Several thousand, I’d imagine.
- WikiFranchise.org: Immigrants as Prey, Cannon fodder, Language shortcomings create a vulnerability
- Franchising Opportunism, 2005 paper
Click here to watch a 45 minute expose called 7-Eleven: The Price of Convenience.
Modern franchising runs identically, internationally, on all countries sharing a British Common law heritage.
The highest levels of national government known full-well for decades that wage theft is largely responsible for the extraordinary ROI that is achieved by franchisors such as Mr. Withers and Ms. Barlow.
Cross-posted on WikiFranchise.org.
Of the investment resources they attract, do they use them effectively or are they squandered?
I chose some of the more “blue chip” of the U.S.-based systems and chased down their 2013 FDD (thank you the state of Wisconsin).
Opportunism is when someone in a position of advantage, uses that position against another. In franchising, the situation that the franchisor controls the store’s sunk cost investment, can be exploited. A very good test of opportunism is: If the ownership of the assets were reversed, would the alleged “opportunist” likely change their decision?
While the 5 systems grew by 4,342 new stores (adding +$6-billion to franchisors’ coffers), there was also a loss of 1,738 stores or $2.5-billion of franchisee store investment that left the industry.
Measured from the best practice level of Dunkin’ Donuts, there is some very large variation in these systems as they purport to take care of “other people’s money”.
Losing over 40% of the invested capital in 4 years? It seems the franchise industry is a bit of a leaky bucket.
The Globe and Mail reports on the new Tim Hortons president, Mr. Diaz Sese:
…Mr. Diaz Sese, who has law and business degrees and previously worked for French sporting goods retailer Decathlon, is moving from Singapore to Oakville, Ont., to take the Tim Hortons job, the company said last month.
Mr. Diaz Sese’s experience heading up Burger King’s expansion overseas fits in with Burger King’s goal of global expansion for Tim Hortons. The company says he tripled Burger King’s annual rate of restaurant growth in Asia.
Mr. Fisher said the new CEO, Mr. Schwartz, is part of a new breed of young leaders in the food service industry. “He’s got a reputation for cutting the fat and running lean operations.”
Yes, 3G Capital cut head office costs at Burger King in that takeover in 2010. But they had also had many corporate stores to sell for a quick cash hit.
This time, there are almost no Tim Hortons corporate stores to sell.
Just 3,800 franchised stores.
It’s because of the actual nature of franchising.
Specifically the sunk cost investment dilemma that manifests itself in franchisor opportunism.
B. The Franchisee’s Problem: Opportunism
… An unrestricted exercise of control by the franchisor will favor the franchisor’s interests over the franchisee’s and create an equally significant problem for the franchisee: risk of opportunism.
For the franchisee, the most significant economic feature of franchising is the allocation of capital investments. Franchisees are distinct from ordinary employees because they have made capital investments in the business. These investments, however, are normally highly idiosyncratic, meaning that a large fraction of the franchise assets often have a greatly diminished value if employed in another line of business. Consequently, the costs of establishing a franchise are effectively sunk costs, which, once expended, are not easily recovered if the franchise goes out of business.
