Collaborative Tensions: Independent Franchisee Associations Vs. In-House Advisory Councils

October 26th, 2018 by Ritwik Donde

Over the two decades, franchisee associations have become a mainstay of the franchise community. Much like the development of labor unions in this country, franchise systems have witnessed the development and rise of franchisee associations as a powerful vehicle of franchisee representation and negotiation.  While large franchise systems have co-existed with franchisee associations for decades, such associations were traditionally unusual for smaller franchises.

Historically, voicing systemic issues and maintaining a healthy franchisee-franchisor relationship used be the mainstay for a franchisor-controlled franchise advisory council. However, recent times have seen them being relegated to a more secondary role, more so with legacy franchise brands. Recently independent associations have been used to agitate support against unprofitable franchisor initiatives. As franchisee tensions bubble to surface, a significant number of franchisees have taken to leverage independent franchisee associations to raise their collective voices. Earlier this month, Jack in the Box’s franchisee association revealed a vote of “no confidence” in the company’s current management and asked that it replace CEO Lenny Comma, an extraordinary move for a group of operators that rarely get into executive demands so publicly.[1] The association, which says it represents 2,000 of the San Diego-based burger chain’s 2,240 locations, has also hired a high-powered attorney in Robert Zarco. The same week of this, McDonald’s operators, including some of the system’s largest franchisees, held a meeting in Orlando, FL, to discuss forming an independent operators’ group. The meeting appears to have put the company on track to form its first independent association in the chain’s long and storied history.[2]

The formation of a franchisee association in response to some franchisor action or to perceived franchisor indifference to franchisee issues is not unusual, according to a paper presented by Presented by Joseph Schumacher, from Wiggin and Dana LLP.  Some councils are created using the franchisor’s funds, are controlled by franchisor appointees. These sorts of limits on the franchise advisory council and the perception that the council is controlled by the franchisor ultimately lead franchisees to seek out independent representation.[3] Often time, when franchisee councils act as mere rubber stamps for whatever franchisor wants to do, has led to formation of independent associations in such systems. According to an interview given by Chip Rogers, president and CEO of the Asian American Hotel Owners Association earlier this year to Hotel Management Magazine, “Franchisee advisory councils, the nominated or elected owners that liaise with their respective franchise companies, are usually seen as a method for open communication between brands and owners, but not all are equally effective. FACs are most successful when the hoteliers that make up the council are a good cross-section of franchisees.”[4]

A recent FRANdata snapshot analysis on a select growth industries indicates that existence of advisory councils has flatlined. Take for instance, the haircare industry, 37% of brands in this space had an active franchisor-controlled franchise advisory council in 2017. Only 38% of brands had such a council in 2017. The same is true with the home healthcare vertical. In 2017, 54% had a FAC; with that proportion being 55% in 2018. The presence of FACs declined among moving and storage franchises from 41.7% to 29.4% in 2017-2018.

Can a Franchisee Association and a Franchise Advisory Council exist in the same system? The nature and efficacy of franchisee-franchisor relationship relationships facilitated through both the independent associations and FACs impacts brands’ respective FUND credit scores. Therefore, there is strong advocation among the franchise business model experts to now study the efficacy of franchisor-controlled councils, and the role that independent franchisee association could play in maintaining a healthy franchisee-franchisor relationship.

[1] Restaurant Business Online

[2] Nation’s Restaurant News

[3] Wiggin and Dana LLP

[4] Hotel Management Magazine

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