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Continued: Behind Big Macs, a hidden drama over corporate control and franchising

  • Article by: CANDICE CHOI , Associated Press
  • Last update: September 3, 2014 - 10:45 AM

The Service Employees International Union also is backing the California bill.

THE POWER STRUCTURE

Many states have no laws regarding the termination of franchisee agreements, and the ones that do vary in the protections they provide. That can leave franchisees at the mercy of contracts, which often put all the power in the hands of companies, franchisee advocates say.

Corporate cultures vary, of course, with some companies exerting more control than others, said Robert Purvin, CEO of the American Association of Franchisees and Dealers in Palm Desert, California. At Subway, for instance, franchisees are in charge of buying supplies, so they know the company isn't marking up prices for cold cuts and lettuce.

Companies also often have advisory councils to give franchisees a voice. Still, there are bound to be disagreements given the nature of the business model. Value menus are a good example.

Franchisers like Wendy's get a percentage of restaurant sales no matter what. Franchisees, by contrast, have to think about ingredient costs and worry low prices can eat into their profits. The friction can lead to disputes that land in court.

In 2009, Burger King franchisees sued the company over a $1 double cheeseburger they said they were losing money on. The suit was settled after 3G Capital bought the chain and worked to mend fractured relations with franchisees. The price of the burger has since gone up.

In other cases, franchisees have leeway on corporate decisions.

Don Sniegowski, who runs the franchisee site BlueMauMau.com, recalled a plan by Dunkin' Donuts two summers ago to sell bananas by cash registers to create a more healthful image. Not all franchisees liked the idea, noting bananas could attract flies and drive up costs. The company went ahead with it anyway.

A Dunkin' Donuts spokeswoman, Tessa Lueth, declined to say how many locations have adopted the program, but said bananas are seen in "a large and growing number" of stores.

In general, franchisees are better at running restaurants than companies since they have more invested in the business, said Jonathan Maze, editor of Restaurant Finance Monitor. Sometimes companies sell restaurants back to franchisees to boost their own performance.

Burger King, for instance, has been refranchising its company-owned restaurants to reduce costs and create a more stable revenue stream from franchisee fees. It's also striking franchising deals to open more locations around the world. The strategy helped Burger King nearly double its profit last year, even though sales rose just 0.5 percent at established locations.

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  • The tension between big restaurant companies and the franchisees they rely on is being tested by unions who are pressing the companies to take responsibility for workers employed by the franchisees.

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