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Clash of titans as DavCo just says no to Wendy’s


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Beth Ewen

DavCo Restaurants, Wendy’s fourth-largest franchisee with 152 stores, is balking at the franchisor’s mandate to remodel 15 stores each year through 2020 and upgrade its point-of-sale system, according to a lawsuit filed in late December by Wendy’s—a move that could be called the nuclear option.

Wendy’s is seeking to terminate DavCo as a franchisee, a relationship that dates to 1976, when founder Dave Thomas, who died in 2002, led the chain. It’s the first public rift in Wendy’s march to upgrade its stores, and the first defiant test of CEO Emil Brolick’s key mandate since joining the chain in fall of 2011.

Adding to the drama: These are early days in Brolick’s efforts to ramp up franchisee compliance, the first of a six-year push. Wendy’s is asking a Franklin County, Ohio, court to declare that DavCo’s franchise agreements require it to comply with the mandates. If the ruling goes the other way, who knows which other franchisees will also rebel?

“If they’ve got one of the biggest franchisees not doing it, some of those smaller ones will balk, too,” says Andrew Bleiman, Marks & Klein in Chicago. He’s not involved in the case, but wrote an article in 2013 urging franchisors to gain buy-in from operators before launching remodeling programs.

Not so powerful?

“This is not good publicity, for a brand to be suing a franchisee,” says one operator, stating the obvious. “Particularly for someone like Emil Brolick,” known for fair dealing when he helmed Taco Bell, “there must be a fundamental disagreement for them to resort to this.”

Wendy’s declined to make an executive available for an interview for this article. Dave Norman, DavCo’s president and general counsel, didn’t reply to requests for comment, and by press time DavCo hadn’t filed a response to the lawsuit.

The operator above, like all the others contacted, wouldn’t talk for attribution, even in general about such topics as the comparative cost of the ubiquitous remodeling programs underway today.

The silence is interesting, given the supposed rise of the giant multi-unit operator—if they wield so much power why don’t they dare speak? Not for attribution, however, they had plenty to say, along these lines:

The Wendy’s remodels are costing $500,000 average, which some deem outrageous. “The estimates I have seen are from $350,000 to $750,000, and that is an inordinant amount of cash,” said one operator.

Franchisees are required to remodel 10 percent of their stores each year for six years, which for DavCo translates to 15 stores and more than $7.5 million each year through 2020. Meanwhile, Wendy’s reported a mere 1.9 percent rise in average sales at renovated company-owned stores in fiscal 2013—not the kind of numbers to excite most operators.

The McDonald’s remodel program famously cost more—up to $1 million each store, causing grumbling among operators but so far no public rebellion. But Popeyes offers a comparison on the other end of the scale.

At first the remodel was to cost $250,000 a store, but franchisees howled. As a result, Popeyes went back to the drawing board, reduced the cost to about $100,000, and is achieving better than 80 percent compliance among its franchisees, according to Popeyes documents and public comments by CEO Cheryl Bachelder.

The extensive re-franchising program at Wendy’s, completed last year, is likely adding to DavCo’s unhappiness as a long-time operator. The project involved the sale of about 350 company-owned restaurants in 10-plus transactions, and legacy operators often grumble that selling corporate stores is a way for the franchisor to load the cost burden onto the franchisee. Moreover, the new buyers have already baked those costs into their calculations and attracted fresh capital to make it all happen.

Meanwhile, the long-time operator, after suffering through the brutal recession years, is unlikely to be feeling so flush. On the other hand, an operator the size of DavCo should plan for remodels and even lead the way, some said. “I still go back to what’s the right thing to do, and you’ve got to put an image out there on the street that’s consistent with the brand’s trajectory,” one operator said. “You can’t just say, ‘My building’s 30 years old, and I’m not gong to do anything about it.’”

Bad blood dates back

Which brings us to the bad blood between DavCo and Wendy’s, dating back to at least 2006, notably before current management arrived. At that time DavCo, then the largest Wendy’s franchisee, and others penned an angry letter that was published by The Wall Street Journal.

“Twenty years ago it was a partnership” between Wendy’s parent and its operators, said Norman at the time, criticizing “the slow decline of our brand due to mismanagement and an apparent lack of concern. Today it’s strictly a business, as with everything else.”

Nor is this the first time Wendy’s has sued a large franchisee to demand compliance. In July 2011, Wendy’s slapped WendPartners Franchise Group, then with more than 300 stores in 20 states, alleging breach of contract because they wouldn’t buy and install bun toasters dubbed essential to the chain’s “Hot ‘n’ Juicy” cheeseburgers line. The dispute was ultimately settled. (Again, this pre-dates Brolick; Roland Smith was CEO.)

In the new lawsuit, Wendy’s seems pushed to its limit. “In the past, Wendy’s, hoping to avoid conflict and maintain good relationships with all of its franchisees, has usually worked out its differences with DavCo,” the lawsuit says.

But no more. DavCo “apparently believes the guidelines announced by Wendy’s, simply do not apply to it. As a result, DavCo stands virtually alone among Wendy’s franchisees in combating, and even repudiating, two key obligations at the core of the franchisor/franchisee relationship between Wendy’s and DavCo.” And so, the titans clash.

Beth Ewen is managing editor of Franchise Times. Send interesting legal and public policy cases to bewen@franchisetimes.com

 

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