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Everybody loves franchising—or do they?


Philip Zeidman

Illustration by Jonathan Hankin

For most of the lifetimes of most of the readers of this publication, the trajectory of general approval of franchising has been steadily upward.

Ask the typical member of the franchise community and you are likely to get an answer along the lines of, “I think the general public—and, now, governmental officials—have awakened to the fact that franchising is good for consumers, good for business, and good for the communities in which the franchises are located.”

But that assumption, I think, may have led to a certain complacency. It’s now becoming clear that, just below the surface (or if you will, outside the bubble we cheerfully and perhaps obliviously inhabit), attitudes may not be quite so reassuringly positive.

A survey conducted last year revealed, among other findings, that the majority of consumers responding felt neither strongly positive nor strongly negative about franchised businesses, and actually rated them somewhat lower than non-franchised businesses. (The ratings went up a bit when the description was “family-owned businesses in your neighborhood”).

At best, the survey’s results paint a picture of ignorance about and indifference toward franchising.

Everyone’s a hater

Even in the public domain, we’ve seen examples in the United States that understanding and appreciation of the franchise model may fall considerably short of the popular (to us) notion of franchising as “American as apple pie.” For example:

•  a city or other political body or a government agency viewing a franchisor and a franchisee as a single unit for certain purposes;

•  considering the location of a franchise unit to serve as the basis for jurisdiction over a distant franchisor;

•  the notion that everyday practices in the franchised system can trigger the treatment of both franchisor and franchisee as “joint employers”;

•  an attack upon customary behavior and franchising (such as protection of franchisees from “poaching” by other franchisees).

All of these and other such occurrences can be seen as a lack of knowledge or acceptance of franchising in quite the way most members of the franchise community would have assumed.  And that’s here in the United States, the ancestral home of franchising.

Now we are beginning to see that attitude emerging in other countries. Sometimes it’s attributable to unfamiliarity, sometimes to indifference, sometimes to hostility. It manifests itself in different forms, including the following:

1. The adverse reaction sometimes arises from the perception that franchisors from developed countries inadequately appreciate the contributions as well as the sophistication of franchisees.

The implication of a condescending and in some cases imperious franchisor is hard to miss. For example, take a look at “Op-Ed: Open Letter to International Food Franchisors,” which appeared online last year, written by an adviser active in the Middle East.

“Without local money, resources and commitment, franchise companies would not be able to extend brands to far-flung territories such as the Arabian Gulf. By design, this should make franchising the quintessential ‘mutually beneficial relationship,’ but sometimes, it’s easy to be a little skeptical,” wrote Sanjay Duggal. He noted “scope for improvement,” including this one:

“Show the homework, please. When you ask for a commitment to, say 15 stores over the next 10 years, please convince me that there’s a thoroughly researched reasoning behind it, and not just, for example, using Google to divide the population by multiples of a hundred thousand to arrive at the number of stores for my territory.”

2. In some countries we are seeing restrictions or requirements that suggest a flawed understanding of how franchising works.  In Korea, the chief corporate regulator is pressing for franchisors to “release” information on profit margins of key goods that franchisees need to buy (information franchisors are unlikely to have, unless they are themselves the source).  

The “watchdog” also plans to ban franchisors from taking retaliatory steps against the report by franchisees of abusive corporate practices, surely an extraordinarily rare step for any informed franchisor to take.

3. Sometimes it’s not a rifle shot but a blunderbuss. A recent opinion piece in an Australian newspaper minces no words: “Australia’s $170-billion-a-year franchise industry is rotten.” It proceeds to criticize “gouging,” underpayment, exploitation and pervasive “greed.” The polemic questions “whether the industry needs to be probed independently and regulatory changes considered,” and concludes “there is speculation about the very viability of franchising.”

At a minimum, there is discussion of whether some adjustments in “business as usual” should be considered. Writing in this space after a trip to China, my colleague Tao Xu recently speculated whether, before franchising, “Will more franchisors, especially those well capitalized ones, choose to establish a presence in a foreign market with company-owned pilot stores?...”

Let’s put this in perspective. The sky is not falling. Franchising, if still imperfectly understood, is generally thought of as a positive force—not only commercially but also societally.

But there are enough cracks showing up, and across the world, that it would simply be foolish for the franchise community to continue to avert its eyes.

These troubling shifts in popular opinion eventually find their way into hostile or at best misguided legislative proposals, or into dangerous litigation. When that happens, franchise companies or associations in at least some countries react in an effort to turn the tide.

But by then, of course, it may well be too late.

Philip Zeidman is a partner in DLA Piper’sWashington, D.C., office. Reach him at 202.799.4272 or philip.zeidman@dlapiper.com.

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