Balancing act: How to create a harmonious franchise system

March 3, 2011

By Steve Coomes


Franchisee lawsuits are among the best known restaurant industry battles, disagreements that in the case several, spurred protracted legal face-offs and staggering unit closures.

But such outcomes needn’t occur. When franchisees and franchisors communicate clearly, consistently and work toward goals that benefit both, disagreements are manageable and sometimes meaningful.

“When conflicts arise, people on both sides have to put their egos aside,” said Frank Barnard, southeast operating partner for Dallas-based Genghis Grill. “Good franchisors know they don’t have all the answers … and a good franchisee—even if he’s grown to 100 units—can’t let his ego get in the way of rationality. It takes compromise.”

While disputes between franchise partners arise from myriad reasons such as egregious markups on food sales or encroachment issues, operators most often pointed to poor communication as a common root cause.

Here are four ways operators can mitigate miscommunication risks that protect both the franchisor and the franchisee.

1. Over-communicate rather than under-communicate. “If you share information franchisees can use to help or protect their businesses, then it’s always good. But even if it’s too much, I’d rather be accused of saying too much than too little,” said Craig Dunaway, president of 225-unit Penn Station East Coast Subs.

“They become disengaged when they feel they don’t have all the facts,” Dunaway said, whose company is based in Cincinnati. He said sharing useful information about ingredient prices, operational procedures and marketing ideas is always valuable, even if it’s overstated. “I’d much rather have them say, ‘Why are you telling me this?’ instead of, ‘Why didn’t you tell me this?’ That doesn’t mean you’ll eliminate problems, but it definitely minimizes the opportunity for problems.”

At Penn Station’s annual franchisee meeting held in February, Dunaway and CEO Jeff Osterfeld held a session in which “we basically put bull’s-eyes on our chests and let the franchisees tell us what they’re thinking,” Dunaway said. During its Franchisee Forum, Dunaway held up a blank sheet of paper and said to the gathering, “‘Here’s our agenda: nothing. You now have the chance to question me and Jeff about what we’ve done in the past and what we’re doing.’”

Dunaway said that of the 25 significant changes made to the Penn Station system in 2010, 21 came from franchisees. “That’s pretty convincing proof that their ideas are valuable to us.”

2. Include franchisees in the brand’s long-range planning. “When franchisees are involved, you increase buy-in and are less likely to get into debates,” said Aziz Hashim, a 40-unit franchisee of Checker’s, Rally’s, Subway and Popeyes Louisiana Kitchen concepts.

“What’s really useful to me is multi-year planning and forecasting,” Hashim said, whose company is based in Atlanta. He cited Popeyes’ CEO Cheryl Bachelder as a prime example of a leader constantly talking about that brand’s future goals. “Franchisors need to let franchisees know what direction the company’s going to take next year, the year after that and five years later. Knowing what’s coming can promote buy-in with franchisees or give them the chance to get out if they don’t like it.”

Ideally, Hashim said, direction for a brand’s future evolves from shared information, not just directives from on high. He said he’s partnered with brands whose leadership dictated their vision without asking franchisee approval.

“Some brands claim to listen to operators, but in reality they don’t value their opinions that much,” he said. “They’re doing the bare minimum, giving token communication to let you think they’re listening to you.”

3. Develop mutual trust through franchise advisory committees. Such groups not only represent operators’ interests effectively, they serve crucial roles in disseminating corporate policy to franchisees.

In a 100-percent franchised system like Straw Hat Pizza, franchisee opinions can carry unusually heavy weight. The 78-store chain’s president, Jonathan Fornaci, said he likes the full-franchise arrangement because “it shows our franchisees we’re not competing against them, that we’re focused on their profitability.”

4. Be flexible about marketing practices. By having operators as the company’s most knowledgeable field representatives the Walnut Creek, Calif.-chain can be unusually flexible with their operators marketing needs. For example, 2 percent of the mandated 3 percent marketing fee is returned to each operator, allowing them to tailor marketing strategies specifically for their unique customers.

“In some parts of California, local advertising is mostly in Spanish, so how can you run a campaign in English in that community?” said Fornaci. “So not only do we allow them to do radio ads in Spanish rather than TV ads in English, we’ll even do customized media for them.”

5. Each party has different goals, so be willing to compromise. “Each group’s interests aren’t always aligned, so people have to put their egos aside and work toward a balance. It’s not hard to come up with the right answer, but it takes work,” Hashim said.

Genghis Grill’s Barnard said since the company maintains a high number of corporate stores (the chain is 55 percent franchised) that helps to to set a clear standard for franchisees and educates concept executives about diverse markets.

“The owners of the concept were actually franchisees of Genghis Grill before they bought the company, so they know how to run stores well,” said Barnard. When there are too many franchised stores, he added, “the tail can wag the dog and the whole thing gets out of balance. But when owners are involved like they are, they really understand the whole situation. That makes great a partnership.”

Topics: Business Strategy and Profitability , Communications , Franchising & Growth , Operations Management

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