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Franchisees Trust Co-ops and Democracy More

ITHACA, N.Y. — In this final piece of a two-part series, Benjamin Lawrence, assistant professor of food and beverage management at Cornell University's School of Hotel Administration, surmises that franchisee associations must support their members' right to assemble and speak, that cooperatives are great instruments for franchise systems, and that democratically elected leaders are important in incorporating sub-groups.   He observes these things through his numerous interviews with franchisees and their leaders from McDonald's to Meineke Car Care.

Lawrence specializes in food and beverage and channels of distribution in the context of franchising. He and Boston University's Patrick Kaufmann worked with many independent franchisee associations in researching how association leaders must walk a thin line between failure and success. They recorded their findings in the Journal of Retailing, Identity in Franchise Systems: The Role of Franchisee Associations.

Lawrence speaks with Blue MauMau to discuss his study.

BMM: I've seen franchisees who are scared to assemble at independent association meetings because they think the franchisor will retaliate against them if they are seen. Surely that perception must hurt association recruiting efforts. What can be done about that?

Summary: Independent franchisee associations should make it a special point to dip into their war chest and support any member who receives retribution by a franchisor because of the member's association with the group or speaking out about the issues it champions.

Lawrence: Associations have come a long way. But there still are franchisors that send no representatives to association meetings. And there sometimes are ramifications for franchisees who are seen to be causing problems with the franchisor.

In these cases, associations sometimes appoint third-party individuals who are not franchisees. That is what Dunkin' Donuts Independent Franchise Owners did. The difficulty is how do you get members engaged in the association if association leaders aren't part of that system? I think DDIFO is facing those challenges.

Meineke is another example. A while back, it was perceived that there was retribution for working with the independent association that was fighting the franchisor. Franchisees were petrified that they would lose their livelihood. Domino's is another example. During its conflict, the franchisor did things that franchisees thought were very punitive.

There certainly is risk in being part of a private association, just like there is risk to any group that goes against a corporation that wants to go one way and they are interested in going another. The best thing an association can do to curb this, and some associations have done this, is to support any franchisee that they view as being punished because of their relationship with the franchisee association or speaking out. KFC has done this in a way because they have a huge war chest. If they feel there is a franchisee member who is being unfairly treated, they will come to the franchisee's aid.

Anytime an association can take that protective role to help shield franchisees from abusive behavior is helpful. That's hard to do with a young association, while associations that have been around for a long time have strong legal counsel. It's very hard for small associations trying to get that foot in the door where you take advantage of division and try to get excitement from franchisees.

One of the easiest things to support franchisee associations in the beginning is conflict. That conflict is often what creates funding for many franchisee associations. In some respects, conflict helps feed franchisee associations. It's how to maintain the association over time that is problematic.

BMM: Franchisees not only form independent franchisee associations, but they also create cooperatives that lead the national operations of a chain. For example, Burger King franchise owners lead a purchasing cooperative called Restaurant Services Inc. Dunkin' Donuts franchisees are solely in charge of funding and directing the chain's supply chain. Or in Subway's case, franchisees command regional and national purchasing. KFC too – in advertising. Is this a good thing?

Cooperatives that take over regional and national functions can be beneficial to franchise systems. But some types of cooperatives, like purchasing co-ops, lend themselves to product stores such as Dairy Queen rather than service outlets like Curves fitness centers.

Lawrence: I think franchisee cooperatives are great. In the case of Dairy Queen, for example, franchise owners have their own cooperative. Cooperatives provide another avenue of value. It provides access to supplies that the franchisor only provided before. In some systems there has been a lot of conflict whether the franchisor takes considerable profit off products it mandates its franchisees buy [via vendor kickbacks to the franchisor]. That's in addition to fees and royalties that the franchisee must pay. My view is in a system like KFC or Dairy Queen, where cooperatives purchase commodities, there's a good opportunity to develop a whole business around that.

