Menus Subscribe Search

Follow us


Economics Essays

franchise

Quiznos. (Photo: Public Domain)

Disenfranchised: Why Are Americans Still Buying Into the Franchise Dream?

• March 04, 2014 • 6:00 AM

Quiznos. (Photo: Public Domain)

In the tight-fisted world of fast food, it’s not just the workers who get a lousy deal.

Bhupinder “Bob” Baber bought two Quiznos franchises in Long Beach, California, in 1998 and 1999. His investment totaled $500,000, and Baber’s wife, Ratty, quit her job to work at the restaurants for no pay. The Babers did this because, as Bob would later recall, he “trusted in Quiznos.” But, as he soon found out, being a franchisee can be a very swift and painful way to lose a lot of money.

Over the past year, thousands of fast-food workers have staged protests and rallies for a higher hourly wage. As they see it, big corporations like McDonald’s and Domino’s can well afford to pay workers more. But the vast majority of these workers don’t work for these giants. They work for people like Bob Baber. Franchisees don’t enjoy the market powers and economies of scale of their parent companies. Rather, they run small businesses with narrow profit margins, high failure rates, and plenty of anti-corporate grievances of their own. Anyone who wants to help immiserated fast-food workers, in other words, also needs to spare a few thoughts for their immiserated bosses. That means reforming the deeply troublesome franchise system.

Franchising as we know it is an American invention, and it dates back to the mid-19th century. The McCormick Harvesting Machine Company, which made reapers, and the I. M. Singer Company, which made sewing machines, found that wholesalers didn’t want to carry or distribute these expensive and novel machines, nor did they want to offer parts and repair. So McCormick and Singer came up with an innovative solution: They built a network of independent agents. In return for carrying the product, the agents received a sizable cut of revenues from sales and repair, and exclusive rights to sell the machines in a certain area. In a vast country, franchising solved a lot of problems related to distribution, distance, and repairs. In subsequent decades, franchising also became the model for selling automobiles.

For a fast-food franchisee, a profit margin in the single digits is common. By contrast, at the corporate level, McDonald’s enjoys a profit margin around 20 percent.

In the 20th century, businesses began to see the value of franchising in the service sector. Howard Johnson used franchising in the 1930s, and Ray Kroc built an empire on McDonald’s franchises in the 1950s, ’60s, and ’70s. Today, fast food is sold almost entirely through franchises. Worldwide, franchises represent about 80 percent of McDonald’s restaurants, 95 percent of Burger King restaurants, and 100 percent of Subway restaurants. (The rest are usually company-owned flagship restaurants in high-profile locations or restaurants relinquished by one franchisee and not yet assigned to another.)

The positioning of franchisees between fast-food workers and large fast-food companies is part of a larger trend within the economy that might be termed (with apologies to Karl Marx and Friedrich Engels) “the devolution of the proletariat.” As the Boston College law professor Kent Greenfield observes, corporations and even the federal government have learned to use “suppliers, subsidiaries, franchisees, contractors, to avoid responsibility” for the welfare of those at the bottom of what business schools call the “value chain.” The low- wage jobs are offloaded onto smaller entities. Making things worse for workers is a lack of opportunities to move up the corporate ladder, since a burger-flipper doesn’t actually work for the company whose logo decorates his uniform.

It’s not just the workers who get a lousy deal. Over the years, Bob Baber, the Quiznos franchisee, became increasingly frustrated by the terms of his contract. One of the issues that galled him the most was that Quiznos was allowed to (and did) place additional sub shops in his franchise area, creating what he felt was direct competition that cut into his profits. Baber formed the Quiznos Subs Franchise Association, a sort of franchisees’ union, through which he hoped to leverage better terms. A month later, the Denver-based company terminated Baber’s franchise, claiming his restaurants were not being maintained properly, and other contractual defaults. When a franchise agreement is terminated, all investment by the franchisee—including acquisition cost, equipment, and fees—is effectively flushed away. Baber and Quiznos became enmeshed in a protracted legal struggle, with Baber refinancing his house and spending nearly $100,000. (A public relations spokeswoman representing Quiznos told us it is the company’s position to not comment on any litigation past or present.)

Despite such stories, people still buy into the franchise dream. For many Americans, owning a franchise seems like a starter kit for being your own boss as a small-business owner. You have the benefit of riding on a well-established national brand, and all you have to do is manage the shop. But a 1997 study by Timothy Bates, an economist at Wayne State University, concluded that “entering self-employment by purchasing an ongoing franchise operation is riskier than alternative routes.” A 2007 study commissioned by franchisors found that franchisees had higher failure rates on Small Business Administration loans than non-franchisees. If everything goes right for a fast-food franchisee, he might enjoy a profit margin of about 10 to 12 percent, but a profit margin in the single digits is far more common. By contrast, at the corporate level, McDonald’s enjoys a profit margin around 20 percent.

