Trench warfare in the franchise field

tish_reisman.top.jpgTish Reisman has sunk $300,000 into her Rita's Italian ice franchise -- with no profit so far.By Eilene Zimmerman, contributing writer


(CNNMoney.com) -- Even in good times, the relationship between franchisors and their franchisees tends to be fraught. Toss in an economic downturn and things get downright nasty. Iconic brands are facing revolts in the trenches from owners fed up with their corporate parent.

Later this month, a Los Angeles jury trial will begin on a seven-years-old and still festering fight between UPS (UPS, Fortune 500) and a group of disgruntled franchisees of Mailboxes Etc., which UPS acquired in 2001. Quiznos recently settled a class-action lawsuit with its franchisees, while Burger King remains mired in a court battle with store owners over a $1 promotion for double cheeseburgers that cost more than a buck to produce.

Garth Snider, president of FranchiseOpportunities.com, a site that advertises franchises for sale, says the level of complaints by franchisees and franchisors alike "is commensurate with the hard economic times we're experiencing. This wasn't an issue three or four years ago, when there was plenty of money to go around, because franchisors weren't looking to be as aggressive with their pricing."

When margins are razor-thin and sales slip, disputes are more likely to blow up into major skirmishes. The Quiznos fight featured complaints that Quiznos forced franchisees to buy food and supplies at inflated prices while setting retail prices so low that store owners couldn't make a profit. Discounts -- like those Burger King offered on its double cheeseburgers -- are another flashpoint. T.G.I. Friday's had a small war with its franchisees last year over a two-month promotion that slashed sandwich prices to a money-losing $5 each.

"It's the divergence between generating volume by forcing your franchisees to charge lower prices and the net effect of that on the actual business owner, who still has to pay the same royalty and the same price for goods," says Justin Klein, a partner in Marks & Klein in Red Bank, N.J., and lead attorney for the Quiznos plaintiffs. "Essentially, it still costs you $5 to make the sandwich but you're forced to sell it at $3.95."

The pressures come on all sides. One of Klein's current franchisee clients is being forced by its parent company to extend operating hours -- even if those extra hours aren't profitable. "Forcing them to stay open longer means they have more employees there," he says.

Life in the trenches

Tish Reisman, owner of a Rita's Italian ice outpost in Tampa, Fla., is facing many of the typical franchisee frustrations. She signed with the Trevose, Pa.-based parent company in June 2007, paying $65,000 for a two-store agreement. Reisman grew up in Philadelphia and had a fondness for Rita's. She believed that in Florida "Italian ice would be a no-brainer."

The first store opened in March 2008. The problems began just six months later.

A competing Rita's opened five miles away. A corporate marketing campaign required her to stand in front of Wal-Mart and Kmart stores handing out coupons, sucking up time and resources she couldn't spare. Rita's requires her to sell every new flavor it introduces for 24 days -- even if it tanks.

"In November, I had to sell caramel apple, which I was throwing away every two days," she recalls. Rita's projected waste from introducing new flavors is 7% and Reisman was given credit for that, but her actual waste was closer to 22%. "It would have been better if I could have decided what flavors would sell, rather than being forced to sell all of them."

Reisman lost $86,000 the first year she was in business and hasn't been able to afford to open her planned second store. She's sunk more $300,000 into the franchise. A single mother with four children, Reisman is worried about bankruptcy.

Jim Rudolph, CEO of Rita's, says the coupon program and new flavor introductions have been successful for other franchisees. The company has been working with Reisman, he says, getting her rent reduced, offering incentives to potential buyers of her franchise, and negotiating with banks on her behalf.

"I feel terrible for her, but we also cannot be responsible for the unfortunate situation she's gotten herself into," he says.

That's the common line franchisors take when store owners run into trouble: You're on your own.

Industry veteran says they've seen a few concessions to the economic downturn. "We're seeing franchisors responding by temporarily deferring royalty payments," says David Kaufmann, a franchise attorney and partner with Kaufmann Gildin Robbins & Oppenheim in Manhattan. "Some have escalated corporate contributions to marketing programs, some are letting franchisees that promised to open new units now push that further into the future."

But Quiznos attorney Klein expects that even when the economy recovers, franchisees and franchisors will continue warring over the financial terms of their arrangement.

"I don't think things like value meals and other low-priced promotions are going to stop," he says. "They are very popular with consumers." To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Questions & Answers



QHow does a florist sell more in this economy? We changed our business to designing weddings and events only, as the everyday flowers are not selling. We had to throw out too much product at the end of the week -- flowers are perishable! More
Get Answer
- The Flower Lady, Suwanee, Ga.
Overnight Avg Rate Latest Change Last Week
30 yr fixed4.19%4.26%
15 yr fixed3.23%3.27%
5/1 ARM3.34%3.45%
30 yr refi4.17%4.23%
15 yr refi3.21%3.25%
Rate data provided
by Bankrate.com
View rates in your area
 
Find personalized rates:

Sections

European leaders are trying to hit Russia where it hurts by issuing new, tougher sanctions targeting Vladimir Putin's cronies and key Russian industries. More

New annual report from U.S. government shows the long-term prognosis for Medicare has improved thanks to slower health spending, while the outlook for Social Security remains unchanged. More

Bunch o Balloons allows multiple water balloons to be filled at once. Parents are loving it -- to the tune of $645,000. More

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.