Econo Lube Is a Case Study in the Risks That Franchisees Face

Randy Cressall has draped banners around his Econo Lube N’ Tune franchise in Chatsworth stating boldly: “Independently Owned and Operated.”

It hasn’t helped. Sales are down 35% over the last year and a half; he has laid off a third of his staff.

George Apkarian toils six days a week and has made customer service a priority, but business at his Econo Lube franchise in Santa Ana has dropped 15% in the last year or so.

Fernando Frias worked hard to build his Lake Forest franchise into a profitable shop that took in $14,000 a week. Now, with his business in ruins, he’s contemplating personal bankruptcy.

Throughout the Southland, the tale is the same for franchisees who have been reeling for the last 18 months from the heavyweight punches taken by Econo Lube N’ Tune Inc., the Newport Beach-based auto repair company. A 1998 television report focused on shoddy and unnecessary work performed at some outlets, the state sued the business over similar claims, and the company expanded too quickly, leading it to Bankruptcy Court last month.

While franchising is often touted as a way for small-business owners to capture a piece of a well-known regional or national operation and benefit from a respected brand name, independent franchisees can find that their reputations and even the very survival of their businesses are at the mercy of anything that the company or another franchisee does.

“A person takes a number of risks when they become a franchisee,” said Lewis Rudnick, a franchise lawyer in Chicago. “They rely to a great extent on their franchiser remaining solvent, [staying] competitive in their industry and acting ethically.”

Apkarian had great expectations when he bought his shop 2 1/2 years ago. But, he said, “In the time I’ve been here, I’ve seen more bad than good.”

To be sure, the company and a few franchisees did much of the damage to themselves.

A hidden-camera expose by NBC’s “Dateline” in July 1998 revealed five of Econo Lube’s 173 franchisees performing shoddy or unnecessary work. At the same time, the state sued the company, charging that numerous company-owned stores sold customers unneeded parts and services.

Earlier this year, California regulators yanked the licenses of 18 company-owned stores and assessed fines and restitution totaling $2.5 million to settle the 1998 suit. Econo Lube did not admit to any wrongdoing in agreeing to the sanctions.

The company also ran into financial trouble by expanding too quickly in recent years, forcing it to close 36 money-losing shops recently and file for bankruptcy protection last month while reorganizing debts, said Sean O’Keefe, Econo Lube’s bankruptcy lawyer.

Econo Lube executives downplay the effect their actions have had on franchisees. They prefer to look forward to a time when bankruptcy is behind them and the company, with 247 shops in 15 states, is running smoothly again.

“We are truly streamlining our operations,” said Dave Schaefers, the company’s vice president of franchise development. “This is viewed as an opportunity, not as a huge PR problem.”

However, for Econo Lube’s small-business owners who bought franchises and ran them without a glitch, the company’s predicament has become their own--and they don’t like it.

More than 100 Econo Lube franchisees in California banded together to pressure the company into making concessions, including a reduction in royalty rates from 6.5% to 5% of revenue, said Paul Zwerdling, a Cypress franchise owner and board member of the Econo Lube N’ Tune Franchise Owners’ Assn.

Don Gentry, though, gave up. For about $100,000, he recently bought out the franchises for his Indio and Cathedral City shops, changed the Econo Lube signs to his own Best Lube N’ Tune and saw sales climb 30% at each shop.

“I’m tickled pink because I’m free of them,” Gentry said. “I don’t send them any rent, any royalties or any advertising fees. I’m in charge of my own destiny.”

For many other franchisees, it’s not so easy. Options are few, and none is desirable. They continue to pay for the black marks that others put on their business name.

Econo Lube franchisees are not the first, nor are they likely to be the last, to suffer from the sins of franchisers or fellow franchisees.

In the early 1990s, 7-Eleven franchisees endured the stain of the company’s short-lived bankruptcy. In 1993, many Jack in the Box franchisees experienced a precipitous drop in sales after four children died and hundreds of people fell ill after eating hamburgers tainted with the E. coli bacterium. At Rico’s Pizza Inc. in Sacramento, franchisees saved the chain only by wresting control of it from the company’s owner during bankruptcy proceedings, said Patrick Carter, a franchise attorney in Sebastopol, Calif., who represented Rico’s franchisees.

The drawbacks notwithstanding, more and more businesspeople are opting to become franchisees to take advantage of existing brand names, operating procedures and national advertising. The number of U.S. franchise outlets now totals 320,000 and is increasing 10% to 12% a year, said Don DeBolt, president of the International Franchise Assn. in Washington.

Still, prospective franchisees should exercise caution before parting with their cash, said Robert Purvin, president of the American Assn. of Franchisees and Dealers and author of “The Franchise Fraud.”

“If you buy into a franchise with a well-known trade name, well-conceived marketing strategy and a good relationship with franchisees, that can be a path to terrific success,” he said. “On the other hand, if the franchiser behaves badly or treats its franchisees poorly, your business can go down in flames.”

Former Econo Lube franchisee Frias knows just how awry things can go. In 1992, he took a job as manager at an Econo Lube in Lake Forest, learned as much as he could about the operation, saved his money and vowed to one day own the shop. Four years and $225,000 later, he did.

In the beginning, his store serviced about 250 cars a week and grossed about $14,000, providing him with a decent living, he said.

That all changed in July 1998 after the “Dateline” TV segment. Frias’ shop was not one of those alleged to have performed shoddy or unneeded work, and he and two other franchisees represented the company on the “Dateline” segment.

Still, after the story aired, revenue at Frias’ shop plunged 30%. Despite offering specials and personally visiting more than 100 local companies to drum up business, Frias was unable to turn things around.

Late last year, he laid off two of his eight employees and began borrowing against credit cards to meet payroll and pay rent.

Frias’ wife, already overwhelmed by the pressures of juggling job and family duties, suffered a nervous breakdown, partly because of the added financial pressures, he said.

“We saw our business going down the drain and our bills piling up,” Frias said. “We felt there was no way out and that we would lose everything.”

Then sales were hit again this summer after news reports about Econo Lube’s settlement with the state. By late summer, Frias was down to about 100 cars and $8,000 in weekly sales, far below what he needed to cover the bills.

Most disturbing, Frias says, was that Econo Lube, the company he defended before a national audience, did nothing to lighten his burden. He believes the company should have at least slashed or suspended his rent payments and waived royalties.

Instead, the company evicted Frias from his store in September for failing to pay rent for six months. With $50,000 in credit card debt, he plans to file for personal bankruptcy by year’s end.

“I’m bankrupt because of Econo Lube N’ Tune. They’ve ruined my life and dreams,” said Frias, 35, who now works as a service manager at a Goodyear Tire & Rubber Co. store, earning about half of what he once did.

Econo Lube disputes his account, saying only that Frias’ sales actually increased after the company’s troubles began. “I don’t know where all his money went,” Schaefers said.

Cressall, owner of the Econo Lube in Chatsworth, sympathizes with Frias’ plight. Given all that’s happened, he says, he wants out and is negotiating a buyout with the company.

Having spent $100,000 of his retirement nest egg to keep his outlet afloat, Cressall said he is angry that Econo Lube’s tarnished name has rubbed off on him and his business.

“I really regret that there’s nearly nothing I can do to get rid of this guilt by association,” said Cressall, 57.

“I feel bad because people look at me and might think I’m dishonest and doing the same types of things they believe the company has done.”

Times librarian Sheila A. Kern contributed to this report.