Trench warfare in the franchise field
Tish Reisman has sunk $300,000 into her Rita's Italian ice franchise -- with no profit so far.
Eilene Zimmerman writes at CNNMoney.com that even in good times, the relationship between franchisors and their franchisees tends to be fraught. Toss in an economic downturn and things get downright nasty. Iconic brands are facing revolts in the trenches from owners fed up with their corporate parent.
Later this month, a Los Angeles jury trial will begin on a seven-years-old and still festering fight between UPS (UPS, Fortune 500) and a group of disgruntled franchisees of Mailboxes Etc., which UPS acquired in 2001. Quiznos recently settled a class-action lawsuit with its franchisees, while Burger King remains mired in a court battle with store owners over a $1 promotion for double cheeseburgers that cost more than a buck to produce.
Garth Snider, president of FranchiseOpportunities.com, a site that advertises franchises for sale, says the level of complaints by franchisees and franchisors alike “is commensurate with the hard economic times we’re experiencing. This wasn’t an issue three or four years ago, when there was plenty of money to go around, because franchisors weren’t looking to be as aggressive with their pricing.”
When margins are razor-thin and sales slip, disputes are more likely to blow up into major skirmishes. The Quiznos fight featured complaints that Quiznos forced franchisees to buy food and supplies at inflated prices while setting retail prices so low that store owners couldn’t make a profit. Discounts — like those Burger King offered on its double cheeseburgers — are another flashpoint. T.G.I. Friday’s had a small war with its franchisees last year over a two-month promotion that slashed sandwich prices to a money-losing $5 each.
“It’s the divergence between generating volume by forcing your franchisees to charge lower prices and the net effect of that on the actual business owner, who still has to pay the same royalty and the same price for goods,” says Justin Klein, a partner in Marks & Klein in Red Bank, N.J., and lead attorney for the Quiznos plaintiffs. “Essentially, it still costs you $5 to make the sandwich but you’re forced to sell it at $3.95.”
The pressures come on all sides. One of Klein’s current franchisee clients is being forced by its parent company to extend operating hours — even if those extra hours aren’t profitable. “Forcing them to stay open longer means they have more employees there,” he says.
Life in the trenches
Tish Reisman, owner of a Rita’s Italian ice outpost in Tampa, Fla., is facing many of the typical franchisee frustrations. She signed with the Trevose, Pa.-based parent company in June 2007, paying $65,000 for a two-store agreement. Reisman grew up in Philadelphia and had a fondness for Rita’s. She believed that in Florida “Italian ice would be a no-brainer.”
The first store opened in March 2008. The problems began just six months later.
A competing Rita’s opened five miles away. A corporate marketing campaign required her to stand in front of Wal-Mart and Kmart stores handing out coupons, sucking up time and resources she couldn’t spare. Rita’s requires her to sell every new flavor it introduces for 24 days — even if it tanks.
“In November, I had to sell caramel apple, which I was throwing away every two days,” she recalls. Rita’s projected waste from introducing new flavors is 7% and Reisman was given credit for that, but her actual waste was closer to 22%. “It would have been better if I could have decided what flavors would sell, rather than being forced to sell all of them.”
Reisman lost $86,000 the first year she was in business and hasn’t been able to afford to open her planned second store. She’s sunk more $300,000 into the franchise. A single mother with four children, Reisman is worried about bankruptcy.
Read more at: CNN Money
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Comments
If you read the whole article at CNN Money you will read some comments from the franchisor.
Basically Rita’s does not really take responsibility. They don’t have to contractually. I hope, however that Rita’s rethinks how they treat Tish and other franchisees and move forward in a positive way.
I have been to Tish’s store numerous times. In fact, I visited her location during its third month of operations. I could see her overhead was way too high, but she was very hopeful. She had two of everything. Two mixers, two cash registers, two of everything. No doubt the store looks impressive, and she could handle a ton of business if it came through the door. However, this looks like another example of over promising and under delivering. Add to it some encroachment from a fellow franchisee less than five miles away and you end serving an Ice Cold business.
Franchisors all know that the honeymoon period is the perfect time to up sell. The devil is in the details, so before you buy a Rita’s make sure you get real numbers and know your territory extremely well. Record everything the Zor says to you and do not sign the contract if what is “said” does not match up to what is written.
In my opinion, Tish has done everything to curb expenses, she employs her family, she promotes her store aggressively and works a full time job on top of putting in 40 hours a week at her franchise. Not only did she end up buying herself a low or no paying job at Rita’s, she has also been forced to take a second job in order to feed her family. I also think Rita’s franchisees would benefit from an Independent franchisee association. I hope they look into it.
There are thousands of franchises to choose from, but only a handful that truly deliver on promises. I love franchising, but sometimes think its success has been its downfall. Often the best franchises are the ones that are the least known. Many of the big name franchises are in the franchise sales business. They advertise, recruit lots of franchisees, get on the top franchise lists, but are more interested in selling franchises than building successful entrepreneurs. There are some, though, that do it right. They only accept a handful of franchisees each year and focus on building successful business people - not building a big namefranchise.
This is an example of when a franchisor has to listen to the franchisee and act as a consultant rather than a dictator. The franchisor should have supported Rita in her ordering decisions because she knows her customers in her region more than the franchisor does.
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