A Canadian court ruling involving Tim Hortons may be a cautionary tale for Dunkin’ Donuts franchisees. The case was brought by a group of Tim Horton’s franchise owners after they were forced to sell items at below cost and switch to more expensive pre-baked donuts from a supplier affiliated with the franchisor.
The economic rationale for franchising is this: the franchisor picks local experts as franchisees; these local operators must, on average, be experts otherwise the franchisor would be better off with a company store.
More and more my practice seems to be shifting to meeting the challenges presented to franchisees by opportunistic franchisors who see the cure for all ills as taking more money out of the relationship with their franchisees.
A few months ago I suggested the use of financial modeling by franchisors as a means for rational self governance of several critical aspects of the franchise relationship, including measurement of the investment worthiness of a franchise system and measurement of the extent to which a contemplated program could be shown before the fact to impact upon franchisee profitability.