October 2011 Archives

Friendly Ice Cream Corp. last week became the latest in a string of classic American restaurant chains to file for bankruptcy protection. The Wilbraham company, founded in 1935 , abruptly closed more than 60 locations and now hopes to reinvent itself as a leaner, more viable business by early December.

The road from private to public company started in 1978. "The Hershey Foods Corp. offered $162 million, or $23 a share, for Friendly Ice Cream's 7.05 million outstanding shares in December 1978. Friendly's board of directors, including chairman Prestley Blake, unanimously agreed to recommend the Pennsylvania company's offer to shareholders."

But the company only started franchising in 1997, or thereabouts.

However, about 25% of the locations were closed by mid 2000, and " Prestley Blake became increasingly critical of Friendly's upper management. In December 2000, he bought 892,000 shares of Friendly's stock for close to $2.5 million, making him its largest shareholder with a 12 percent stake in the company."

Sun Capital bought Real Mex from Bruckmann Rosser in, I believe 2006, and then the chain basically went bankrupt, KKR provided financing to keep it going, Sun gained possession again, and now it has collapsed under Sun for the second time in five years.

Why did this happen?

Sun, immediately after buying the chain, separated its real estate, selling its headquarters and the land under 160 of its 512 restaurants for more than $40 million. Sun used the money to fund its buyout of Friendly's, so that it payed little money down in the leveraged buyout.

Friendly's restaurants started paying higher rent.

When filing for bankruptcy, Friendly's, without referencing how Sun split its assets, cited high rents as one of the problems.

Sun restaurant chain Real Mex in the last few weeks also filed for bankruptcy.

Sun Capital bought Real Mex from Bruckmann Rosser in, I believe in 2006, and then after the chain basically went bankrupt, KKR provided financing to keep it going, and Sun gained possession again, and now it has collapsed under Sun for the second time in five years.

As in Friendly's, Sun put pressure on Real Mex by cheapening the product, for example, by putting less chicken in fajitas, a source said.

By starving its restaurants during a recession, Sun could not save enough costs to compensate for the traffic both Friendly's and Real Mex lost.

Social media and brand awareness creates unique problems for a franchisee system, the well understood division of national and local advertising has to be revisited.  

One important question is: should every franchisee own a website for local marketing purposes?

Michael Seid, a well known franchisor consultant and Board member for of the International Association of Franchisors, speaking for his franchisor clients, argues on Linkedin, that franchisees should not have the right to develop their own local content marketing program using a franchisee owned website.

Before a franchisee develops an independent website, they should review their franchise agreement to determine if they are allowed to.

Most well developed franchise systems would likely have some prohibition regarding a franchisee developing their own independent site.

However, many franchisors do provide the franchisee with a customizable site linked through the franchisor's website.

Even if the agreement does not discuss an independent web presence for its franchisees, a franchisee should discuss this with their franchisor to determine if the franchisor has any policy regarding this.

(Most of MSA's clients have such a policy and I do not believe any allow the franchisee to set up an independent site, for a host of reasons, although some do provide the franchisee with a customizable web presence.)

 

I disagree with Michael Seid's suggestion that it is in the franchisor's economic interest to contractually ban its franchisees from exercising their first amendment rights to free speech.  
 
First, many franchisees are active participants in local charities and events and correctly wish to publicize via social media their roles and achievements, which indirectly adds to brand value.
 
Second, a contractual ban on franchisee "ownership" of a  website is not likely to be effective given the tremendous opportunities in social media which do not require the ownership of a website to be effective.
 
This is an area in which organic practices have to drive policy to be effective.  What those best practices are is unknown at this moment.  Franchisors simply don't have the advertising or support dollars to set up the necessary social media tools by themselves, and  some form of user generated content is going to be needed to make them effective.
 
Third, the franchisor owns the trademark, the brand is what people are saying about you - which you don't own and need many listening posts to find out what the trends are.  That cannnot be done with a single command listening post.
 
Finally,  Franchisors risk missing the value of either content or inbound marketing, the online replacement for yellow pages, if they attempt to ban franchisee's first amendment rights.

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This page is an archive of entries from October 2011 listed from newest to oldest.

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