Franchisees Organize to Counter Company Power

By MARC BALLON

Feb. 23, 2000 12 AM PT

TIMES STAFF WRITER

John Boyd, a Mail Boxes Etc. Inc. store owner for the past 11 years, became furious when the company mandated that franchisees like himself spend up to $55,000 to remodel their stores.

To Boyd, who said his California, Md., establishment didn’t need a face-lift, it was like taking money straight from the till.

Instead of going along, Boyd decided to fight. On Jan. 29, he and four other Mail Boxes Etc. owners formed an independent association for franchisees. In less than a month, the group has signed up more than 200 of the company’s 3,500 U.S. franchisees, and Boyd said he hopes to add 800 more members by the end of the year.

Like Boyd, growing numbers of franchisees across the nation are banding together to form independent franchisee associations. Emboldened by the success of independent groups at Burger King Corp. and elsewhere, franchisees are battling as never before to shift the balance of power in their direction.

Anger over systemwide changes such as remodeling agreements are among the top reasons franchisees have organized, the groups say. They are also rankled by new stores opening too close to existing franchisees, and they chafe at having to buy from franchisers’ designated suppliers, who sometimes charge higher prices and give rebates to franchisers. Franchisee groups are increasingly trying to form purchasing cooperatives to cut costs.

In some instances, the groups have pressured companies to renegotiate franchise agreements and treat them more like business partners and less like hired hands, said Robert Zarco, a franchise lawyer in Miami.

“Franchisees are taking a page from the labor movement of the 1920s and 1930s and are beginning to organize into independent associations, which gives them an ever increasing voice and leverage,” said Robert Purvin, president of the American Assn. of Franchisees and Dealers in San Diego and author of “The Franchise Fraud.”

In 1992, there were fewer than 30 independent associations, Purvin said. Eight years later, there are 250. Such associations have long existed at larger chains where master franchisees with scores of outlets have traditionally wielded lots of power. But it is only recently that they have begun appearing at such smaller systems as Submarina Inc., a San Diego sandwich chain, and Econo Lube N’ Tune, a Newport Beach auto repair company.

But franchisers, though less hostile than a few years ago, tend to regard the associations with suspicion.

San Diego-based Mail Boxes Etc., for example, so far has declined to recognize the new independent association, preferring instead to work through its existing franchise advisory council, which it funds.

“If franchisees come to us, we’re really good at sitting down and solving any problem with them,” said Don Higginson, the company’s senior vice president of franchise relations. “The critical mass of franchisees at MBE are very positive.”

Mail Boxes Etc. rescinded the remodeling requirement that sparked Boyd’s ire, but he and other franchisees have no plans to disband the group.

The proliferation of franchisee associations, advocates argue, is a reaction to the power franchisers have amassed in recent years. As companies have grown in size, they have grown more aggressive with franchisees, said Ann Dugan, a professor of business at the University of Pittsburgh and author of the book “Franchising 101.”

For instance, franchise agreements have grown to over 100 pages in some cases, up from three to four pages in the 1970s.

Franchisees have received support from the U.S. House of Representatives. A bill that would protect the right of franchisees to form independent associations and prevent the termination of franchise agreements without good cause has garnered bipartisan backing from 42 co-sponsors, said Rep. Howard Coble (R-N.C.), the legislation’s coauthor.

“The purpose of this bill isn’t to make life miserable for franchisers,” said Coble, who hopes Congress will act on his proposal later this year. “It’s simply to try to insert some sort of civility and fairness into the equation as it relates to franchiser-franchisee relations.”

That hasn’t been a problem for several years at Burger King. In 1995, the company and the Burger King National Franchisee Assn. hammered out a new franchise agreement that addressed several franchisee concerns. The most noteworthy requires Burger King to compensate a franchisee if a new restaurant siphons away a significant amount of business, said Diann Banaszek, a franchisee who helped negotiate the agreement.

Burger King and the independent association, which now represents 1,700 franchisees who own 7,500 outlets, have built on that agreement. Company executives and franchisees sit on several joint committees that address such subjects as marketing, operations and government affairs, Burger King spokesman Rob Doughty said.

