The need for compliance in franchising

On the face of it, this sounds reasonable enough but franchisors will have none of it. Their counter argument is that the success of their brands, and with it their franchisees’ success, depends on compliance with everything the brand stands for. So, who is right and who is wrong? We decided to find out.

A franchisees’ tale
First, we talked to a disgruntled franchisee. He was convinced that his franchisor was too heavy-handed in his approach towards compliance and had the following tale to tell. “My fast food outlet is doing OK, but nothing to shoot the lights out. So, when my sister-in-law started a home bakery and was looking for sales outlets, I grabbed the opportunity with both hands. To promote cake sales, I put a display fridge for her decorated cakes and a stand for other baked goods into my store.

“My customers loved the extra offering and all went well until my franchisor’s field service consultant came for a routine visit. When he saw the display of baked goods he nearly blew a gasket. In front of customers and staff, he ordered me to remove the cake display at once or he would shut down the business.

“I told him in no uncertain terms that as this is my business and I am paying the rent, I have every right to sell what I want to sell. I then ordered him off the premises. He left but my victory was short-lived. The next day, I received an email from my franchisor’s lawyers advising me that I was in breach of the franchise agreement. They referred to some clauses in the franchise agreement I had never even looked at and instructed me to remove the cake display within 48 hours, failing which I would face termination. They also mentioned the imposition of substantial financial penalties.

“I phoned my franchisor and tried to reason with them but to no avail. I then sought advice from my own attorney, only to find out that in terms of the franchise agreement, the franchisor had the right to determine what I could and could not sell in the store.

“Taking business realities into account, compliance was my only realistic option. However, I was not a happy man. This experience prompted me to reassess my position and made me question whether franchisees are entrepreneurs or merely glorified managers with the added disadvantage of carrying the full financial risk. Be this as it may, one thing is certain. As soon as someone makes me a reasonable offer I will sell the business. After this experience, no more franchises for me!”

The franchisors’ retort
We approached the unhappy franchisee’s franchisor for comment but they refused to talk to us and referred us to their lawyers instead. Predictably, the lawyers responded by reiterating that in terms of the franchise agreement, the franchisor had the right to control the product offering and the franchisee had committed a breach. They concluded by saying that they had nothing else to add.

A franchise practitioner’s view
We considered the franchisor’s response to be unsatisfactory and turned to franchise stalwart Tony da Fonseca for comment. As our regular readers will know, Tony is the Managing Director of the award-winning franchise OBC Butchery. He is also the Immediate Past Chairman of FASA and eminently qualified to give us a meaningful assessment of the case.

Tony set out by stating that the franchisee was indeed in the wrong. For starters, he should have read the franchise agreement properly before signing it. Had he done so, he would have known that if he wanted to add an item to the product range he needed to obtain the franchisor’s permission first.

However, the way the franchisor went about handling the matter was certainly not in the spirit of franchising. In fact, in my view it was totally unacceptable. No matter what the issue at hand, a franchisor representative should never discipline a franchisee in front of customers and staff. Should this happen in my organisation, it would trigger a disciplinary enquiry.

Instead of embarrassing the franchisee publicly and practically forcing him to assume a defensive stance, the franchisor representative should have taken him to his office or to the nearest coffee shop where he could have explained quietly that cakes do not form part of the brand’s product offering. Selling cakes in one store would send the wrong message to the brand’s customers who might now expect every outlet of the brand to sell cakes.

Should the franchisee refuse to budge, a senior Head Office representative should have become involved. He should have contacted the franchisee, ideally in person, and reiterated that a franchise is about duplication of a proven concept. This does not mean that franchisees are expected to follow the system like mindless zombies. Should a franchisee believe that items should be added to the range they need to follow the steps laid down in the operations manual for this purpose.

The franchisor would consider the idea and probably bounce it off representatives of the marketing committee. Should there be consensus that the product would add sales, they would test the idea, usually in company-owned stores. Based on this, the idea would either be rejected outright or adopted throughout the network. As stated previously, franchising is about duplication of a tried and tested concept. Broadly speaking, every franchised outlet must offer the same range.

In the unlikely event that the franchisee still doesn’t want to see reason, the franchisor should have followed up with an email setting out the problem and requesting compliance. Only once all these appeals have fallen on deaf ears should the threat of terminating the franchise agreement be raised.

Franchising is about seeking consensus
It is no coincidence that franchise experts compare the franchise relationship to a marriage. Disagreements will arise in every marriage but the partners will generally seek consensus rather than threatening divorce proceedings at every turn. It’s the same in franchise relationships.

Should anything like this happen in my organisation, I would sit down with the offending franchisee at the earliest possible opportunity. I would explain to him why his conduct is unacceptable. I would also raise the very real threat of hygiene violations. I would reassure the franchisee that I fully accept that his sister runs a clean kitchen but it is home-based, without any of the safeguards that apply to commercial kitchens.

It is my experience that when approached in the right way, franchisees generally see that they are in the wrong and are prepared to put matters right.

Given the circumstances of the above case study, the franchisor was definitely in the wrong. He immediately chose the legal route instead of trying a more humane approach first. It is this kind of heavy-handedness that gives franchising a bad name. Without wishing to generalise, it is my experience that this often occurs when the franchisor is a large corporate. Multiple layers of management tend to take the soul out of the equation.

The best piece of advice I can offer prospective franchisees who want to protect themselves against this type of unwelcome surprise is this:

1. Familiarise yourself fully with the way franchising works. An individual who yearns for total independence will never be happy as a franchisee.
2. Get to know the people in the franchise organisation you consider joining. Don’t just talk to the franchise sales person but insist on meeting everyone you would be working with as a franchisee. Contact established franchisees of the network as well. The CPA gives you the right to do so and you should really use it!
3. Before signing the franchise agreement, seek input from an attorney with experience in franchise matters.
4. Now decide for yourself whether the many benefits an established franchise network offers outweigh the degree of independence franchisees have to forgo for the sake of the brand. Then make your decision.

In spite of the somewhat depressed economic climate, members of the OBC franchise continue to produce satisfactory trading results. Because the brand offers daily necessities within an inviting store environment and at prices their customers can afford, its resolve to continue on the expansion trail is well justified. It follows that opportunities exist in many parts of South Africa. Click here to find out more about the OBC franchise opportunityor write to Business Development Manager Robbie Capazorio – robbie@obcgroup.co.za.