Franchisee associations that are service-based have a harder time. If you are a franchisee in a system like Curves, using cooperatives is difficult because you aren't selling a product [that benefits from economies of scale through purchasing]. If you are buying proprietary fitness equipment, there is very little value to a [purchasing] cooperative because individual stores don't go much to the market to buy large quantities of products. Curves franchisees would have very little ability to generate money through such a cooperative.

But if you are a food outlet, that's another thing. However, one of the problems is getting everyone to buy in. With the Dairy Queen cooperative, they haven't been able to get all franchisees to participate in the purchasing cooperative. Their goal is to get more into the cooperative because the more that buy, the lower the unit purchasing cost gets.

Cooperatives are one way in which independent franchisee groups can deliver value that can be used to feed back to an association to support other functions.

BMM: Is there better transparency in franchisee cooperatives compared to franchisors that traditionally lead a chain's advertising, purchasing or information technology efforts?

Cooperatives that direct operating functions nationally are more trusted by franchisees and have more incentive to be transparent to their body of owners in their transactions .

Lawrence: Yes. There is better trust. There is a feeling that I'm buying this from a franchisee-based organization that has no ulterior motive other than to pay back the cooperative. If I buy from the cooperative, then I will be paid back via my annual check based on the performance of that cooperative.

One of the biggest problems in the franchise relationship is trust between franchisor and franchisee. Franchisors that fail to deliver on the promise to be totally transparent, where they are getting a kickback or payment from suppliers that franchisees are not aware of, cause franchisees to wonder what else the franchisor is doing that takes money away from them as franchisees. The model of franchising is based on the mutual understanding that if a franchisee doesn't succeed then the franchisor cannot succeed.

Domino's is another example of where conflict rose specifically out of having to purchase a Point of Sales system that couldn't be also bought from a third-party vendor. Franchisees felt that the franchisor was trying to extract money from another stream in addition to their royalties.

Obviously a system that is run by franchisees, which is cooperative in nature, will be seen as more trustworthy.

BMM: Last year there was a collision at Choice Hotels between the established members of the franchise advisory council and its newer members, largely of Indian heritage. The chair of the council had to step down after implying that having this newer group of owners lead them would be like having the worst professors teach their children. I believe the established association leaders were largely made up of Caucasian members. The new growing class has roots in Gujarat, India. How do associations bridge differences — for example, established and new, white and South Asian?

Independent franchisee associations are more trusted when they have sub-groups that are incorporated into the democratic process.

Lawrence: One of the things to try to break down those barriers between these sub-groups is to try to develop leadership that represents both. When you have these groups that have strong cultural cores, they are more likely to trust their own leaders and not necessarily others. There can be power struggles within the association, where certain groups will want their leader elected. This will create a lot of problems for associations because there is infighting in which the association cannot develop a consensus. It's harder to present a united front to the franchisor. Another thing that hurts is that sometimes different sub-groups have different contracts. So old franchisees have one set of contracts, while new franchisees have another. Older franchisees might have a better contract of which the newer franchisees are envious.

A solution is to rotate leadership. Have successive leaders who represent different bodies, so associations don't get stuck with individuals feeling disenfranchised.

BMM: Is there a good governance model that associations should follow to help them do this?

A term of one year for democratically elected positions is a good model to follow.

Lawrence: KFC has a good model to follow, where the president changes every year. If you have 60 percent majority devoted to one person, and that person doesn't represent the other percentage, then you suddenly have people who just do not want to be involved in the association. Communication and having leaders that can communicate with each other is important. I think that is a really hard issue to solve because that cultural divide is something that tears many associations apart. One of the things that can help is to have local chapters that can define themselves. 7-Eleven has done that. They have local chapters that may be more skewed toward certain demographics. They can develop who they are independently as a small, local chapter and at the national level as more of a consensus.

Read part one of this two-part series: Growing an Independent Franchisee Association

Professor Ben Lawrence consults and researches franchise systems. He can be reached via email or call him at 1 (607) 254-1669.


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