In a world where a lot of major expenses like housing, medical, and education are growing at a much faster rate than typical inflation, it’s no surprise to learn that consumers are increasingly gravitating towards eating out less and using value menus when they do. It’s also no surprise that franchisors are pushing those value menus more than ever, in an effort to keep the sales numbers up and the juicy royalties flowing. Unfortunately, that means a lot of franchisees are caught in the middle and fighting to stay afloat.
Subway is just one off many franchises forcing the squeeze onto their loyal franchisees. In this LA Times piece, one frustrated franchisee says he spends more than $4 to produce every $4.99 footlong. Add in the fact that Americans are drinking less soda and using more debit and credit cards to pay (creating additional transaction fees), and you’ve got a recipe for franchisee misery.
When you buy into a franchise, you’re stuck with what they give you. If they decide their California-based franchisees need to honor the same deals as their Midwestern franchisees (in spite of vastly different costs of living), you could find yourself struggling to make ends meet. When you’re talking about investing hundreds of thousands of dollars and many hours of your time, you need to know the company you’re partnering with is looking out for you.
How Can You Protect Yourself?
If you already own a franchise in a system that treats its franchisees poorly, you might just be out of luck until you’re able to sever ties. However, if you’ve decided you want to open a burger franchise or get into pizza franchising, there are things you can do to protect yourself.
- Ask the franchisor how they respond to the challenges of operating in areas with vastly different costs of living. Do locations in places like Hillsboro, Illinois charge the same prices as locations in places like New York City, Los Angeles, and Washington, DC?
- Find out ahead of time what the rules are on promotions. Do you have to opt into all of them? When price cuts are required, do they subsidize it or reduce royalties in any way?
- Make sure your contract doesn’t make it excessively difficult to change brands. Look at the terms offered by a variety of brands in your desired niche. Leave yourself a reasonable out.
- Get your own lawyer to read through the paperwork. Franchisors have teams of lawyers writing contracts heavily slanted in their favor. The least you can do is get someone to help look out for your interests.
- Remember that terms are negotiable. You may not have much power as one single-location franchisee of a large and established company, but if you join a smaller system, especially in a new regional market, you may have a little more pull.
In general, don’t let yourself be swayed by brand names. Talk to other franchisees and attend conferences. Opening a franchise of any type is a huge investment, and no matter what they say, franchisors are looking out for the brand first. That doesn’t mean they can’t be wonderful partners, but it does mean you need to look out for yourself. Nobody else will.