Franchise nightmare: The rat effect

NEW YORK (CNNMoney.com) -- When dozens of rats were seen scurrying around a closed KFC/Taco Bell restaurant in New York City's Greenwich Village last month, other franchise owners knew they would pay the price for one store's transgressions.

The owner of the restaurant, Matthew Bernardo, had been cited for a number of health code violations and was forced to close his doors after video of the infestation ran rampant on the Web.

Although a spokesman for Taco Bell insisted that the company has "strict quality assurance standards, and this situation was completely unacceptable," other franchise owners had to face the backlash head-on.

"One of the great advantages of a franchise business is that, as a single operator, you have the benefit of this enormous network and brand," said Matthew Shay, president of the International Franchise Association.

"The potential risk associated with that is that if there is one negative occurrence at another unit, you might feel some of that fallout."

In fact, Susan Kezios, president of the American Franchisee Association, said this type of scenario is the biggest dilemma facing franchisees. "You may be running your store up to standard but if another store has rats running around, that's going to reflect on you."

Kezios said even an isolated incident could "absolutely affect" other franchisees' revenue. "It's your worst nightmare, through no fault of your own," she said.

But despite the losses at stake, in the end, it is strictly up to the franchisor to contend with a public relations setback.

"Ultimately franchisors are charged with protecting the integrity of the brand," Shay said.

Often that is written in franchise contracts. In fact, many franchises have policies that restrict franchisees from addressing any topic that could be seen as adversely reflecting on the brand.

And if the corporation determines that a franchisee's action adversely reflected on the name, then the franchisee could lose the investment, which could be upward of $1 million.

"There's not a lot you can do as a sole owner aside from keeping your place clean," Kezios said.

In this case, however, Taco Bell's corporate response does not address whether other franchisees may have been negatively affected. "We have communicated openly and regularly with our New York City area customers via the news and online to apologize to them for this incident and let them know the actions we have taken to address the incident at this restaurant," the spokesman said.

But this isn't the first time the company has had to address an enormous public relations setback. Last fall dozens of customers were sickened by E. coli bacteria, which the Centers for Disease Control and Prevention traced back to the chain's supplier of lettuce.

The outbreak prompted the closure of many Taco Bell restaurants throughout the Northeast.

KFC and Taco Bell are owned by Yum Brands, a publicly held corporation based in Louisville, Ky.

The two restaurants often operate in the same retail space. Taco Bell has nearly 7,000 locations in the U.S., about 80 percent of which are owned and operated by independent franchisees.

Shares of Yum Brands (Charts) have fallen more than 3 percent in the past month.

Taco Bell lettuce suspected in E. coli outbreak