The Culture Of This Franchise System Must Change—Chapter 2
In the last issue of Avanti, I explained why I believe the culture of this franchise system must change if it is to move forward and meet the substantial and material challenges that it now faces, and will most certainly face in the future, both internal and external to the system.
As further evidence of this pressing need, particularly in the context of the ongoing but mainly opaque discussions regarding the 2019 franchise agreement, I bring to your attention SEI’s serial noncompliance with an essential element of the Final Settlement Agreement and Release that memorialized the settlement of the DVR dispute.
That settlement agreement, which was heavily and carefully negotiated on both sides, required SEI to make a report to the settling franchisees and to the National Coalition every 30 days regarding the number of franchisees that signed a new Security System and Monitoring Amendment, as well as an indication of whether or not the return rate is particularly low in certain geographic areas. The new form of Security System and Monitoring Amendment was posted to the 7-Eleven Hub on January 11, 2016. As your General Counsel, it has been my responsibility to monitor SEI’s compliance with this provision. Thirty-day reports were due on February 11, March 11, April 11, May 11, June 11, July 11, August 11, and September 11, 2016. I can say without fear of contradiction, that SEI did not meet a single one of those 30-day deadlines, and that all of the information received regarding the number of Amendments signed was received after written request, sometimes repeated requests, for that information.
The often repeated phrase, “What’s sauce for the goose is sauce for the gander,” simply means that what is good enough for one party in a relationship ought to be good enough for the other. The same is or should be true in franchising in general, and in this franchise system, in particular. I don’t think it takes much imagination to determine what SEI would do if a franchisee failed to comply with the same deadline, eight months in a row, eight weeks in a row, or even eight days in a row.
And now, for the other of the coin.
The October 2016 issue of the Harvard Business Review contains a very illuminating article written by Cheryl Bachelder, the CEO of Popeyes Louisiana Chicken, entitled “The CEO of Popeyes on Treating Franchisees as the Most Important Customers.” You can read the entire article for yourself: https://hbr.org/2016/10/the-ceo-of-popeyes-on-treating-franchisees-as-the-most-important-customers. (Full Disclosure: since July 2010, I have been Counsel to the Popeyes Independent Franchisee Association).
Ms. Bachelder relates her experience at Domino’s Pizza, starting in 1995, when management was confronted by allegations made by franchisees that the company was unfairly profiting from the sale of dough and other supplies that it was selling to franchisees. She was part of a management team that resolved the dispute by creating an audited, transparent system for the sup,ply business, and by agreeing to share profits above a certain threshold with their franchisee community. This created a more positive relationship with franchisees, which led to substantial growth and innovation, and ultimately to the 1998 sale of the company to Bain Capital for $1.1 billion. Today, the company has a market capitalization of $7.2 billion. Wouldn’t it be terrific if SEI management could learn from this example by creating a supply chain that was not shrouded in mystery, but rather one that was completely above board and treated the franchisees as partners and not captive, involuntary customers?
When Ms. Bachelder became CEO of Popeyes Louisiana Kitchen, the franchisee community was angry and frustrated, and the company’s stock had fallen precipitously. She and her team, after a number of inquiries and management exercises, came to an understanding that the company’s franchisees were its primary and most important customers and that no one has more skin in the game. They became focused heavily on unit level profitability, which they had not previously even been measuring, but then started to track closely. Ultimately, Popeyes decided that it needed a national ad campaign, and in order to do that, wanted franchisees to agree to increase the advertising contribution from 3 percent to 4 percent of sales. The franchisee leaders said they would agree to this, but only if the company made a $6 million investment of its own in national advertising. A deal was struck. This collaboration led to increased franchisee success rates and the attraction of franchisees from other systems to become Popeyes franchisees, in a true turnaround in the fortunes of both the company and its franchisees.
There are a number of ways to measure this turnaround. First and foremost, the number of domestic franchised locations grew from 1,451 at the end of Ms. Bachelder’s first year as CEO to 1,934 units as of July 10, 2016, an increase of 33 percent. The stock price of the franchisor, a way of measuring Wall Street’s appraisal of the CEOs leadership principles and style, rose from just over $13 per share in 2007 to nearly $55 per share as of August. Moreover, even a cursory examination of SEC filings, and an examination of her salary stock-option awards in stock awards, would show that Ms. Bachelder has been richly rewarded for her turnaround of the company.
In explaining the path to this result, Ms. Bachelder states, “The Popeyes turnaround has become a case study in what happens when leaders think about serving others—in this case, our franchisees. Leadership is an active stewardship, not a practice that is solely for your personal benefit. The test of our leadership is simple: Are the people entrusted to our care better off?”
To be sure, the relationship between Popeyes and its independent association is far from perfect, and occasionally involves bumps in the road. But the level of communication, interaction, dialogue and mutual respect is indeed admirable.
Ms. Bachelder’s message: treat franchisees fairly and treat them as partners, not adversaries, not only because it’s the right thing to do, but because it’s good for business.
If SEI wants this system to advance, to grow, to adapt to changing customer expectations and rapidly expanding technology, to meet its external and external challenges, it needs to pay more attention to, and—as Ms. Bachelder argues—serve its franchise owners. This means more collaboration, more transparency and more attention to the bottom line of each and every franchised location in the country.
To SEI I say, please learn from one of the most successful franchise executives in the country, and listen to the company’s shareholders and to its franchise owners. You have nothing to lose and a great deal to gain.