2004 was a big year of change in franchising.
Even the FTC thought so -- when it issued its proposed changes to the FTC Rule and requested comments. The franchise community responded provided dozens of comment letters to the agency, both applauding and questioning certain new requirements. The changes to the FTC rule have not yet been promulgated, but the comment period is now closed. To view the proposed changes and the comments, click here.
Bread is back on the menu -- After a difficult spike in low-carb eating, some carb-dependent concepts - like pizza, bagels and ice cream -- are breathing a sigh of relief as life appears to be returning to normal and people returning to carbohydrate-rich diets. Some time in mid-year, the low-carb craze plateaued and people began visiting their local pizzerias again. Time will tell how this change will affect the success of concepts based on low-carb products.
In Memoriam -- The franchising community was shocked this year by the sudden passing of James Cantalupo, McDonald's CEO, in April at a franchise conference in Florida. After Mr. Cantalupo's death, Charlie Bell was named McDonald's CEO, but recently resigned his post to focus on his battle with colorectal cancer. Jim Skinner is now the CEO for McDonald's.
Krispy Kreme falters, then plummets -- In 2003, Krispy Kreme, the Wall Street darling praised for its near-perfect U.S. expansion, hit a high in its stock price at nearly $50 per share. After riding a three year wave of media love, the company hit a wall in 2004 (I like a mixed metaphor once in a while). This February, the company announced that it would buy back four large franchise territories, a move that had some market analysts scratching their heads. In April, analysts began to criticize the company's strategy and the stock price started to come down. In May, shareholders filed suit against the company and in July, the SEC announced an informal probe that became a formal investigation into the company's accounting practices in October. By November, when the company announced a $3 million loss for the third quarter, the company's stock had dropped more than 75% to $9.30 per share.
FLSA Class Actions -- In other class action news, several franchise chain operators have been caught in class actions over claims that they violated the Fair Labor Standards Act in the operation of corporate restaurants. According to the lawsuits, some companies do not pay managers overtime because they believe them to be exempt employees under the FLSA. Class action lawyers read the law differently, claiming that if the managers are performing non-managerial duties 90% of the time, they deserve overtime pay. CKE paid $9 million in an FLSA class action settlement, and similar cases were filed against Pizza Hut, Ryan's Family Steak Houses and Claim Jumper Restaurants.
Blockbuster Corp. isn't afraid to take it up a notch. The company announced that it would make a hostile takeover bid for Hollywood Entertainment, Inc. if its directors continued to refuse negotiations with Blockbuster. Blockbuster is prepared to offer Hollywood's shareholders $11.50 per share in cash, which would amount to $700 million, plus an assumption of $300 million in debt. The takeover bid is scheduled to occur in mid-January and continues the battle between Blockbuster and Mark Wattles, Hollywood's chairman, and a Los Angeles investment firm who offered $10.25 per share.
Despite the flurry of news last year about the demise of the video rental industry and Viacom's efforts to jetison Blockbuster from its holdings, Blockbuster believes that its acquisition of Hollywood can help it compete in the changing video marketplace -- including Blockbuster's new on-line movie rental service. If it acquires Hollywood, Blockbuster will control 50% of the country's video rental stores. Hollywood's shares closed at $13.16 today, while Blockbuster's shares were down at $9.33/share.
Here's a concept that can't miss. There are companies whose principal business is to clean residences or lodging facilities that have been the site of a grisly death -- often by suicide or murder. Tragic Solutions and Aftermath, two companies that have pledged themselves to the cleanup of crime/death scenes, are profiled in this article from the Bucks County Courier Times in Pennsylvania. The owner of Tragic Solutions has even indicated that he plans to offer franchises in the next 6 to 8 months. Despite the gruesome nature of the work, there has been some interest in the field - at least by potential employees for the companies -- generated by the popularity of crime scene investigation shows.
In a lawsuit filed in Santa Clara County, California, some existing and former Apple resellers claim that Apple tried to drive them out of business by opening Apple Stores in close proximity to the resellers and by withholding inventory to ensure that it was available for the corporate stores. According to this article on msnbc.com, the original Apple lawsuit has been pending since 2003 and there are now five plaintiffs in separate actions, which will likely be consolidated. The plaintiffs, however, are looking for some Apple reseller solidarity by inviting other resellers to file suit and have recently engaged franchisee counsel to lead the prosecution of their claims. It's unclear whether any franchise claims (under California or other state law) have been asserted in any of the suits, but the resellers' new counsel, David Franklin, is comparing the cases to an encroachment case he handled against the Fotomat franchisor in the early 1980s. A copy of the most recent complaint against Apple is available here.
