner.