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?

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Comments

Solomon you should write a book

I again enjoyed reading your writing.
I have been part of business establishments that lasted for 30 years. I would say 30 years is a good run for any business. Of course it was in the 70's through the nineties. Things have changed drastically since those days. I believe there are more people now but there is alot more competition. Your lucky to stay in business for a decade. Everyone is copy-cating each other. In the old days there were only six or seven resturants in the city I lived in. With maybe three steak or dinner houses. Now there is resturants everywhere and many fast food places. All you have to do is turn your head and there is a place to eat.
Now there is coffee places everywhere. You can go in a grocery store and there is a Starbucks.Walk outside and there is another Starbucks. Now there other coffee places. (Tully's is my favorite.) Again you can turn your head and find coffee anywhere.
I can go on and on. How can anyone make any money if there continues to be fierce competition? People will systematically go bankrupt and no one will make it. As soon as a novel idea pops up someone will copy cat it. Every segment of the marketplace is saturated. What is the answer to this? Will people one day sing, "Where have all the businesses gone? Long time passing." Are we headed torward socialism?

What shall Dunkin franchisees do?

Well, lets look at what the DDIFO did only last year:

1. Singlehandedly got the RI Fair Delaership Act enacted and modified to protect franchisees, saved it from repeal and got the Dunkin franchisor and the IFA on the record saying that it was a good mainstream law.

2. Successfully turned back the new franchise agreement being imposed on franchisees and brought the franchisor to a collaborative negotiation of its terms. Did DDIFO get ll of its requests? Of course not, but it did help bring out a new dynamic of collaboration between franchisor and franchisee that has been lost inr ecent years.

3. Had the franchoir's President officially address a meeting of its members. WIll Kussell spoke to franchisees at an association meeting to lay out his agenda for the system and took direct, sometimes hard questions hoonestly and forthrightly. We won't always agree on everything, but at least we are talking now about things that bother franchisees to the guy who makes the decisions. A giant step forward.

4. Franchisee Profitability Committee formed with franchisees writing the bylaws. Franchisees get an advance view of all Brand initiatives and have already reshaped (and rejected) several new ones before they get rolled out. All Brand iniatives get a REAL review by operators with finaicial and operational saavy that know what the store level costs and effects will be. This has bee HUGE for the franchisr and francjhisee alke. It doesn't get better than this. Competitors beware. There has never been cloer alignment at Dunkin' DOnuts between franchisor and franchisee on things that realy matter to the bottom line of both. The rest is hot air--this is where the real wrk of making money (and not wasting money) gets done. DDIFO and Will Kussell did this togther. Both sides deserve enormous amounts of credit.

These stories don't get told because it isimportant for both sides to work together, and not for people to posture in the public press. The franchisor deserves real credit for moving to listen and DDIFO deserves real credit for consistent, constructive efforts to engage the franchiosr that are finally bearing real fruit that delivers value to its members.

Franchisee associations that simply bluster to the media do not seem to ever get their agenda items fulfilled. It may feel good to berate the franchisor management, but it does nothing for your business. DDIFO has new fields to plow in 2009 and some new management faces to approach. We'll see if DDIFO canexpand on its significant acheivements.

As for members being afraid to pony up, DDIFO gets record contributions and has a substantial treasury. Members stick together.

I have to agree that that is a very significant accomplishment.

Congratulations, and I hope it continues in that direction.

--

Richard Solomon, FranchiseRemedies.com,  has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

DDIFO

Congratulations. Job well done.

DDIFO is no stranger in the news. The stories posted above have been told in the press over time, which is evidence that this is not an organization that is working in secret, shunning publicity. Your posting is a wonderful recap of their accomplishments. To this outsider, it looks like a very impressive independent franchisee association.

 

Let us not forget about the DDIFO’s:

Right you are Guest, but let us not forget about the DDIFO’s:

- Founding membership in the Coalition of Franchisee Association, which is becoming a major force in Government Relations. Please see:
http://thecfainc.com/about.html

- adding significant benefits for their members:
- High-quality, competitive health insurance
- Low cost EPL insurance
- Other misc. benefits

This f'ee association is on the move!