Sunk costs play an important role in creating the incentives that operate within an established relationship. This is best understood by considering the difference between fixed costs (overhead or up-front costs) that are sunk and those that are recoverable. For example, consider a business in which a variable cost of production has increased dramatically, so that the highest price in the business can charge for its product covers only the marginal cost of producing it, leaving nothing to contribute to fixed costs. Although the business can cover its variable expenses, such as wages and ingredients, it is making negative profits because it has nothing left over on its investment in overhead assets. If the business can resell these assets to recover its fixed costs, then the business can raise its profits to zero by shutting down and selling off the assets. If, however, these assets are sunk assets, then, by definition, their sale will not recover their full cost; shutting down will still leave the business with negative profits. If the business has any revenue left after paying variable costs to defray the cost of these assets, the profit-maximizing decision is to continue to operate, instead of junking the assets entirely and losing the whole investment. The key difference is that a business with recoverable fixed costs will shut down as soon as it shows losses, employing its capital more profitably elsewhere. A business with sunk costs, on the other hand, will continue to operate even though it has never recovered its investments in fixed costs, and it will not shut down until the amount it is losing exceeds what it would lose by simply abandoning the investment. [my emphasis]
The incentive that causes a business with sunk costs to stay in operation despite losses makes franchisees vulnerable to franchisor behavior known as “opportunism.”. Because the franchisee will continue to operate even if it is not recovering its sunk investment, the franchisor can make decisions that induce such losses without the franchisee going out of business. When these decisions benefit the franchisor at the expense of the franchisee, the franchisor opportunistically extracts a portion of the franchisee’s sunk costs. A franchisor can potentially extract this value from the franchise directly in a number of ways: it can raise the price of goods sold to franchisees, increase rent, boost royalties through an increase in the required volume of a franchise, levy fees, or divert advertising funds to general corporate uses. Extractions can occur indirectly as well. To increase the price of new franchises, a franchisor could require franchisees to make excessive advertising investments, to participate in promotional programs which are not cost-effective, or to undertake unnecessary renovations.
Just as the risk of free-riding makes control a central concern for the franchisor, the risk that franchisors will extract sunk costs makes opportunism a central concern for franchisees. These concerns meet head on: Where franchisors seek to expand their control, franchisees seek to erect boundaries. In some circumstances a franchisor’s decision to require increased advertising by franchisees, for example will reflect a legitimate exercise of franchisor control to overcome free-riding. But in other circumstances, it will reflect only opportunism.
Excerpt from Problematic Relations: Franchising and the Law of Incomplete Contracts, Gillian K. Hadfield. See full 1990 Stanford Law Review article on WikiFranchise.org
Many decades of very profitable franchisee relationships can
turn on a dime
when the franchisor decides to exercise their discretion in a more self-interested way.
The Canadian Franchise Association says it …advocates on behalf of franchisors and franchisees in Canada…
April 4, 2000
Investigate Franchise Association Abuses: Martin
Tony Martin, MPP, Sault Ste. Marie
New Democratic Party
Legislative Assembly of Ontario, Canada
INVESTIGATE FRANCHISE ASSOCIATION ABUSES: MARTIN
TORONTO – The Consumer and Commercial Relations Ministry should investigate the Canadian Franchise Association over its failure to help Ontario franchise holders, NDP MPP Tony Martin said today.
The CFA is advising the Conservative government on proposed changes to provincial laws governing franchise agreements. But the association is under fire from hundreds of its own members for its indifference to their complaints, the NDP Critic for Consumer and Commercial Relations said in the Legislature today.
“The CFA has been of no help to many hundreds of entrepreneurs who lost their shirts in shoddy franchise deals,” Martin said. “Instead of taking the CFA’s advice this government should be sending in ministry staff to thoroughly investigate this association’s failures.”
Martin raised the case of Brenda Hope, a mother of two from Coldwater who lost $90,000 as a Chemwise Inc., franchisee. For more than a year, the CFA has refused to look into Hope’s complaints, although it endorsed Chemwise as a member.
Similarly, the CFA has refused to accept a registered letter from Bulk Barn franchisees who have a series of complaints against the franchisor. Martin was also refused when he tried to deliver the letter. The Sault Ste. Marie MPP called on Consumer and Commercial Affairs minister Bob Runciman to act now to protect small businesspeople.
“Perhaps the minister can convince the CFA to live up to its responsibilities to mediate franchise disputes. If he can’t, we need a full-scale probe of this group. It’s the least we can do for hard-working families who lose everything in dubious franchise deals,” Martin said.
The MPP has proposed his own legislation, Bill 35, that is far tougher than the government’s Bill 33. The Martin Franchise Bill would require full-disclosure of franchise contracts, a dispute resolution mechanism, the right to associate and the freedom to source products outside of the chain when not trademark related.
Also: Martin’s questions directed to the CFA during their Mar 2000 expert witness testimony.