During this spiritual season, thoughts of franchising come second to thoughts of faith. This post from Times and Seasons, however, helps tie two life-affirming concepts together by considering the Church (presumably any Church - although this site is run by Mormons) as a franchise -- right down to the uniformity of practice and doctrine, training and ops manuals that characterize so many successful franchises. If "Law and Order" can have a franchise, why should the Church be denied?
In intellectual property news, companies continue to charge that Google is misappropriating or infringing their trademarks by selling advertising to their competitors on Google searches. Google allows companies to buy advertising on a search page if a consumer plugs in a search for one of their competitors. According to this article, several companies are suing the search engine powerhouse for trademark infringement. Geico, however, recently lost its claim that Google's advertising practice would cause confusion among consumers based on a lack of evidence.
In an end-run around the Federal Arbitration Act, the wives of Snap-On Tool franchisees have won the right to present their fraud claims against the franchisor before a jury. The Snap-On wives, as they are affectionately called (evoking an image of wives hooked onto their husbands' belts like cell phones), sued the franchisor in New Jersey state court, claiming that they had been defrauded by Snap-On because their family was induced to invest its savings into the franchise. Because the Snap-On wives did not sign the franchise agreements, they argued that they were not bound to the arbitration clauses that prevented their husbands from suing Snap-On in court. This case presents a dangerous precedent and a warning to franchisors.
As a matter of practice (and presumably to address some debt and execution issues down the line), many franchisors require that franchisee spouses sign franchise agreements even if they will not operate the franchise. With this New Jersey ruling on arbitration clauses, it may become more difficult for married persons to avoid having both spouses sign the franchise agreement.
In a recent verdict in a lingering lawsuit in Connecticut, a federal jury awarded $2.3 million in compensatory damages to a former Nationwide Insurance agent, finding that Nationwide terminated the agent's contract without good cause in violation of the Connecticut Franchise Act and the Connecticut Unfair Trade Practices Act. Nationwide claimed that the agent had violated state law in the performance of his duties as a Nationwide agent and that it had the right to terminate him. Nationwide also argued that its contract, like most insurance agency contracts, expressly provided that it could terminate "without cause" and that the agent was not a franchisee under the Connecticut Franchise Act.
In interpreting the Connecticut Franchise Act to cover this relationship, the jury essentially voided the "without cause" provision in the contract. Because most insurance companies work through agency relationships and do not provide FTC or state required disclosures, this verdict could have far-reaching implications for the insurance industry. The parties will submit post-trial motions and Nationwide is considering an appeal to the Second Circuit Court of Appeals.
Krispy Kreme announced yesterday that an independent law firm concluded that no one in the company engaged in any misconduct related to the company’s acquisition of a Michigan franchise. Krispy Kreme has been under investigation by the SEC for its franchise buyback procedures and accounting, as well as its earnings outlook. The company also faces shareholder claims. Although the company released a statement regarding the Michigan franchise, it continues to review other errors and adjustments related to accounting franchise buybacks in Michigan and northern California.
Krispy Kreme posted a $3 million loss in the third quarter of 2004 and recently stated that it would close a $4.6 million doughnut plant in northeast Ohio as a result of oversupply problems.
In Los Angeles, two of the members of the 1960’s pop group “The Turtles” filed suit against Applebee’s International, Inc. for the company's parody of the group's 1967 hit “Happy Together.” According to this article from Reuters, the ads, in which the words to “Happy Together” are changed to “Imagine steak and shrimp, or shrimp and steak/ Imagine both of these on just one plate,” have compromised The Turtles' reputation. Applebee’s claims that it contacted the song's publisher for permission, but did not contact The Turtles, who own the master recording.
Just weeks after announcing its decision to sell Wright Express for $1 billion, Cendant entered into a deal to buy the Gullivers Travel Associates and Octopus Travel Group Ltd., two U.K.- based travel companies, for $1.1 billion. This acquisition expands Cendant’s presence in the travel industries, adding Gullivers Travel to the stable of travel brands in the hotel, car rental and travel services business. Cendant is the parent company for such brands as Days Inn, Ramada, Howard Johnson, Super 8 and Travelodge. The company also bid $1.25 billion in September for the internet travel company, Orbitz Inc.
Today both Gymboree and Domino’s Pizza announced in unrelated statements that their CFOs were stepping down. Gymboree CFO Myles McCormick resigned on Tuesday, December 14. The statement did not provide any explanation for the resignation. Meanwhile, Domino’s Pizza announced the retirement of CFO Harry Silverman. The company has not identified Silverman’s replacement, however, because his retirement from the company will be phased out over a two-year transition.
