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The real story on how national ad funds work for you.

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Depending on how your franchise agreement is structured, you're probably contributing a portion of your sales into a national ad fund. This money is used for the development and placement of advertising on a variety of media, sometimes both on the national and local level.

There can be sticking points, though, between the franchisor and franchisees over how that advertising money should be spent. Locally, franchisee co-ops can disagree over these same issues. Franchise Zone discussed some of these sticking points with Steve O'Leary, chair and founder of O'Leary & Partners Corp., an Irvine, California, company that has helped franchises like Century 21, Subway and Fantastic Sams establish and execute their ad funds. Here, O'Leary addresses the impact of the Internet on national advertising and reveals how franchisees and franchisors can work together to ensure advertising programs succeed.

For a franchise that's regional and is starting to branch out into other areas, would it still be beneficial for a franchisee to be participating in this national ad fund if they're in Washington and the franchise is concentrated mainly in the Southeast?

This is a common problem. You're hitting a sticking point with some franchisees and franchisors that don't have national coverage. The franchisor, because of the way the agreement is worded, actually decides to do national advertising, but they're not located in enough markets to make it as valuable as it could be for the local franchisees. We encourage the clients we work with to establish a minimum level of market penetration around the country--when that hits, it makes sense to go to national advertising. Until then, the money is saved and spent in Charlotte or in Baltimore; rather than going into a national ad, it's spent locally in their market. Most franchisors also divide their contribution into media placement percentage and production percentage, so a certain amount of money is set aside for creating materials, generally in the 15 to 20 percent category, and 80, 85 percent is spent in media placement. That delineation allows it to be a local ad fund or a regional fund created for the benefit of the franchisees.

What are franchisees in out-of-the-way places or untapped markets allowed to do as far as local advertising?

There's usually no restriction. Some ad funds are cut and split national and local and a certain amount of money automatically flows back. Let's say the contribution is 5 percent of retail sales. One and a half percent could go local and 3 1/2 percent could go national. They would have the right to use that on an individual market basis for their own store or on a co-op basis with other stores in their area. Above and beyond the 5 percent, they can always spend whatever they want on an individual basis, and the franchisor usually provides materials for them to do that. Some people have a lot lower percentage than 5 percent, some have fixed amounts, but there's usually that kind of division. If it's a lower amount, it's usually all going to national and none of it's being credited back locally.

Let's take an example of a franchise organization that has 50 franchises on the East Coast and one or two in five other markets. If it's smart, it would return the advertising dollars back to the franchisees with some sort of recommendation, or say, "You must spend this in recognized mass media advertising--direct mail, newspaper, radio, cable, rather than urinal advertising." They'll put some sort of parameters on where the funds must be spent to generate, based on their experience, the best value for the dollar.

Preventing Problems

Since franchises don't have a certain requirement for local advertising, are there ever problems if, say, somebody in the franchisee's region isn't putting forth the advertising dollars locally but is benefiting from what another franchisee near them is spending?

That's a challenge, because let's say we've got a franchisee in Irvine and we've got one in San Clemente, California. They're really not competing in the same business area, but if I run a cable TV ad in Irvine, the franchisee in San Clemente is going to get the benefit of the exposure, and he or she isn't required to kick into the fund. That often deters some franchisees from doing what might be in their best interest, because they're not required to co-op their fund. That's why there's usually a co-op provision once a certain number of franchisees reach a certain threshold where the funds can benefit from mass media. You try to establish and think that through, but not every franchise agreement does that. So that problem occurs and, unfortunately, often leads to acrimony between the two owners. Or if they do do something together, they don't agree on what the promotion should be. It's a fairly common problem, especially for direct mail type incentive offers and things like that--how do you agree on price, how do you share the space, how often do you run the ad.

Is there anything the franchisees could do to resolve that?

Unless it's in the franchise agreement, it can't really be resolved. It would be hard to create a franchise agreement universal enough to deal with local franchisee disputes. It's easier for the franchisors to say, "Now that we've got 30 stores, we're going to put the money you're spending locally into a co-op fund." There's some screeching and hollering at that point, but generally after a while, franchisees look back and say, "I could never have been on television on my own, and now I can, through the power of franchising."

What can a franchisee do if they feel a national ad campaign doesn't work for their market?

Just to take the franchisor's point of view for the moment, everybody has their own opinion about what the message ought to be, because it's advertising. We're all critics or born-again copywriters who feel we know what's best. A lot of [franchisees] see their market as being unique, so they don't feel anything will work on a national basis. Contrary to that, there are a lot of similarities of consumers across markets, and often a well-thought-out advertising message can work if it has some sort of adaptability to a local market. For example, a franchise may have a national message, but franchisees can tag the message with a promotional offer they've arranged with [local vendors]. It's smart to have a common message, because otherwise you have total disarray. But you've got to allow for some local adaptability.

If an advertising campaign isn't working, how quickly can the franchisees and the franchisor work together to try to resurrect something or bring in a new campaign?

Most franchise organizations have some sort of advertising council or advisory committee that makes changes, provides input or even adaptations. Generally, they're not quick. It's not like, "Hey, this promotion's not working, and we've got to do something in the next two weeks." It's more like, "That one didn't work, and here's why, so we're not going to repeat that next year. Here are a couple of ideas that worked in two or three other regions--maybe we ought to turn these into a national promotion."

Net Presence

A lot of companies are starting to focus on Internet advertising. Does Internet advertising take away from the power of a national ad fund or add to it?

I'm not sure I'd agree with the statement that more advertising co-ops are spending more money on the Internet. It's rebounded slightly from a real low a couple of years ago, and we're seeing some of the major advertisers doing more of it, but it's probably less than 10 percent, maybe even less than 5 percent of overall spending for most national advertisers, so it's not a huge medium. Having said that, the advantages are that it is pretty much a non-localized medium, and so from that vantage, it's better than some vehicles like television or radio that have local formats or local preferences by consumers. You can do things on AOL or on Google or some of these major sites, and the appeal is pretty universal to people who are heavy Internet users.

Should franchisors have total control of the franchisees' Internet presence?

We did a site for Sir Speedy. They had a problem in that a lot of their franchisees had their own independent sites, and there was no commonality. We created a system--sort of an umbrella program--that all the individual sites fit under. It actually facilitated more Internet commerce between different franchisees, made it easier for them to trade business. One company wanted to print something in another market and use their account with the Sir Speedy in the local market. Part of that issue of site development is the need for an umbrella concept that helps all the franchisees and at the same time provides some localization or individualization for them.

Are there restrictions within a franchise contract if a franchisee did want to start a Web site?

Usually, most franchise agreements don't cover that category unless they're a relatively new company or it's a new franchise agreement. Since the Internet is somewhat of a new phenomenon, a lot of agreements didn't deal with it as a medium--you're seeing new agreements cover that. The typical restrictions national advertisers place on any kind of advertising is use of the trademark, and usually there are certain guidelines provided. In fact, we've prepared national advertising guideline books that our clients give to their franchisees about how they must use certain things. Generally speaking, franchisors don't try to limit the type of advertising; they try to direct it by providing better materials. Most franchisors are trying to encourage franchisees to spend more rather than restrict.