A Litany of Complaints in the Booming Franchise Industry : Unhappy Stories Spawn Calls for Tougher Regulation
Sports writer Cary Koegle had spent more than half his life working for someone else, but the newspaper journeyman from Bellflower always wanted to be his own boss.
So in 1991, Koegle retired early from the Pasadena Star News, cashed in his employee savings plan and went shopping for a business. At a franchise trade show in Anaheim, the Sign-A-Rama booth caught his eye. After investing $30,000 in a franchise, Koegle and his two sons opened a sign-making outlet in Orange.
But Koegle’s dream faded as the business faltered. His financial woes worsened, and he was forced to sell his home.
Last January--on moving day--Koegle had a heart attack. Two days later, the 48-year-old was dead. His son places part of the blame on stress from the failed business. “He knew he had been naive,” Charles Koegle said. “He felt very depressed.”
The Koegles’ is one of many unhappy stories in the booming franchise industry. The complaints have grown so loud that state and federal regulators are considering an overhaul of franchise laws that in many cases have not been updated in more than a decade.
Newcomers to the business--which now counts more than 558,000 franchise units--aren’t the only ones with complaints:
* Richard L. Cohn, a Chicago businessman who has owned Taco Bell franchises since 1983, alleged in an August lawsuit that Irvine-based Taco Bell engaged a corporate spy in an attempt to drive him out of business. Taco Bell denies the allegations.
* Also last summer, a frustrated franchisee of Anaheim-based Carl Karcher Enterprises sued the company for willfully misleading him on the value of a dozen Carl’s Jr. restaurant franchises in Arizona. What made the suit unusual was that the plaintiff was Frank Karcher, the company’s former vice president of franchising and a brother of founder Carl N. Karcher. The suit eventually was dismissed.
* Late last month, Ventura County residents Alexander and Sabrina Shin filed suit against Karcher Enterprises in Santa Ana Superior Court, alleging that the company misled them on the value of eight restaurants they purchased in 1990. They contend the firm fraudulently assured them that the Northern California restaurants were likely to turn a profit, even though a company study indicated that they would lose money. A Karcher spokesman declined comment on the suit.
* Militant franchise holders have formed two trade groups to lobby legislators and exchange information.
Franchisers offer their own litany of complaints about the $803-billion-per-year industry, whose rapid growth has transformed the way people eat, shop and work. Many companies say longstanding franchisees won’t acknowledge a dramatic change in consumer buying patterns.
“This whole industry has changed,” said Jonathan Blum, spokesman for Taco Bell, which is alienating some franchisees by selling its Mexican-style fast food through a growing array of unconventional outlets, including kiosks, carts and grocery stores.
Other franchisers argue that agreements signed decades ago are woefully out of date. “We’re trying to ensure that we don’t become tomorrow’s Hula Hoop, and (franchisees) aren’t willing to help,” fretted one franchising executive.
Legislators and regulators in California and beyond want to settle the feud.
U.S. Rep. John J. LaFalce (D-N.Y.) has introduced three bills that would force franchisers to make fuller financial disclosures and otherwise bolster protection for franchisees.
In California, State Sen. Steve Peace (D-Chula Vista) last month introduced legislation that would allow California-based operators to sue out-of-state franchisers in state courts rather than having to file in the franchiser’s home state.
A number of states are reviewing a groundbreaking law passed in Iowa last year that established what proponents call a “franchisee bill of rights.” A federal court struck down part of the Iowa legislation, and franchisees lost a hard-fought battle last year for similar protection in Texas.
But “franchisees tasted blood in Iowa, and they’re going after the same protection elsewhere in the country,” said Susan Kezios, president of the newly formed American Franchisee Assn. in Chicago.
While legislators consider new laws and franchisers offer proposals for self-regulation, franchising continues to flourish--especially in the retail, restaurant, and home and office service sectors. The International Franchise Assn. projects that total franchise sales will hit $1 trillion by the year 2000.
Franchising is an especially appealing alternative for people who have lost jobs with big companies--or who start businesses on the side in anticipation of being laid off.
There’s certainly no shortage of opportunities.
The cover of Irvine-based Entrepreneur magazine’s January issue boasts that in California alone there are “over 777” different franchise opportunities. The magazine is chock-full of ads that promise financial security, big money and unlimited income--including one from a Mississippi company that for $599 offers entry to the “$12-billion a year untouched market (for) renewing tennis shoes.”
But the dramatic growth is generating controversy. In California, complaints “have definitely been on the uprise in the last couple of years--partly because of the proliferation of franchise trade shows that target all the people who have been laid off from work,” said Judy Hartley, a lawyer for the state Department of Corporations.
The International Franchise Assn. urges consumers to “do their homework, to check with lawyers and accountants,” said spokesman Andy Trincia. “We are always telling people that if it seems to be too good to be true, then it probably is.”
Dean Sagar, economist for the House Committee on Small Business, notes that “a whole franchise industry developed in the mid-1980s--enormous chains were set up merely to sell franchises. Unlike the established franchisers, such as McDonald’s, these new franchisers (don’t) have a proven concept.”
Some established franchisees, dealers and distributors also are grumbling about what they perceive as shabby treatment from their longtime corporate partners.
A growing concern is encroachment on a license holder’s territory by other franchisees--or the company itself.
Yorba Linda resident Danny Stone, who operates a Snap-On Tools franchise, complains that the Wisconsin-based company has shrunk his territory in recent years.
“It’s like having a gym floor that takes one guy an hour to sweep: You could hire three more guys, cut everyone’s salary and get the job done in 15 minutes,” said Stone, 42.
Tommy Clark, Snap-On’s director of franchise operations, defended the Wisconsin-based company’s decision to cut back Stone’s previous territory to 225 customers from 300. “If you call on your customers once a week, there’s no human way you could service more than that,” Clark said.
Across the country, newly militant franchisees are banding together. After just more than a year, the American Franchisee Assn. claims 13,000 franchised locations under its umbrella, including holders of Taco Bell, Dunkin’ Donuts and Jack in the Box franchises.
Another organization, the San Diego-based American Assn. of Franchisees & Dealers, says its charter is “providing a counterbalance in the franchising industry.”
The emergence of those groups hasn’t gone unnoticed by the International Franchise Assn., long the industry’s dominant trade group. Last year, the IFA took the unprecedented step of inviting franchisees to join the organization. The 33-year-old IFA, which represents most of the biggest franchise names, also created a voluntary dispute-resolution program and crafted what its officials describe as a tough professional code of ethics.
“By and large, the vast majority of franchisees are happy and making money, but there are some who aren’t happy, and there’s enough dissension that the board of directors recognized that it’s time for more teamwork,” spokesman Trincia said.
But officials at the newly formed franchisee organization question whether the IFA’s invitation to franchisees is sincere.
Flexing its new-found muscle, the American Franchise Assn. anheld its first national meeting in Las Vegas last week--on the same days that the IFA held its annual meeting.
The Most Popular Franchises
Franchises accounted for more than $803 billion in 1992 retail sales--35% of all retail sales in the United States. They employ 8 million people--an average of eight to 14 per establishment. Here is a list of the most popular categories of “business format” franchises, those that offer franchisees a complete system of doing business.
Franchise Sales in billions: Restaurants: $85.5 Non-food retailing: $31.4 Hotels, motels: $26.0 Business services: $20.8 Auto products, services: $15.4 Convenience stores: $15.0 Retail food (non-convenience): $12.1 Auto-truck rental: $8.0 Construction, home improvement: $7.1 Recreation: $4.8
* Figures are for 1991
Source: International Franchise Assn.