“We really work hand-in-hand with them, which is good for both of us,” he said. “We have all our debates internally. So by the time we’re ready to roll something out publicly, we’re pretty much lock-stepped as a system.”

Collaboration also defines the relationship between executives and franchisees at Great Clips Inc., a hair-salon chain based in Minneapolis. Management and members of the Independent Assn. of Great Clips Franchisees have met several times to discuss an array of franchise issues since the group’s inception in 1998, association president Ken Hand said. “We’re buying fire insurance before the house sets on fire,” he said.

Sometimes franchisers agree to do business with franchisee associations only when times are desperate. That’s what happened at struggling Econo Lube N’ Tune, which has since filed for bankruptcy protection.

The company initially refused to recognize the Econo Lube N’ Tune Nationwide Owners Assn. and even considered creating a competing franchisee group under its control.

Only after the independent group had attracted more than 100 members did Econo Lube come around and make some concessions, including a reduction in royalty rates from 6.5% to 5% of revenue, said Cypress franchise owner Paul Zwerdling, the association’s president.

“We’re definitely seeing a willingness from Econo Lube to improve the relationship,” he said. “They are reliant on us for royalties to pay off their Chapter 11 debts. I think they need us more now than we need them.”

Econo Lube executives could not be reached for comment.

Their recent successes notwithstanding, independent franchisee associations have yet to gain widespread acceptance among franchisers, said Susan Kezios, president of the American Franchisee Assn. in Chicago, a trade association with 16,000 members nationally.

“The more enlightened franchisers know they have nothing to fear, but the majority of the franchisers want nothing more than to crush them,” she said. “They perceive the independent associations as a threat, because they believe they will lose control if franchisees get together.”

Jackson Hewitt Tax Service in New Jersey doubled the size of its existing franchise advisory council just before an independent association came into being, said Robert Schiesel, president of the Independent Assn. of Jackson Hewitt Franchisees. Though the 8-month-old group claims to represent nearly half of Jackson Hewitt’s 650 franchisees, the company said it prefers communicating with franchisees through existing channels.

“The franchisee associations that franchisers create are paid for by them and often toe the line,” Dugan said. “They’re not going to advocate too many changes on behalf of franchisees, especially if they’re adverse to franchisers.”

Some franchisees so fear retribution from franchisers that they decline to join independent associations or do so secretly. McDonald’s franchisees formed a clandestine group in 1996 called Consortium Members Inc., said Dick Adams, Consortium president and a former McDonald’s franchisee. The group, which claims 350 members, serves as a “watchdog.”

Testifying before the House Judiciary Committee’s commercial and administrative law subcommittee, former Taco Bell franchisee Darrell Dunafon said the company took punitive actions against him after he became president of the restaurant’s independent association in 1993. Among other things, Dunafon said, the Irvine-based company denied him the right to open new outlets. Dunafon sold out in 1997 and sued Taco Bell, eventually reaching a settlement in 1998, according to his testimony.

“I was driven from the system and had my livelihood taken from me,” he said.

Taco Bell spokeswoman Laurie Gannon declined to discuss Dunafon but said, “Today we have great relationships and work and cooperate with our franchisees.” Taco Bell’s independent association ceased operating in 1997.

Despite the hard line of some franchisers, independent associations should gain more acceptance and power, said Andrew Selden, a franchise attorney in Minneapolis.

Franchisers are realizing that their companies run better by consensus than by edict. Companies ignoring that lesson do so at their own peril, Selden said.

“Franchisers that take a tough attitude are digging their own grave,” he said. “The system will be so consumed with internal fighting and turmoil that it will lose its competitive edge.”

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Franchising at a Glance:

* An estimated 1,500 franchise companies operate in the U.S., doing business through more than 320,000 retail units.

* Seventy-five industries use franchising to distribute goods and services to consumers.

* Average initial investment levels for nearly 8 out of 10 franchises, excluding real estate, is less than $250,000.

* Average royalty fees range from 3% to 6% of gross sales.

* Most franchise companies have fewer than 100 units.

* Average length of franchise contract is 10 years.

Source: International Franchise Assn.

Top 10 Franchise Industries

1. Fast food

2. Retail