What’s in Store for Franchises in the Future?

May 26, 2017Articles The Legal Intelligencer

Restaurant Brands International Inc. (RBI) owns indirectly three fast food iconic brands: Burger King Corp., Tim Hortons and now Popeyes Louisiana Kitchen Inc. RBI is indirectly owned by several investors, with the ­majority owned by 3G Restaurant Brands Holding. The growth has been fueled by both public company and private equity investment, and presents a snapshot of what may be in store for franchises in the future.

Burger King Corp. has been operating and franchising Burger King quick service hamburger restaurants since 1954. Today, there are over 15,000 Burger King ­restaurants worldwide, and most are located outside of the United States. In 1992, Popeyes Chicken and Biscuits began operating and franchising with almost 2,800 restaurants, now known as Popeyes Louisiana Kitchen. RBI paid $1.8 billion last year for the chain. Tim Hortons is an iconic coffee and doughnut restaurant named after the famous Canadian hockey player and has about 800 units, concentrated in and near Canada.

RBI's growth strategy has been to ­consolidate management and fund franchisees with private equity investment. Consolidation provides economies of scale, brand and buying power at the franchisor level. At the franchisee level, each brand has moved from mom and pop operators to area developers. For example, Tim Hortons is trying to grow in the greater Rochester, New York area, where it had over 35 restaurants owned by small groups of restaurant operators. In 2016, Hortons granted a private equity group, Ninety Rock, an exclusive development agreement for the Greater Rochester area. Hortons also arranged for the transfer of 17 existing stores owned by six franchisees to Ninety Rock. Overnight, Ninety Rock became the largest franchisee in the Greater Rochester area, competing with Dunkin' Donuts in the northeast United States. Note that Dunkin's home field is New England, so this is the battleground for Hortons, which had a difficult launch in Rhode Island using the mom and pop strategy. This private equity development strategy has worked well at the franchisor level with extraordinary ­returns on capital.

RBI bought Tim Hortons and merged it with Burger King. Applying best ­practices, the new owners imposed efficiency changes, which raised stock prices by 40 percent, but upset the legacy franchisees. Tim Hortons franchisees are pushing back against changes implemented by the chain's new owners that are designed to cut costs, however, some franchisees complain the ­efficiencies have the effect of lowering the quality of the ­products. Canadian franchisees have ­created an organization called the Great White North Franchisee Association to represent their interests. They are lobbying RBI to slow down and rethink aggressive cost-cutting strategies.

The association complains about inferior equipment such as coffee carafes, mugs, lids and trays that break more often. So far, the association has gained the ­attention of RBI. A Tim Hortons app that was intended to allow customers to order ­remotely for pick-up at their favorite Hortons ­location was pulled from distribution at the ­request of the association. The association claimed during testing that franchisees were not ready for such an app and the app was not ready for customer rollout. In addition, the ­association prevailed on RBI to eliminate some of the criteria used for benchmarking ­franchisees because the measurements did not accurately reflect the operating ­efficiency of their units.

Franchise associations play important roles in franchise systems. They give ­collective voice to franchisees allowing safe communication of their needs without fear of individual reprisal. They provide an ­advisory opportunity for the franchisor when introducing new products and ­initiatives. Franchisors have the ability to have their communications enhanced by association endorsement. Moreover, the franchisees, through the association, can participate in advertising and promotion activities.

Unfortunately, many associations are formed to fight a new franchisor ­initiative. For this reason, many state franchise ­statutes specifically prohibit discrimination against collective activities by franchisees. The FTC rule governing the disclosure of franchise offerings specifically requires the disclosure of the name, address and telephone number of any franchisee association that meets the FTC triggers for disclosure. Prospective franchise candidates would be wise to ­contact the association when ­considering buying a franchise. Cultivating an ­association before there is an issue is a great way to increase positive franchisee participation in the system, and can short-circuit systemic problems before they become toxic. Fear not the association as it can be shaped to help the franchise system cope with changes and growing pains.

Reprinted with permission from the May 30 issue of The Legal Intelligencer. (c) 2017 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.