What Franchisors Have to Tell Buyers About Their Business Model

I would think that the FTC would be interested to learn that a wholly owned UPS subsidiary is marketing a franchise which is designed to generate new house accounts for UPS and this fact is not disclosed to potential franchisees. Some may wonder whether this makes business sense -- after all, The UPS Store customers are already UPS customers. Why would it be so important to UPS to convert these customers to six digit accounts? In many cases, as an incentive to switch, UPS charges the customer less than what it charges customer through the UPS Store. The answer may lie in the fact that The UPS Store sales are "off the books." These sales are moved "on the books" when The UPS Store customer is converted to a UPS customer. In effect, while UPS sales appear to be increasing, this program is in the nature of a bookkeeping maneuver to make UPS sales appear stronger than they actually are. The UPS Store shipping sales represent about 1% of UPS's total shipping volume and these is significant potential to mislead investors as to the health of UPS. If the SEC (or general accounting principles) doesn't require disclosure of misleading schemes such as this, perhaps this problem should be brought to the attention of the SEC as it sets out on a major rewriting of securities laws in the near future. It is surprising that UPS would have a program designed to take shipping business away from The UPS Store. Shipping represents more than half of the revenue for the typical store and up to seventy-five percent of sales for the newer stores. It should be clear by now that UPS is serious about putting the stores out of the shipping business. It is also clear that the stores cannot survive without shipping revenue. UPS bought MBE and has the right to use the asset as it sees fit, including destroying it. What is upsetting is that MBE continues to represent that The UPS Store franchise is a viable business opportunity. MBE recently trumpeted the fact that the number of franchises had surpassed 6,000. What is not revealed is that the number of US franchises grew by 26 in 2007 and 7 in 2008. The figure for 2009 will not be made public until April. While UPS may “hope” that the stores will survive without its shipping revenue, it knows better. It spent about three million dollars to the Boston Consulting Group to study the problem. Clearly, the response was so bad that UPS suppressed the report. To date, not even the store FAC representatives have read it. Yet, MBE continues to sell franchises fully aware of the fact that its own study concludes that the franchise does not have a viable business model. A company such as UPS should be embarrassed to be running such a scam. Before the start of the current recession, a franchise association concluded that more than half of The UPS Stores were losing money. That conclusion has never been disputed by MBE or UPS. Some FAC members expressed the opinion that it would only take one shock to the Network to bring it down. Given the severity of the downturn, we may see hundreds if not thousands of UPS Stores fail in the near future. If the Network suffers a severe contraction, UPS’s returns program would be endangered. Since the inception of the UPS Store, UPS has worked out arrangements with a number of large retailers to handle returns. The retailer produces and gives return labels to customers who drop off the packages at UPS Store locations. The program has succeeded beyond UPS’s wildest dreams, increasing the number of drop offs at the UPS Stores by tenfold. This program would be endangered by a severe contraction of the network. The imminent failure of the UPS Store network could be a golden opportunity for Federal Express. Federal Express has invested significant resources in its retail locations and stands to benefit from the increasing difficulty of finding UPS Stores to drop off packages. A number of these retailers could flip from UPS to Federal Express resulting in an increase of millions of ground packages for Federal Express and an offsetting decrease of package volume for UPS. No one should be surprised if the current recession causes a significant shake up of the shipping business. Federal Express appears to be acting in a proactive mater while UPS has assumed the deer-in-the-headlights posture. “Hoping” that the stores will survive is not a business plan. As an observer of the situation for a number of years, I am shocked by the lack of vision displayed by UPS. It should be clear to even a package sorter that the paltry 5 million a year of support that UPS provides to the stores is insufficient. Perhaps I am mistaken in asking UPS to look past the next quarter and evaluate the big picture.

After reading Judge Wright's summary judgment decision here, layman such as I are left with the impression that the plaintiffs have absolutely no case after having spent what probably amounts to huge sums of money. In fact, as I read it, the plaintiffs got their a$$e$ handed to them by this judge. But of course, it's also difficult to read and also subjective. So what say you, do the opinions of this judge warrant criticism or have the plaintiffs been treated fairly?

Are listed on the Welcome Page of AOL as one of the top Franchise Someone should direct all those who are curious to BMM before they BUY

Stay tuned - UPS is next up on the hot seat. Class action trials scheduled for Jan, Feb and March of '09.

I find the decision perplexing, but I wanted to focus on the bigger picture and not individual parts of the decision.

In the comments, I wantl focus on some of the odd parts of the decision.

First, the dismissal of the breach of contract.

The clause in question reads:

“In reliance on Franchisee’s commitment to comply with the designated maximum prices, MBE agrees to use best efforts to ensure that its affiliate [UPS] gives Franchisee discounts and incentives on Franchisee’s wholesale cost of UPS services." 

The Judge ruled that this best efforts clause could not go to the Jury.  This is quite surprising, because generally it is up to a Jury to determine whether efforts were reasonable in the context.

MBE argued that they had satisfied this clause because "wholesale cost" meant "retail cost" and that their hands were tied up UPS as to the discounts offered at the retail level.

This interpretation butchers the language and intent of the clause: the franchisee is agreeing to limit their retail pricing pursuant to UPS policy, and in return MBE is agreeing to make best efforts to reduce their wholesale cost.  Otherwise, why would the franchisee agree to limit their retail pricing? 

But the Judge decided: "Critically, UPS reserved for “its sole and absolute discretion” the right to “modify” Plaintiffs’ incentives. This provision, to which Plaintiffs assented, not only limits MBE’s ability to obtain incentives, but it also tempers Plaintiffs’ justifiable expectations.

Coupled with Defendants’ undisputed efforts (and the results obtained), the court cannot but conclude that Defendants fulfilled their obligation." 

I don't say that a Jury might not come to this conclusion.  But, there are several material facts that a Jury would have to decide:

1.  It would have to decide that that contract really was about retail prices, despite the actual words.

2.  Otherwise, it would have to decided that franchisee should not have reasonable expected wholesale prices to have negotiated, because of UPS's reservation regarding incentives included wholesale prices.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"