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    Inside the Franchise Battle Waging at Jack in the Box

  • Operators have banded together to address growing concerns.

    Web Exclusive January 25, 2019 By Kevin Hardy
    flickr: Thomas Hawk
    Jack in the Box has had some open conflicts with its franchisee association in recent months.

    Michael Norwich says no one has more invested in the Jack in the Box concept than its franchisees. They’ve made the biggest investment in the brand and have every incentive to ensure it’s successful.

    “We put our heart and soul into it,” he says. “We have probably the most at stake.”

    But franchisees are worried about the current direction of corporate leaders. Much of that is tied to declining sales: In November, Jack in the Box reported total quarterly sales of $177.5 million—a 23.5 percent year-over-year decline. Norwich says Jack in the Box’s years-long transition from a restaurant operation company to an asset-light franchise company has been painful and franchisees worry corporate decisions are too focused on short-term metrics like stock performance and neglect the long-term health of the brand.

    Norwich is a 27-year franchisee of the brand and the chairman of the National Jack in the Box Franchisee Association, which was formed in 1995 and now includes 95 franchisees representing the ownership of about 2,000 stores of the brand’s total of about 2,240.

    He recalled the days when former Jack in the Box CEO Paul Schultz would meet with franchisees and talk through complexities of operating restaurants.

    “He’d pound the table and say, ‘Don’t you think I care about restaurant operations? I have 80 percent of the stores,’” Norwich says. “Nowadays, there are operators that are much bigger than the company operations themselves. It’s changed.”

    That evolution, Norwich says, has driven the need for franchisees to band together through the independent association.

    “The issues we had back then are far different issues than the issues we have today,” he says. “There are so many things that have changed in the overall franchise business model over the last few years that it really necessitated strong franchisee associations more than ever now.”

    READ MORE: Is Jack in the Box exploring a sale?

    The association has continually sparred with corporate leadership in recent months: In October, the group approved a vote of no confidence in CEO Lenny Comma that franchisees described as a culmination of years of frustrations. In November, it filed a complaint with the California Department of Business Oversight regarding Jack in the Box’s new financial restructuring strategy. And in December, the group filed a lawsuit against the brand, alleging a breach of contract.

    “The relationship shouldn’t be this way,” Norwich says. “But thus far it’s been difficult. And we don’t believe that we’ve been particularly well heard or understood.”

    While the association has repeatedly made headlines, Jack in the Box operators aren’t the only ones making waves through an independent associations.

    In October 2018, more than 400 McDonald’s operators voted to form a self-funded advocacy group, reportedly motivated by concerns over shrinking cash flow and burdens associated with store remodel mandates from corporate. Likewise, the Tim Hortons franchisees joined together to create the Great White North Franchisee Association in March 2017. That group, which boasted half of all Canadian franchisees as members, said its conception was in response to “the mismanagement of the Tim Hortons franchise” by TDL Group Corp. and its parent company Restaurant Brands International.

    “We wholeheartedly agree that having productive dialogue between a franchise and your franchisees is essential to a healthy franchisee relationship and a franchise system." — Matthew Haller, SVP of government relations and public affairs at the International Franchise Association.

    Matthew Haller, SVP of government relations and public affairs at the International Franchise Association, says franchisee councils and associations are a mainstay of the franchise business model, whether it’s in the restaurant, hotel or retail space.

    By its nature, the franchise model is inter-dependent: franchisors only make money when franchisees make money. To keep that relationship healthy, most franchise companies have some mechanism designed to keep open lines of communication. Associations make it easier for franchisors to introduce new initiatives and roll out new products. And they act as sounding boards, connecting corporate leaders to operators with real experience on the ground.  

    “We wholeheartedly agree that having productive dialogue between a franchise and your franchisees is essential to a healthy franchisee relationship and a franchise system,” Haller says.

    But, he says, not all those groups are created equally, particularly recent ones birthed from controversy.

    “They typically form out of frustration that their voice isn’t being heard. And I think that’s where you can run into more problems,” Haller says. “You always take it with a grain of salt when you’re putting too much stock into the loudest voices in the room.”

    Haller declines to weigh in on individual associations, but he says some groups may be motivated by desires to get out of their contractual obligations with a franchise system.

    Jack in the Box C/O Marissa Wallace

    Franchisee associations can do more than just facilitate communication between operators and the franchisor.

    “Sometimes, where there’s smoke there’s fire. But other times it may just be somebody trying to use an independent association to relitigate the terms of an agreement they very clearly entered into with eyes wide open,” he says. “That’s why a franchisee is ultimately governed by a contract.”

    Haller says associations and advisory committees are most useful when they’re formed during times of relative calm. A strong track record of open dialogue and cooperation makes it much easier to weather times of difficulty.

    Tabitha Burke, executive director of the National Jack in the Box Franchisee Association, shares a similar view.

    “I think it’s important for franchisees to start associations when they have a healthy and positive relationship with the franchisor,” she says. “A lot of times you’ll see these associations come out of conflict.”

    Though the Jack in the Box group is involved in a high-profile conflict, Burke says, franchisee associations can do more than just facilitate communication between operators and the franchisor. They also allow owners to band together to purchase insurance and build volume for more favorable pricing from vendors. But at their heart, they’re most effective in ensuring the interests of both sides are aligned.

    “The franchisors are looking at the top line while the franchisees are looking at the bottom line,” she says. “So, it’s finding that balance where both can be profitable.”

    Jack in the Box officials could not be reached for comment. But in a November quarterly earnings call, the CEO told investors his team was “managing through” issues raised by the association. He acknowledged “spirited debates” with the brands franchise community, but assured that corporate was “fully aligned” with franchisee goals.

    "We understand their concerns about issues our industry is facing such as rising labor costs, finding traffic, and market share in a hyper-competitive environment,” Comma said on the call. “We know that Jack in the Box cannot be successful if our franchisees aren't successful.”