After seven months of trial in Hartford, the fraud case against two former Cendant executives has been delivered to a federal jury. Almost seven years ago, Cendant discovered a $500 million accounting fraud, which has since been dwarfed by Enron and WorldCom. Walter Forbes, Cendant's former chairman, and E. Kirk Shelton, the former vice chairman, face charges of securities fraud, wire fraud, and conspiracy in connection with a scheme to inflate the revenues and earnings of CUC International, a company that was acquired by Cendant.
Since the fraud was uncovered, Cendant has paid $2.85 billion to settle its shareholder lawsuits. Once the verdict is returned in the criminal proceeding, Cendant will likely proceed against its former auditors, Ernst & Young. Ernst & Young paid $335 million to settle a Cendant shareholder lawsuit in 2000.
Although KFC led the effort to show that co-branding increased unit sales, Yum recently announced that its chicken concept would no longer be partnered with other brands until KFC's sales improved. According to this article from the Louisville Courier Journal, KFC has experienced same store sales declines for the last two years and expects another 1-2% drop for 2004. The company cited increased competition and what it called "self-inflicted wounds" as reasons for faltering sales. In revamping the system without the co-branding model, KFC plans to fashion its 2005 marketing after successful campaigns for its sister companies, Taco Bell and Pizza Hut, to achieve growth in same stores sales next year.
The owners of Shorty's, a Pittsburgh purveyor of hot dogs and hot dog-related offerings since the 1930s, have faced adversity before. Out of the ashes of their two downtown locations, which have fallen prey to reconstruction projects, may rise the Shorty's chain --a hot dog stand chain. The owners think complete annihilation of their hot dog empire may create an opportunity to rebuild and even expand the brand. Tim Murphy, an associate professor of entrepreneurship at Washington and Jefferson College, said that Shorty's expansion plan could be "almost a case study for a franchising class" -- testing the reasons for the popularity of the brand: location vs. food and service.
The New York Times reports that in a statement published on Friday, new McDonald's CEO James Skinner promised to continue to implement the strategy responsible for 18 months of growth at McDonald's. This strategy includes continued marketing of McDonald's salads, which have recently increased McDonald's sales in Europe. According to the article, the maintenance of strong sales will require McDonald's to strike a balance between offering premium foods and offering low cost foods. Mr. Skinner said that 37% of McDonald's customers make their food choices based on cost alone. USA Today speculates in this article on the challenges that lie ahead for Mr. Skinner and McDonald's.
Meanwhile, Charlie Bell, McDonald's former CEO who resigned last week to attend to health issues, has returned to his native Australia to be with friends and family.
Fast Company published this interesting article on Dunkin' Donuts' strategic pursuit of Starbucks. Although Dunkin' attracts new customers of specialty coffee beverages with lower prices and faster sevice, coffee experts contend that Starbucks customers come back for the Starbucks experience -- upholstered furniture, good music and clean environment. The article is a good review of how far value will go to win customers -- or conversely, how much customers will pay for a better experience.
It's also a commentary on the importance of one of the principal principles in franchising -- uniformity. The vast majority of Starbucks locations are corporately owned and operated; in contrast, Dunkin's units are franchised and according to the Fast Company piece, customers expressed frustration at the difference in coffee quality from location to location. The other critical variation in the Dunkin' brand, according to the article, is the cleanliness of the locations.
Dunkin' has crusaded for years now to improve quality assurance and get its franchisees to meet the franchisor's standards. It may still have a long way to go though. According to this article, if Dunkin' intends to catch Starbucks, it may not need Ray Charles' music and leather sofas, but it still has to convince its customers that its stores are clean.
In a settlement approved by an Oklahoma judge, Jiffy Lube has resolved 9 lawsuits filed against it for environmental surcharges tacked on to customer invoices. The lawsuits alleged that the environmental fees amounted to hidden charges added after the parties already reached an agreement on price. Jiffy Lube claimed it did nothing wrong, but agreed to provide 7 million customers with a $5 coupon and pay plaintiffs' attorneys' fees of $2.75 million to avoid costly litigation. A similar settlement should end the class action in New York.
CnnMoney.com reports that Wendy's will close 15 to 18 of its Baja Fresh Mexican restaurants. The burger company operates 300 fresh-Mex units and has enjoyed success in California and the eastern U.S. Baja Fresh sales have been sluggish, however, in some other markets like Chicago, Nashville and Columbus. These sluggish sales and losses resulted in lower than expected earnings for shareholders.
According to Wendy's, this announcement is only the first wave of initiatives to improve Baja Fresh's numbers. Wendy's stock rose 7% in trading this morning after announcement of the company's plans to address the Baja Fresh problems.