Kissin Don't Last, Neither Do Good Franchise Relationships

Back in my early biker days I recall riding through Pennsylvania Dutch country – Lancaster County as I recall – and saw a sign in a gas station/store that proclaimed “Kissin Don’t Last But Cookin Do”. I thought to myself, thank God I’m a good cook.

The ability to present really grand tasting meals in one’s own kitchen works faster in getting the ladies to like you a lot than your expensive watch, car or “men’s cologne”.

In my law career segment that focuses on franchise relationships and how they work and don’t work, I have learnt over the years that even the best franchises eventually get ripe, old, over the hill.

We seldom think of the vicissitudes of really profitable franchises. We focus on the really bad franchise investments in which almost no one ever makes any money and it all becomes highly visible as an obvious fraud on the investors. Yet even amongst the very profitable we find that well off franchisees whine and complain constantly too. It’s just that they complain about different things. Mainly they seem to believe that since they make good money the franchisor should just turn management of the system over to them. The answer to that is that if you want to call the shots, buy the company. That rarely happens. When it does it is usually a purchase made in a bankruptcy proceeding.

Yet even long standing profitable franchise systems get old. Concepts have life cycle dynamics just like products do. The aging of concepts tends to be accelerated by changes in tastes (if we’re talking about food and fashion) to the advent of competition. Economics are such that success invites imitation. Success invites the entry into any business market of new competition, until the market approaches saturation. As saturation approaches, price competition increases in its ferocity and profitability moves toward marginality. That defines the “mature” stage of the concept life cycle. At that peak it becomes a downhill ride, no matter how wonderful it may have been financially or for how long. It is simply old. The end stage of the life cycle is the decay stage in which the owners of the concept/brand stop investing in it and start milking it. You can strip a brand of financial support and reduce expenses. There is a bit of lag time in the interim between expense stripping and demise during which some profits can still be derived by the brand owner, even if that is not so for the franchisees. Remember that the franchisor’s take is a percentage of gross sales, so whether franchisees are making any money in the mature and decay stages is nor of great concern. The concept is not expected to remain investment worthy and no one with intelligence is expected to invest in it any more. That doesn’t mean that people cannot be found who are bottom feeders and expert at squeezing returns out of even comatose organizations. In the main, however, attracting new investors is not something anyone gives much thought to.

As the capital value of the brand declines, the capital value of the brand’s franchisees also declines. Less operating profit/cash flow means that system wide dissatisfaction becomes epidemic, with the attendant ranting and raving about how great things used to be, and why can’t we make the good times come back again. You can’t.

Supposedly, if the brand owner is astute, there was diversification substantially before the brand reached the maturity stage, and another earlier in its life cycle concept was brought in to reinvigorate the company’s prospects. The new concept is segregated so that the new opportunity does not become infected by the disease of old age being experienced by the senior brand. The franchisees of the senior brand do not benefit from the new addition unless they become franchisees of that new brand and it too has a positive growth and profitability experience. But the new brand can never rejuvenate the senior brand. The senior brand continues on its downward path to eventual oblivion.

Cosmetics are usually employed to the aging brand. It is reorganized internally in functional ways that are mainly just cost cutting maneuvers – functions combined; unnecessary functions no longer funded with internally generated money. Personnel changes are a clear symptom of this. That takes many forms, but usually it is simply the bringing in of outsiders whose tenure is often rather short. Only God can make a tree as the song goes, and new management aint God.

An historical constant in this dynamic is that the senior brand’s franchisees rant louder and louder, demanding relief from above – not unlike the Israelites in the wilderness complaining to Moses that he was wrong to bring them out of Egypt into this harsh environment, because at least in Egypt they had leeks and garlic. The “leeks and garlic” cannot be restored to old franchise systems any more than Moses could provide them in his wilderness experience.

The problem with this scenario is that there exists a workable remedy to the franchisees’ situation, but it has rather substantial capital requirements – no - not buying the franchisor – why on earth would anyone want to do that? Franchisees are notorious for not being willing to spend real money in support of self protection. They don’t form early on independent franchisee associations, and when they do form them, they are underfunded to enable the acquisition of real clout, and they are also unsupported by a level of militancy that could deter franchisor unilateral self serving decisions that are permitted in the franchise agreement. Well funded militant franchisees can make good things happen despite permissive contract language, except that they don’t support each other to the requisite degree. They prefer in the main to lay in the weeds and watch each other get picked off one at a time. They believe that if Joe does ever win anything, they will benefit from that without having had to get involved or write checks. History teaches that that is sheer nonsense. But it is still the current practice.

We are in the midst of a perfect case study example of this phenomenon in the Dunkin Donuts saga. It’s not a pretty sight to watch. But as we watch, it should be asked, what do these folks think they can do to make the stream flow backwards and carry them back to the good old days?