Issue #1: A Lack of Communication

Whether you own one or one hundred restaurant franchises, you know how difficult it can be to
establish and maintain communication with your franchisor.

A lack of communication can take a serious toll on franchise owners, particularly in the realm of
finances. Changes can trickle down from a corporate level to individual restaurant owners
without clear communication to or feedback from those owners, restricting franchisees’ abilities
to voice concerns and providing limited time to make necessary adjustments to the menu, sales
forecasts, and operations.

Example: Quizno’s

In 2009, Quizno’s decided to go head-to-head with Subway’s “Five Dollar Footlong” special,
offering coupons to patrons for a free sandwich.

Unfortunately, franchisees' concerns were not heard, which caused owners to reject these
coupons. In a heated competition between Subway and Quizno’s, this fiasco angered many
Quizno’s customers, effectively costing Quizno’s their path to victory in this sandwich war.
Quizno’s—the business once boasting more than 4,500 locations—now has fewer than 400.

How to Address This Issue

Establish both formal and informal communication channels between the franchisor and
franchisee. Both parties should have a direct phone number and email address for on-the-spot
questions, while more formal communication should be sent down from corporate in the form of
email newsletters or scheduled debriefings on need-to-know information. Franchisors should
also actively source franchisee input on new initiatives and ongoing issues, while franchisees
should utilize this privilege and share concerns as they arise.

Issue #2: Franchisees Taking the Fall

With a restaurant group large enough to be franchised, mistakes and times of controversy run the
risk of instant scrutinization by the media and the public. It’s not uncommon for the mistake or
decision of one store to impact several others, but it’s worse when the change comes straight
from corporate.

Restaurants that franchise tend not to own many locations as a company. Take McDonald’s, for
example, which owns around 5% of all its locations. As a result, franchisors and corporate
employees will often make decisions that, if made from someone with daily exposure to the
restaurant, might have been made differently. These decisions can have a strong impact on
franchisees, for better or worse.

Example: KFC
In 2018, about two-thirds of KFCs in the United Kingdom had to temporarily close due to an
inventory issue. KFC utilized a supplier with a single location, and deliveries were compromised
when problems arose at that spot.

The result? No chicken at hundreds of KFCs across the United Kingdom.

That’s right. No chicken at Kentucky Fried Chicken.

Mistakes happen in restaurants. However, this incident with KFC’s supplier—an incident that
franchisees had no control over—impacted KFC’s reputation across an entire country,
threatening to permanently damage the livelihood of every KFC franchisee.

How to Address This Issue

Be like KFC and do the right thing: own your mistakes as a franchisor.

To respond to the chicken shortage, KFC took out a full-page ad in multiple publications,
apologizing to their customers.

Franchisees shouldn’t have to pay for mistakes they’re not responsible for. Ensure you have
a franchisor-franchisee relationship where everyone owns their mistakes and steps up to make it
right for themselves, their business partners, and (of course) their customers.

Issue #3: Costs and Royalties

Franchisees benefit from built-in brand recognition of their restaurants, but have to (quite
literally) pay the price. On top of an initial license fee, franchisees must pay regular royalty fees
to franchisors. These are either percentage-based or fixed dollar costs that go to marketing and
operations for the entire business.

Naturally, the never-ending check cutting doesn’t leave every franchisee happy. When the
contribution is fixed, franchisees who are slow to start or who are having a bad month may not
be able to meet their agreed-upon dues. For successful franchisees, a percent-based royalty fee
can seem punitive, since the more you make, the larger check you have to write to corporate.

Example: Domino’s

In December 2018, multiple Domino’s franchisees threatened to “declare war” on corporate and
stop opening new stores if the franchise cost and profit models were not restructured.

While not all franchisees across the industry have taken such action, it’s not a stretch to say
many have at least thought about it.

How to Address This Issue

Franchisee costs and royalties are often tough to negotiate and tend to be consistent across all
locations.

The best solution for this issue is stronger alignment between the franchisee and franchisor on
how to grow sales. Franchisees need to feel supported, and franchisors need to feel confident that
each franchise can hit its goal. To aid in this, franchisors can provide best practices on how to
increase sales and streamline internal operations to increase profits, while franchisees should be
ready to reach out when they need help to show they’re invested and want to hit their goals.

One way to simplify this is through integrated restaurant technology, such as POS and employee
scheduling software. When franchisors have granular data on sales and staff performance, they’ll
be able to offer more specific guidance on what areas need improvement from a corporate
perspective and what has worked for franchisees in the past.

Either way, when sales grow, it’s a win-win for franchisees and franchisors.

Issue #4: Technology Woes

Most will agree that choosing the best systems to help restaurants run smoothly is in corporate’s
ballpark.

However, some franchisees are less receptive to change than others, which complicates
accounting and reporting on both the franchise level and the corporate level.

Conversely, some franchisees are ready and willing to adopt new systems, but corporate is
reluctant to change operations at their hundreds or thousands of locations.

Example: Wendy’s

When one of Wendy’s largest franchisees would not agree to adopt a universal POS system,
Wendy’s sued the operator of the 152 locations.

As restaurants become increasingly reliant on technology, it’s imperative that large franchises
have systems in place to gain visibility into each location’s success metrics. This is true for all
software—not just POS software, but online ordering, accounting, and employee scheduling
software as well. Otherwise, corporate will have a huge blind spot into how to improve and grow
their business.

