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The Advertising Fund Advantage Is it a good idea to have franchisees contribute to a franchisor-established fund? The franchisor of McAlister's weighs in.

By Devlin Smith

Opinions expressed by Entrepreneur contributors are their own.

As part of many agreements, franchisors require their franchisees to contribute to a national advertising fund that pays for the development and placement of ads for the company. Sounds like a good idea...unless you're a franchisee in a new territory that advertising has yet to reach, or if you're a franchisee who believes the franchise is benefited more by this advertising push than you are.

Franchise Zone spoke with Philip Friedman, president of deli franchise McAlister's Corp., about how his franchise operates its advertising fund and addresses franchisees' concerns about the fund, as well as what any prospective franchisee should know about advertising funds before buying a franchise.

Franchise Zone: Why did McAlister's institute an advertising fund?

Philip Friedman: First off, an advertising fund is standard. We are not an extensive marketer or advertiser, so we employ a minimum advertising fund to develop local marketing materials and to fund research into our concept and our performance.

How does the advertising fund benefit the system?

It provides a consistency in our marketing/advertising programs. It also fosters internal communication between the company and franchisees, since we have a committee represented by [both parties] that works on the marketing plan and the allocation of funds.

How does it benefit your franchisees?

They get the benefit of the research, the interpretation of the research, the benefit of the marketing programs themselves. They don't have to develop their own programs. They have programs that are consistent throughout the system available to them.

Many franchise systems don't have an advertising royalty. Is that a good thing or a bad thing?

I would say it is a mistake. First, it should not be called an advertising royalty, since the purpose of the advertising fund fee is to market the system. The fee is not income to the franchisor--it's used to finance a franchisor-led marketing effort designed to benefit all stores in all markets of the system.

Without a marketing fund, there's a high probability systemwide marketing won't be developed. Or if such an effort is started by the franchisor with the help of only some franchisees, all franchisees won't be required to participate, and the effort will either fail or cause discontent in the system. If an advertising fund fee didn't exist, it would indicate to me that the franchisor hasn't thought through the system's needs or is not willing to lead such an effort.

How does McAlister's advertising fund work?

Our franchise agreement requires a contribution to an advertising fund. There's a minimum of 0.5 percent to a maximum of 2 percent, and we are actually funding it at a much lower level [than the maximum], because we've developed a budget and determined what the allocation should be. Every franchisee comes into the system knowing they will be contributing to the advertising fund; they know what the maximum is, and every year they know what the current [contribution] is.

What specific things do McAlister's franchisees get from the advertising fund?

We're not an aggressive media marketer, so most of our effort is geared to in-restaurant, in-market promotion. The franchisees get development, research and production of all materials; local market planning; menu development and production; customer satisfaction research and reporting; focus group research and reporting; an annual marketing plan, and annual budget preparation and reporting. The fund is also responsible for brand development and new product development, and fulfillment for all marketing materials and uniforms. We've produced radio spots, and we're working on TV spots.

Does anybody ever object or want to opt out?

The objection would be more of a decision of whether they want to join the McAlister's system or not. After they're in, they have a chance to discuss through the marketing committee what they feel the proper allocation and use of the funds is. Opting out is not an option.

What kind of reaction do the franchisees have to the fund's performance?

Overall, our franchise community is happy with the way we approach marketing, the way we use the fund's dollars and the level of spending. As I said, we try to keep the fund low, so they tend to be happy. I think they feel the materials are good.

Do some of your franchisees feel they might not be helped in their market by the advertising fund?

Some franchisees feel they don't need the marketing help, that their restaurants are doing well and they'd rather go it alone. In every system, there are different approaches toward spending, and you always have some people who just don't want to spend money.

What does the company say to those franchisees?

They have to comply. We try to explain this is established for the benefit of the system--the programs are well thought out, they're consistent with our marketing plan and marketing strategy, and they have value for the individual restaurants.

How much of an opportunity do the franchisees have to contribute their ideas or thoughts?

The committee meets every three months, and we have quarterly franchise operating meetings. Most franchisees are able to comment on the marketing on almost a quarterly basis. There's a lot of involvement and open discussion. We're still a small system.

Because you are still a relatively small system, how does the advertising fund benefit franchisees in a completely new market?

Since we're so research based, [that information] folds into site selection. A big part of marketing is to pick the right location in the right area. We know from the development of the marketing materials what works in different types of market situations, from experience and from research, so we're able to apply that knowledge to specific situations.

For a prospective franchisee of any system, how important is the presence or absence of an advertising fund?

This depends on the importance of marketing to the concept. I believe it is extremely important and would be very concerned if one did not exist or the mechanism to implement one was not addressed in the franchise agreement.

Franchisees in other systems have objected to their advertising royalty, because they don't feel they benefit from it. Can you comment on that?

Once again, if the franchisees or the franchisor think of it as a royalty, that's probably where the difficulty lies. If done correctly with an approved marketing plan, sound franchisor leadership, systemwide cooperation and budget reviews, an advertising fund should produce recognized sales building and brand building benefits.

When prospective franchisees are researching a franchise, what questions should they ask about the advertising fund?

Is there a fund committee with strong franchisee participation? How often does the committee meet? Is there an annual budget reviewed/approved by the committee? Has the marketing been effective? Can I call members of the committee to discuss the use of the funds? Has the fee remained the same over the years? Has it changed recently?

If a franchise doesn't have an advertising fund, how can the franchisor and franchisees decide whether they need to institute one?

By determining the importance of systemwide marketing materials and the value of a consistent brand image/presentation to the concept. If franchisees are spending significant money on marketing, what is the value of a joint effort? Evaluate competitor activities and their approach to customers. Look for successful models to emulate.

What makes an advertising fund successful?

Good direction--a strong team that understands franchising and realizes they're working with groups of owners as much as a system or a concept. Also, strong, research-based marketing plans.

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