Well-known fast-food companies have so much clout that franchisors get to set the terms, and franchisees can take them or leave them. A 2013 McDonald’s franchise agreement stipulates not only how the restaurant shall be designed and the food prepared, but also how many days a week it shall be open (seven) and during what hours (7 a.m. to 11 p.m. or “such other hours as may from time to time be prescribed by McDonald’s”). In order to ensure clean finances among those with whom it partners, McDonald’s requires the franchisee to submit two financial reports monthly, plus a profit and loss statement and balance sheet once a year, and McDonald’s is free to examine at any time all franchisee financial records.

The more successful the brand, the tighter the leash. “Thirty years ago,” says Rick Swisher, who opened Los Angeles County’s first Domino’s in 1981, “we ran our own business with guidelines from the franchisors as to how the product was to look.” But by the time he closed his 11 Domino’s franchises in 2012, he says, franchise reps were so concerned with corporate imaging that they were telling employees, “You’re not answering the phone correctly.”

Franchise agreements usually require the franchisee to purchase food and other items only from authorized vendors. This helps to maintain consistency in quality. But, as Robert Zarco, a Miami-based franchisee attorney, points out, there’s more to it than that. Vendors can get picked because they offer a rebate to the franchiser. So if you’re a franchisee of, say, a pizza chain, you might find yourself overpaying for tomato sauce, only to see your overpayment make its way into the pocket of your corporate overseer. Yet as long as the rebate is disclosed, it is not, in the eyes of the law, an illegal kickback. More than one observer has likened contemporary franchising to sharecropping.

If a franchisee folds, moreover, the corporation may not suffer much. So long as willing buyers keep lining up, a restaurant can churn through successive franchisees. Robert Purvin, in his book The Franchise Fraud, cites a Popeye’s franchise in San Diego County that had five different owners in just 11 years. “Five businesses have gone under,” he writes, “but the ‘franchise’ still exists!”

At some point, however, squeezing franchisees becomes bad business. If too many restaurants go belly up, so could the franchisor. (Quiznos, for instance, has struggled financially in recent years. In 2010, the company settled, without admitting liability, a multimillion dollar class-action lawsuit brought by franchisees. New executives have spoken publicly about taking measures to improve the company’s franchisee relationships.)

Franchisees enjoy few regulatory protections at the federal level, and even at the state level, statutes intended to prevent exploitative franchising arrangements can be vague. New Jersey’s Franchise Practices Act, for instance, outlaws the imposition of “unreasonable standards of performance upon a franchisee” but doesn’t define what these are. Some people might argue that federal and state governments have no business imposing specific limits on private contracts between consenting parties. But governments already do that through minimum wage and maximum hour laws. There’s no logical barrier to regulating franchise agreements in a similar way.

The approach favored by Purvin, who is chairman of the American Association of Franchisees and Dealers, is to strengthen franchisees’ ability to create franchisee associations to engage in something like collective bargaining. (Some franchisors actually require franchisees contractually not to join franchisee groups.) Granted, enshrining such rights of association wouldn’t necessarily prevent companies from finding ways to retaliate (just as detailed labor laws don’t prevent companies from finding ways to fire union supporters), and enabling franchise owners to earn larger profits wouldn’t guarantee that they’d treat workers better (that’s why fast food workers must themselves unionize). But it would at least make better treatment more possible.

So, while fast-food strikers and franchisees have little love for each other—low-wage labor and cash-strapped management tend to regard each other with the opposite of solidarity—the two groups have more in common than they think. Both are being squeezed by the same absentee overlords. Increasing the minimum wage is necessary to improve the station of fast-food workers, but so too is loosening the franchising straitjacket.

In November 2006, Bob Baber walked into the bathroom of a Quiznos, pulled out a gun, and shot himself three times in the chest. He wrote a suicide note for his wife, and one for the media. A portion of the latter read: “In this franchise system the Franchisor has all the rights and no duties or obligations, whereas it is just the opposite for the Franchisee.” After Baber’s death, the Toasted Subs Franchisee Association, a group of Quiznos franchisees, posted his suicide note online. Six days later, eight board members of the association received notices from Quiznos: Their contracts had been terminated.


This post originally appeared in the March/April 2014 issue of Pacific Standard as “Disenfranchised.” For more, subscribe to our print magazine.

Timothy Noah
Timothy Noah is a writer at MSNBC.com and the author of The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It (Bloomsbury Press).

More From Timothy Noah

A weekly roundup of the best of Pacific Standard and PSmag.com, delivered straight to your inbox.

Recent Posts

December 20 • 10:28 AM

Flare-Ups

Are my emotions making me ill?


December 19 • 4:00 PM

How a Drug Policy Reform Organization Thinks of the Children

This valuable, newly updated resource for parents is based in the real world.


