Bagging chain conformity

Once upon a time, the only matter left to the discretion of a restaurant franchisee was the route he or she drove to work. Exact conformity to a chain’s procedures, design and menu were enforced with a vigor that had Third World dictators muttering, “Whoa. Those dudes are serious.”

Contrast that with some recent chain-restaurant openings. At the new Burger King in Ionia, MI, you’ll be served a thicker French fry and coarser cut bacon. Further north, on the other side of the border, your options include two new poutines, or sauced fries.

At the new Johnny Rockets in Sunrise, FL, you can play arcade games or watch pro sports on TV in the bar. It’s also the only restaurant in the chain to offer pizza.

The newest franchised Johnny Rockets in Cincinnati lets patrons get wine and beer to go. Breakfast is also available.
The list goes on and on. Clearly iron-fisted conformity is out, and adaptation to the realities of a local market, even an individual block, is the smarter business mindset that’s replacing it.

That’s partly due to the growing militancy of franchisees. No longer can the home office dictate how their businesses will run. When the franchisor tries, it’s likely to end up in court, as Burger King, Wendy’s and KFC have learned.

But it’s also smarter business. Patrons in downtown Miami might not want the same choices as the snowbirds staying by the choice or the trendinistas roller-blading through South Beach.

One of the trends that’s subtly helped fast-food in recent years has been the embrace of market-by-market pricing, which is really a version of yield management. Chains still advertise a chainwide bargain to get the most from their ad budgets, but they do it more selectively.

Another other factor is the undeniably increase in importance of franchisees. Chains have mothballed the rule of thumb that one-third of the system should be franchisor-operated to keep the home office focused on day-to-day functions.

But perhaps the main impetus is the realization that franchisees are the best consumer sales force a chain can have. No one knows the business and customer preferences like the ones who are immersed in the field every day.

No wonder headquarters are loosening the reins. It one of the most positive after-effects to emerge from the Great Recession.

More flamebroiling tempers at BK?

A financial analyst may have inadvertently fanned the broiler flames at Burger King, where franchisees have squared off with the home office over the deeply discounted Double Cheeseburger.

The Wall Street Journal reported online this afternoon that Morgan Stanley had advised investors to reconsider their positions in McDonald’s because the burger giant is being sapped by competitors’ discounts. BK’s $1 Double Cheeseburger was specifically cited by the brokerage, where analyst John Glass handicaps the restaurant sector.

If investors pull their money out of McDonald’s because it’s being hurt by Burger King, is it such a leap to assume some will shift it over to Burger King Holdings, the keeper of BK’s castle?

In other words, the Double Cheeseburger appears to be helping the franchisor’s stock price. And that’s going to go down like three-week-old Onion Rings with franchisees.

They’ve argued that the quarter-pound Double Cheeseburger is boosting traffic and sales, the base for the home office’s revenues and profits, at the expense of unit-level profits. In filing a lawsuit a few weeks ago to halt the head-turning offer, an association of franchisees alleged they’re losing a dime on every Double they sell for a buck.

Now comes word that the deal is not only helping BK Holding’s revenues, but also boosting its stock valuation.

If you should see a torch-toting mob of BK franchisees outside the chain’s Miami headquarters, you’d best run for cover. It could get ugly.

Off with The King's head?

There’s probably no truth to the rumor that Burger King headquarters is planning a new line of kids-meal action figures called Butthead Franchisees (“Collect all the dolts--and their lawyers, too!!”) But the home office clearly isn’t friending some of its licensees on Facebook these days, and vice-versa. Though that’s sort of like saying Batman and the Joker had their inter-relational challenges. We’re probably only a snipe away from seeing The King in combat fatigues and camouflage face paint.

The flashpoint is the $1 Double Cheeseburger that the chain decided to promote systemwide despite a forceful don’t-you-dare from franchisees. In a gambit that drew more media coverage than Michael Jackson’s funeral, a group claiming to represent three-fourths of BK’s licensees filed a lawsuit to halt the promotion, arguing that the franchisor was fixing prices. The National Franchise Association said at the time of the filing that a franchisee stands to lose a dime on every double that’s sold.

By franchising standards, that sort of gripe is the equivalent of asking Mike Tyson if he prefers women’s clothing. But the association took the further step of sending a letter to each director of Burger King’s parent company, asking that they intervene to reverse management’s decision and set the home office on a more intelligent strategy. The elevated middle finger was leaving CEO John Chidsey, the director who crafted the current plan, on the mailing list.