How to Address this Issue

Return to the feedback loop from issue #1. Franchisors mandating massive technological
changes should provide a clear rationale for the change, a list of benefits, an outline of costs, and
a list of dates as to when changes should be made. Franchisees should use this time to share their
thoughts and work alongside franchisors to ensure a confident and successful rollout in the
requested time frame.
The benefits of this alignment pay for themselves and benefit all parties. For example, 7shifts
employee scheduling software can save managers 3% in labor costs and reduce time spent on
scheduling by 80%. This alone puts more money into the franchise and improves the efficiency
of managers.

Issue #5: Assuring Franchisees Meet Corporate Standards

We’ve been putting a bit of the onus on franchisors in this article, but there are instances where
franchisees can step up to improve this business relationship.

Franchises work in part due to consistency of brand, menu, design, and service. A variation of
any of these factors from one location to another calls into question the consistency of the
business, which defeats the very purpose of a franchise business model. Thus, franchisees must
recognize the type of business they are operating and hold themselves accountable for meeting
certain standards.

Example: Burger King

When Burger King Corporation noticed a 37-location franchisee was not meeting its service or
cleanliness standards, they sued that franchisee.

This was the right move for Burger King. They showed that they value their declared standards
and won’t tolerate a blatant disregard for the health and safety of their customers. However, the
lawsuit arguably shed even more light on the situation, and like many other issues on this list,
likely impacted multiple franchisees and their revenue.

How to Address this Issue

Franchisors should continue to monitor brand consistency long after the restaurant’s opening day
and take note when certain franchise-owned locations are starting to slack.

Franchisees should respect the benefits of owning a franchise and make it a top priority to meet
the standards set by corporate. After all, this is a company that has successfully grown from one
location to dozens, hundreds, or even thousands. This means giving up some autonomy and
holding your staff and yourself to high standards in every aspect of running a restaurant.
Otherwise, your sales—and the sales of other franchisees—could start to suffer.

Issue #6: Disagreement on Brand and Market Positioning

There are multiple reasons to buy one restaurant franchise over another, with some of the popular
choices being the branding and concept of the restaurant.

Unfortunately, it’s not uncommon for corporate to spot an opportunity in the market, seek to
embrace change, and reposition the brand and position of the restaurant.
This move can disrupt the franchisee’s vision for his or her business. When sales take a dip, it
causes friction in the franchisor-franchisee relationship.

Example: Pizza Hut

Jonathan Maze of Restaurant Business Online predicts Pizza Hut’s franchisees will be facing a

difficult next few years, citing a 3% same-store sales decrease in Q3 2019 as the company
repositions itself from a dine-in pizzeria to a predominantly takeout and delivery restaurant.  

Additionally, Maze notes Pizza Hut executives themselves are weary during this time of
transition.

“While we strongly believe that these are the right strategies to build the business for the longer
term, these moves will introduce some uncertainty in the business performance over the short
term,” says David Gibbs, president and incoming CEO of Pizza Hut’s parent company Yum
Brands.

The uncertainty that Gibbs references stems from “weak finances or high debt loads” franchisees
are facing. This shift is leaving franchisees feeling less secure in the short term, with the threat of
restaurant closure looming.

How to Address this Issue

In a situation of forced rebranding, franchisors should be more sympathetic to franchisees and

realize the means come before the end. Some solutions include more leniency during the shift, in
addition to adjusting royalties and fees during times of transition as each location’s market
position changes.

Issue #7: Pressure

Just reading over the list of the past six issues threatens to raise the stress levels of
franchisors and franchisees.

Restaurants that franchise are multi-million or even multi-billion dollar companies, with constant
scrutiny from consumers, stockholders, and the media. With all of that, it’s easy to see why
franchisor-franchisee relationship can so quickly boil down to a purely transactional one.

Example: McDonald’s

McDonald’s future looks bright. New menu items, a focus on delivery and digital ordering, and a
sleek new building design all support that notion.

However, at least three-quarters of McDonald’s’ U.S. franchisees are feeling left behind in this
movement. When forced to adopt changes and pay costs they weren’t enthused about, more than
one thousand franchisees banded together to form the National Owners Association–a group of
McDonald’s franchisees openly expressing a few of these concerns on their own behalf.
While unprecedented, this group’s formation isn’t entirely unexplainable. New requirements
from franchisees included remodeling all restaurants by 2020 (the costs of which McDonald’s
pledged to pay 55% of) and increased sales numbers to qualify for lease renewal (which
McDonald’s predicted up to 40% of locations may not be able to meet).

How to Address this Issue

How do you alleviate pressure? Look for more flexibility.

McDonald’s is already taking steps to address the concerns of their franchisees, such as allowing
remodeling to be completed dates as late as 2022 rather than 2020. This is a clear move to
respect the needs and wishes of franchisees, which businesses like McDonald’s rely on to stay in
business.

In the end, it comes down to the fact that everyone involved in a franchise—the franchisor and
the franchisee alike—is under immense pressure.

There’s always an opportunity for both parties to step it up for their partner. Franchisees can
focus in on improving efficiency and guest experiences, while franchisors should focus on
making business-wide improvements that offer a net benefit to their franchisees.

Improving the Franchisor-Franchisee Relationship

Franchises are a staple of the restaurant industry, but their predominance doesn’t make the
relationship that forms them any easier to navigate. With better communication, a focus on the
future, and agreement on the positioning of their business, franchisors and franchisees can
establish and maintain that much-needed alignment to keep the business thriving.