Tim Horton's the Franchisor loses Business Battle

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The result of the franchisee's class action lawsuit being dismissed is that Tim Horton's, the franchisor, lost a major business battle.  In a rare summary judgment motion., the reasons for the judgment, part 1 and part 2 can be read here, a motions judge  dismissed the franchisee's class action. But, now  Tim's will now struggle mightly to get same operator expansion as a result of this legal victory.

Like any mature franchisor, Tim's relies upon same operator expansion for its growth.  It is fortunate to have a substantial number of operators who have grown with the system from near the beginning.

Sophisticated operators know that franchise operations need modification and changes.  And Tim's is no exception.  This type of operator needs to know how to plan and budget for such changes, paying for them in part by the expected increased return.  But, now that planning process is riddled with uncertainty.

In 2002, after considerable debate with its franchisees, Tim's introduced a centralized baking system.  Tim's baked centrally and shipped frozen products to its stores.  (Only in Canada could one say with a straight face that these baked goods were "Always Fresh".)  The par baking facility was funded by the TDL Group and constructed by its joint venture partner, IAWS.  These joint venture partners contributed approximately $95 million (US) in 2002.  During 2002 to 2009, the 3,000 franchisee's collecitvely contributed approximately $100 million (Can.) for store modifications, without which the joint venture partner's par baking facility would be useless.

At issue in the class action lawsuit, was whether either the franchise contract or the equity of fair commerical dealing required that the return on the joint venture partnership be commensurate with the return on the franchisee's collective investment.

This would appear to be a difficult question of fact and law requiring a trial.  But the motions judge handed Tims and TDL, a complete legal victory and business disaster.

As reported by Robert Thompson, who wrote Ron Joyce's biography, the founder of Tim Horton's, "Stores had once made upwards of 20-percent margins, a windfall for the mom-and-pop shops that were often operated by pioneers who entered the business in the early 1970s. Margins fell under Wendy's management, and Joyce was concerned they would continue to decline after the IPO, which is exactly what Jollymore alleges was the case. These days, those close to Joyce say stores are lucky to make 13 percent, a steady decline from a decade earlier."

Sophisticated operators like the representative plaintiffs, the Jollymores, know now that the franchise contract doesn't require any equitable sharing on the returns made as the result of the franchisee's collective investment of new capital.

The Court sanctioned unfairness will make it difficult for Tim's to continue to grow with same operator expansion.  (Analysts of the public company may wish to reflect on another franchisor who spurned same operator expansion - Jackson Hewitt. Bankrupcty looms nearer when the experienced franchisor operator as a group doesn't expand.  The Jackson Hewitt franchisors did not share equitably with the franchisees the fruit of the Refund Anticipation Loan program, "RAL".  The franchisees refused to expand the system, and so when the franchisor needed their support it wasn't there.  The franchisor needed the franchisee's support for expansion when the RAL program was gutted by the IRS.)

We can hope that the Jollymores, Ron Joyce and the other franchisees will now see the wisdom in what Colonel Sanders saw many years ago when he imbuded his franchisee's with real protection - for the betterment of the franchise system.

"When Colonel Sanders sold Kentucky Fried Chicken, he feared his franchisees would lose control of their own businesses and the future that they were working toward and in which they had invested.

So he encouraged them to unite to protect the franchisees that he considered part of his own "family" and to give the franchisees a voice in the future development of a concept which would prove to be far greater than was envisioned at the time.

This brought about several small meetings with early franchisees and in 1965 the Southeastern Kentucky Fried Chicken Franchisee Association was formed and formally organized in Atlanta, Georgia.

Ten years later, the AKFCF (our national association) was incorporated in the same city.", from the Association of  Kentucky Fried Chicken Franchisees website.

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This page contains a single entry by Michael Webster published on March 1, 2012 11:06 AM.

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