That’s when things started getting really ugly.

Yesterday, someone leaked an e-mail to the Associated Press that had been sent to Franchise Association members over the weekend by Chuck Fallon, the Chidsey direct report who oversees BK’s North American division. It cautioned the dissidents that they could be limiting their growth opportunities with all the public grumbling.

“Bankers, landlords, suppliers and potential new franchisees are watching and listening,” the A.P. quoted Fallon as warning. The upshot, he said, could be less lending and less attractive terms—or a lower price should the malcontents look to sell their businesses.

A return volley has yet to be fired by the franchisees, or at least it’s not yet come to the attention of the media. But give it time.

Not that they’re the only franchisees who are ready to string up their franchisors during these trying times. NPC, Pizza Hut’s largest franchisee, told its shareholders in an earnings statement last week that the pizza brand and its marketing need to be handled differently, a veiled criticism of franchisor Yum! Brands. Making that observation in a financial statement is like telling a soccer mom that her kid couldn’t hit a barn with three free kicks.

And Quiznos franchisees probably have a rule that you have to pay a dollar everytime you mention the franchisor or otherwise cuss.

Because of its sheer size, BK is going to be the fracas in the spotlight. It’s just a matter of time until the feud starts snagging covered on CNN.

Do franchisees prefer a scooter or a stool?

Quiznos tested several prices for its 13-inch-long Torpedo heros before settling on $4, the lowest by at least 7%, CEO Rick Schaden recently revealed to the Associated Press.   

Forget for a moment the stunning revelation that sales-test participants preferred the lowest price. Since introducing the baguette-style sandwich, Schaden told the A.P., sales have increased by double digits and traffic has increased by about a third. It’s been a slam-dunk, an introduction that will serve as a new model for the all-franchised chain, Schaden said in another communiqué from headquarters.   

There’s just one problem: Franchisees complain that it’s tough to make any money off the item because the food and paper costs are too high. And to make matter worse, regular customers are trading down from sandwiches that provide a better margin.  

“Without high volume this Torpedo is a bust,” someone from the Toasted Subs Franchisee Association,  an owner-operator group, told me in an e-mail. Despite Schaden’s assertions, franchisees apparently aren’t wowed by the sales pop.   

Then again, Quiznos, as the franchisor of an all-franchised chain, doesn’t make its money off profits. Its royalties are assessed on owner-operators’ top line, underscoring the inherent conflict between franchisor and franchisee.   

Lately I’ve been writing a lot in my freelance work about McDonald’s, a business model that should be taught in grade school to help youngsters understand fairness.  Fred Turner, Ray Kroc’s grill man and early company leader, described the chain as a three-legged stool, with franchisees, the home office and suppliers playing an equal role in the success of the company. For that reason, Turner preached, each had a stake, each should have a say on the chain’s direction, and each would do its part for the success of the other two legs.   

It’s an idea that sounds kind of pollyannish. Indeed, when I worked for Nation’s Restaurant News during the 1980s, one of our parent company’s executives picked up the term to describe our business. Amongst ourselves, we snidely preferred to call our business the three-legged divan, the three-legged TV stand, or the three-legged  knickknack nook.   

Yet if you ask anyone at McDonald’s today to sum up the company’s attitude toward franchisees, they’ll mention the three-legged stool. So will the franchisees. They may have criticisms, which the home office encourages and heeds, but they feel they’re a pillar of the organization. A stool leg, so to speak. 

Turner, by the way, still has an office at the home office, and still talks about the three-legged stool.   And the chain that likens itself to a bar seat just posted a 6.1% increase in U.S. same-store sales for April. 

Quiznos recently adapted its own metaphor for the chain’s new attitude and business model. Schaden sent a scooter to all employees, explaining that it symbolized how the brand intended to respond faster and with more agility to market trends. He noted how the Torpedo line exemplified that new mindset, going from notion to promoted product in a relative flash.   

The scooter was why I e-mailed the Toasted Subs franchisee group. I didn’t quite get it, and suspected there may be more to the symbolism than I was seeing. And the franchisees?   “We have no idea what is behind these scooters, it strikes us as being very odd,” the spokesperson responded.