I can’t see Subway the same way after hearing franchise holders talk about their troubles during the debate over raising the minimum wage in Seattle. What I see is little fish swimming fast to avoid being eaten by bigger fish who are themselves on the menu of very big fish — like that old cartoon image.
Some of the fish in the middle have filed suit to stop Seattle from treating them like bigger fish in the plan the city adopted for gradually raising the minimum wage to $15. I think they should turn more attention to the big guys on their tails.
Five franchisees are carrying the flag for the International Franchise Association, which argues the three to four years they have to raise their minimums to $15 is too short; that they are small businesses. Small businesses have up to seven years to reach the new minimum.
The classification system isn’t entirely fair to every business. Sharp lines in a fuzzy world rarely are.
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I asked David G. Sirmon, at the University of Washington, for his thoughts, and he said franchises are a lot more complicated than businesses with a sole owner. It’s going to be a challenge for them to manage “a regulatory shift that changes their cost structure (while) their relationship to the franchiser doesn’t change.”
Simon is an associate professor of management, and Robert Herbold Professor in Entrepreneurship at the Foster School of Business. The impact will be different for an owner who has deeper wealth and more experience (such as a McDonald’s owner) than for a franchise that has more entry-level entrepreneurs.
Franchisees own their businesses, but the franchiser — Subway, McDonald’s and lots more — owns the name, sets standards for the product or service, uniforms, the store look and so on.
The system seems to work great for the biggest fish. I read a piece in Forbes Magazine that said, “the 45 largest franchise stocks gained at nearly twice the rate of the Standard & Poor’s 500 in 2012.”
In the middle, there is the franchise owner who must pay the corporation to open a business, sometimes pays annual fees and may be required to buy products from the corporation.
Would-be entrepreneurs choose the franchise route for a number of reasons. They usually get training, a business plan and the benefits of corporate advertising, but part of their profits go to the corporation. And they have to pay the workers.
Owners at one hearing at Rainier Beach High School said it can take years to make a profit, and one said that in the beginning he took home less than some employees.
One owner said that the ideal is to buy multiple franchises to attain the standard of living many entrepreneurs are seeking when they buy a franchise. In Seattle there are 1,700 or so franchise businesses owned by 600 franchisees. They employ about 19,000 people in businesses from restaurants to health services to hotels.
The new wage floor is intended to help employees survive in an expensive city.
Sirmon said there are good arguments on both sides of the wage issue with regard to franchises, but making the change work is going to involve some short-term pain.
Some owners will handle it better than others. “A good strategist will be able to take advantage of the cost savings that come from holding on to good employees,” not needing to deal with high absenteeism, turnover and the constant need to retrain workers.
That will require a change in attitude for some. A Subway owner at the Rainier Beach hearing talked about coming to the United States with nothing but dreams of a better future, a story that would be repeated by others during the evening. And now, he said, the city is taking away the progress immigrants like him have made.
Someone in the audience asked about the immigrants working for him. Don’t they deserve dreams too? Rampant inequality is killing lots of dreams.
The fish in the middle are making noise with their suit, but it might be more useful for them to aim their discontent toward the part of the system where their troubles begin. Having an association gives them at least a chance to argue for a system that lets them enjoy a little more of what they’ve worked for without taking more bites out of the smallest fish.
Sirmon said that because this change is local, it will be hard to pull together enough owners to negotiate changes with the corporations.
But if wage increases spread and corporations see businesses threatened with failure under the current structure, they might be willing to rethink the current model. That’s something to work toward.
Jerry Large’s column appears Monday and Thursday. Reach him at 206-464-3346 or email@example.com