Franchisees Team Up Amid a Tough Climate

Overcapacity and poor management plague the franchise industry in the wake of a recent boom. Learn how sophisticated players are taking advantage of this opportunity by banding together.

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As more franchisers run into problems, some of their franchisees stand ready to take control.

The boom in franchising in recent years -- followed by the economy's slump -- has led to some struggling companies, hurt by overcapacity and poor management. The weakness, though, has provided an opportunity for sophisticated franchisees who own and operate many outlets, and who are experienced at raising capital and running large organizations.

"The franchisees in many markets outperform their corporate counterparts" running company-owned outlets, says Tom Brule, a franchising lawyer in Cleveland.

For instance, a group of franchisees of Suburban Lodges of America Inc., a chain of lower-priced extended-stay hotels, purchased the franchiser's rights and formed their own company in May. Franchisees of the former Outsource International Inc., a temporary-staffing firm, bought out the rights and founded their own company in April. And agents of Bekins Co., who operate similarly to franchisees, bought the moving and storage concern last December.

In other cases, franchisees may not take control, but still exert a strong influence. At Burger King Corp., in Miami, they became aggressive supporters of the fast-food chain's separation from Diageo PLC. An investor group completed the purchase of the 11,450-restaurant chain earlier this month for $1.5 billion.

Continual Tension

Franchisers and franchisees, of course, often have different agendas. The umbrella companies typically want to expand rapidly, and that can mean allowing new franchisees to open near existing outlets, cutting into sales.

"It tends to be adversarial," says Kevin Lewis, 42 years old and president and chief executive officer of Suburban Franchise Systems Inc., of Atlanta, the firm formed by 19 franchisees who purchased the franchiser's rights from Suburban Lodges and own and operate 62 hotels.

Corporate-run franchise organizations sometimes cut back on service -- quality assurance, training, sales help -- to reduce costs and boost earnings at the corporate level, Mr. Lewis says.

The former hotel franchiser, Suburban Lodges, made a controversial investment in a lodging-software company that some franchisees and investors felt too far afield of its business. A proxy fight ensued, and when Suburban was sold to a lodging concern that didn't really want franchisees, the franchisee group bought the rights that the franchiser held.

Focus on Interest

This was a "chance to realign everybody's interests," says Mark Daley, a big franchisee-owner of the new Suburban. Now, he says, the company's board, on which he serves, is solely focused on "what maximizes the brand and everybody's real-estate investments."

Mr. Daley, 36, is an example of the new, more sophisticated franchisee. His family has been in the lodging business for 40 years, operating franchised hotels for several chains. And his company, Generations Cos., based in Research Triangle Park, N.C., invested $100 million to build and run 12 hotels -- half as an owner-franchisee in the Suburban chain and half in another. Blindly taking orders from headquarters isn't his approach. "We can help any brand we're associated with get better," he says.

Overhead Reduced

Suburban Franchise Systems has cut corporate overhead and is spending more of its owner-franchisees' royalty fees on marketing and sales efforts, Mr. Lewis says.

Bekins, of Hillside, Ill., is a 112-year-old company that, during the past two decades, was passed around among investment groups. "They were bleeding the cash out of this company," says Bruce A. Rosene, president of Boyer-Rosene Moving & Storage Inc., an Arlington Heights, Ill., agent of Bekins that has annual revenue of about $20 million.

When Bekins's latest corporate parent, GeoLogistics Corp., hit tough times, payments to the agents slowed, Mr. Rosene says, imperiling his company. "They had a lot of our money," he says. "Things got relatively serious." GeoLogistics could not be reached for comment.

Agents' Investment

The agents and Bekins management were rebuffed in their initial bid for Bekins, but GeoLogistics agreed to sell after a second round of talks. Bekins assumed some of its parent's debt, and the agents put in about $9 million in new equity.

It was easier for Bekins because other successful van lines are agent-owned.

"Even when the company was run very well, you still had management turnover and management decisions you didn't agree with," Mr. Rosene says. "We know now the decisions are going to be made in our best interests -- always. When we go to a board meeting, we're talking about our company."

Copyright © 2003 Dow Jones & Company, Inc. All Rights Reserved

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