Franchise Companies Passing Along Costs

FRANCHISING
OCTOBER 21, 2008
Owners Say Franchisers Are Passing on More Costs By RICHARD GIBSON
Wall Street Journal
http://online.wsj.com/article/SB122455304637652833.html?mod=djkeyword
Some franchisees say they are being forced to pay for a variety of expenses for the first time -- making difficult economic times even tougher. Associated Press McDonald's franchisees contend they have to take on some expenses once covered by their franchisers For instance, operators of McDonald's Corp. restaurants, under pressure from the fast-food giant to install equipment and counter space for an array of new beverages, complain that they have to pay for nearly half the upgrade's architectural and engineering fees -- items the company used to cover. Franchisees put those added fees at several thousand dollars, and some say the entire project has yet to be cost-justified. McDonald's acknowledges that in the past it has paid for architectural and engineering work done when an individual franchisee made construction improvements to a restaurant. But because the beverage project is systemwide and so substantial, those costs are now part of the expenses that McDonald's will cover at only 40%. Franchisees of Hollywood Tans LLC, an upscale tanning salon chain, say the company is billing them for maintenance on some equipment they had purchased under warranties that covered servicing charges. "They're reclassifying what had been normal wear and tear [and] we now have to pick up" the cost on items such as fans and booth door locks, says Jeff Wogan, who operates a salon in Ranson, W.Va., and is a member of the franchisee owners' association. He adds that it can take days for someone to show up to fix items, partly because the company's maintenance crew has been downsized. A spokeswoman for the Sewell, N.J., tanning chain acknowledges maintenance-staff reductions "to improve the service level and our cost efficiency," but contends that despite the chain's purchase by private investment firm ACI Capital in June 2007, the service-warranty policy hasn't been altered. She says the warranty doesn't cover normal wear and tear. Soaring fuel prices are pinching UPS Store franchisees. Last month, parent United Parcel Service Inc. changed its policy on refunding shipping costs to customers under its money-back guarantee for packages not delivered on time. Now, UPS won't refund fuel surcharges added to those bills. For an overnight envelope, those surcharges could easily be several dollars. Franchisees say customers expect to be reimbursed the full amount, and may become upset and take their business elsewhere if they don't get it. As a result, many franchisees are digging into their own pockets to make up the difference. Confirming the refund reduction, UPS spokeswoman Karen Cole says the shipper's fuel costs are up 61% so far this year. "It's a huge expense," she says, "and we all have to adjust, unfortunately." Training is another contentious area for some franchised systems. "More franchisers are saying, 'We'll do it, but only for a fee' or 'We're going to drop that activity,' " says Andrew Selden, a franchising attorney at law firm Briggs & Morgan in Minneapolis. "It adds an unexpected cost to the franchisees' business." Franchisees in such situations may not realize services they had assumed were contractually promised really were provided at the franchiser's option, he says. KFC franchisees contend that company training support has been cut and that they're now being charged for training manuals, which they say used to be provided at no cost. A spokeswoman for Yum Brands Inc.'s KFC says the company and third-party vendors provide free and fee-based training to franchisees, which she says is outlined in the firm's franchise disclosure document. Write to Richard Gibson at dick.gibson@dowjones.com