December 19 • 2:00 PM

Where Did the Ouija Board Come From?

It wasn’t just a toy.


December 19 • 12:00 PM

Social Scientists Can Do More to Eradicate Racial Oppression

Using our knowledge of social systems, all social scientists—black or white, race scholar or not—have an opportunity to challenge white privilege.


December 19 • 10:17 AM

How Scientists Contribute to Bad Science Reporting

By not taking university press officers and research press releases seriously, scientists are often complicit in the media falsehoods they so often deride.


December 19 • 10:00 AM

Pentecostalism in West Africa: A Boon or Barrier to Disease?

How has Ghana stayed Ebola-free despite being at high risk for infection? A look at their American-style Pentecostalism, a religion that threatens to do more harm than good.


December 19 • 8:00 AM

Don’t Text and Drive—Especially If You’re Old

A new study shows that texting while driving becomes even more dangerous with age.


December 19 • 6:12 AM

All That ‘Call of Duty’ With Your Friends Has Not Made You a More Violent Person

But all that solo Call of Duty has.


December 19 • 4:00 AM

Food for Thought: WIC Works

New research finds participation in the federal WIC program, which subsidizes healthy foods for young children, is linked with stronger cognitive development and higher test scores.


December 18 • 4:00 PM

How I Navigated Life as a Newly Sober Mom

Saying “no” to my kids was harder than saying “no” to alcohol. But for their sake and mine, I had to learn to put myself first sometimes.


December 18 • 2:00 PM

Women in Apocalyptic Fiction Shaving Their Armpits

Because our interest in realism apparently only goes so far.


December 18 • 12:00 PM

The Paradox of Choice, 10 Years Later

Paul Hiebert talks to psychologist Barry Schwartz about how modern trends—social media, FOMO, customer review sites—fit in with arguments he made a decade ago in his highly influential book, The Paradox of Choice: Why More Is Less.


December 18 • 10:00 AM

What It’s Like to Spend a Few Hours in the Church of Scientology

Wrestling with thetans, attempting to unlock a memory bank, and a personality test seemingly aimed at people with depression. This is Scientology’s “dissemination drill” for potential new members.


December 18 • 8:00 AM

Gendering #BlackLivesMatter: A Feminist Perspective

Black men are stereotyped as violent, while black women are rendered invisible. Here’s why the gendering of black lives matters.


December 18 • 7:06 AM

Apparently You Can Bring Your Religion to Work

New research says offices that encourage talk of religion actually make for happier workplaces.


December 18 • 6:00 AM

The Very Weak and Complicated Links Between Mental Illness and Gun Violence

Vanderbilt University’s Jonathan Metzl and Kenneth MacLeish address our anxieties and correct our assumptions.


December 18 • 4:00 AM

Should Movies Be Rated RD for Reckless Driving?

A new study finds a link between watching films featuring reckless driving and engaging in similar behavior years later.


December 17 • 4:00 PM

How to Run a Drug Dealing Network in Prison

People tend not to hear about the prison drug dealing operations that succeed. Substance.com asks a veteran of the game to explain his system.


December 17 • 2:00 PM

Gender Segregation of Toys Is on the Rise

Charting the use of “toys for boys” and “toys for girls” in American English.


December 17 • 12:41 PM

Why the College Football Playoff Is Terrible But Better Than Before

The sample size is still embarrassingly small, but at least there’s less room for the availability cascade.


December 17 • 11:06 AM

Canadian Kids Have a Serious Smoking Problem

Bootleg cigarette sales could be leading Canadian teens to more serious drugs, a recent study finds.


December 17 • 10:37 AM

A Public Lynching in Sproul Plaza

When photographs of lynching victims showed up on a hallowed site of democracy in action, a provocation was issued—but to whom, by whom, and why?


December 17 • 8:00 AM

What Was the Job?

This was the year the job broke, the year we accepted a re-interpretation of its fundamental bargain and bought in to the push to get us to all work for ourselves rather than each other.


December 17 • 6:00 AM

White Kids Will Be Kids

Even the “good” kids—bound for college, upwardly mobile—sometimes break the law. The difference? They don’t have much to fear. A professor of race and social movements reflects on her teenage years and faces some uncomfortable realities.



Follow us


Don’t Text and Drive—Especially If You’re Old

A new study shows that texting while driving becomes even more dangerous with age.

Apparently You Can Bring Your Religion to Work

New research says offices that encourage talk of religion actually make for happier workplaces.

Canadian Kids Have a Serious Smoking Problem

Bootleg cigarette sales could be leading Canadian teens to more serious drugs, a recent study finds.

The Hidden Psychology of the Home Ref

That old myth of home field bias isn’t a myth at all; it’s a statistical fact.

The Big One

One in two United States senators and two in five House members who left office between 1998 and 2004 became lobbyists. November/December 2014

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.