As the economy continues its slow recovery from the Great Recession, franchising remains a significant sector, both for those looking to own their own business and for companies seeking to expand their presence and generate more revenues.
But with the unsure economic climate comes challenges, as players on both sides try to balance franchisees’ sometimes-strained financial resources with the corporate need to continously promote a high-quality brand.
Some, such as Choice Hotels International of Silver Spring, did cut their franchisees some slack during the recession, but more recently are cracking down on those franchisees who they say fail to invest adequately in their properties.
But other franchisers — especially those in other industries, according to experts — remain more forgiving, as they try to retain franchisees, who are the lifeblood of their companies.
“I’ve never seen franchisers be more accommodating,” said Raymond T. McKenzie, who has a business law firm in Gaithersburg that specializes in franchise law.
“Compared with the six or seven years ago, they’re a lot more flexible,” he said. “Not a lot of them are pushing for improvements right now.”
Franchisers are aware that many of their franchisees are hurting financially and that if they push too hard, the franchisees are going to exit the system, McKenzie said.
“That could be true because people are not buying franchises as much as they used to,” said Susan P. Kezios, president of the American Franchisee Association in Chicago. “If people can keep their job, they’re doing that instead of throwing everything into a franchise that might not work.”
A decade ago, it took franchisees an average of 32 months to recoup their startup costs, Kezios said.
Today, some franchisees, such as a recently closed California Tortilla in Laurel, can take up to five years to turn a profit.
Franchise owner Pavan Bhatia said he had been experiencing his first sales growth, at 8 percent, for the first five months of this year before a rent disagreement shut him down last month.
“We were able to survive the hardest times of the recession,” Bhatia said. “Then this happens, just as things were finally starting to look up.”
In general, when franchisees have “gone back and cried poor” these days, the franchisers have been lenient, McKenzie said.
The whole issue of franchisees’ and franchisers’ rights and obligations remains controversial in the industry, with many on both sides refusing to comment for this article.
Protecting the brand
For Choice Hotels, this balancing act could result in significant changes. The company may terminate about 400 Comfort Inn hotels, mostly those whose owners refuse to invest in the company’s capital improvement program, according to a report in trade publication HotelNewsNow.com.
The hotelier franchises more than 6,100 hotels, comprising more than 490,000 rooms in the U.S. and more than 30 countries and territories, according to Choice’s website. It has 2,000 Comfort Inn locations.
Choice Hotels has been involved in a capital improvement program throughout its properties, although it delayed requirements during the recession.
“We immediately postponed a lot of the work that needed to be done and pushed back a number of the requirements that were there,” CEO Stephen P. Joyce said at the Asian American Hotel Owners Association annual conference in Atlanta in May, according to the trade publication.
Choice Hotels representatives did not respond to requests for comment.
The company reported revenues of $638.79 million and a $110.4 million profit last year.
"Consistent quality standards are critical to the success of a hotel franchise," reads Choice's 2011 annual report. "To encourage compliance with quality standards, various brand-specific incentives and awards are used to reward franchisees that maintain consistent quality standards. We identify franchisees whose properties operate below minimum quality standards and assist them to comply with brand specifications. Franchisees who fail to improve on identified quality matters may be subject to consequences ranging from written warnings, the payment of re-inspection fees, attendance at mandatory training programs and ultimately to the termination of the franchise agreement."
Joyce’s comments were echoed by others in the hospitality industry at the Atlanta conference, who said hotel owners are responsible for maintaining the quality of their property now that the market is returning, according to HotelNewsNow.com.
A franchisee who doesn’t invest in his asset is bringing the whole brand down, Bill Fortier, senior vice president of development for the Americas for Hilton Worldwide, reportedly said.
Who pays?In response to Choice’s and other hoteliers’ push for more property improvements, Robert Zarco, a partner with Zarco Einhorn Salkowski & Brito in Miami, has been representing franchisees protesting the corporate requirements.
Brand companies are quick to demand major changes because the franchisees are paying for them, HotelNewsNow.com quoted Zarco, who could not be reached for comment.
Isaac Green, owner of eight McDonald’s restaurants, including five in Maryland, said he invested $250,000 each into remodeling two restaurants and rebuilt his Capitol Heights location, which reopened at the end of October.
Green originally dipped into his 401(k) account to buy his first two buildings from the Oak Brook, Ill., fast-food chain.
Kezios said franchisers also use franchisees as “captive purchasers” of their products, requiring them to buy new furnishings, equipment and software. She said franchisers benefit through deals with the vendors selling these products.
“Many chains are having trouble in this economy, including fast food, the grand-daddy of the franchise industry,” Kezios said.
In contrast, John Flatley, a Chick-fil-A franchisee in La Plata, said the Atlanta company handles all the property investment. The majority of the chain’s franchisees own only one restaurant, he said.
‘A consistent brand’
Rent-A-Wreck, a Laurel franchiser that offers used rental cars, rarely terminates a franchisee based on not making changes to the property, said spokesman Jason Manelli.
“We do everything along the way to make sure that step is not taken,” he said. “The preservation of our locations is very important to us.”
He added that Rent-A-Wreck franchise disclosure documents include language that covers remedial steps if franchisees do not keep operations up to the corporate standard. Rent-A-Wreck monitors franchisee sites through annual site visits and often gives suggestions, Manelli said.
“We want to deliver a consistent brand,” he said, adding that franchisees not keeping up with their counterparts do diminish the brand as a whole.
If people look at a shop and see it is in poor shape, they might question vehicle maintenance as well, said Clyde Raghunath, a Rent-A-Wreck franchisee in Rockville.
“I take pride in doing this,” Raghunath said. “I’ve been doing it for 17 to 18 years. You want to build a brand.”
Rent-A-Wreck has 130 franchise locations, with six in Maryland, Manelli said.
Candy Express Franchising of Burtonsville, which owns candy franchises Candy Express and Coco Moka Cafe, asks franchisees to upgrade their stores every five years per the franchise agreement, said President Michael Rosenberg.
“It’s not a requirement, but in the event that the owners need it, it’s done upon request,” he said. “The uniformity of image and policies and procedures is important to the success of the concept so customers can identify that.”
Rosenberg said the company has yet to terminate any franchisees, although it has engaged in conversations to fix problems found during store visits.
Candy Express has six locations in the U.S., but none in Maryland.