When Franchising Meets Religion, Could Franchisees Be Left Holding the Bag?
October 2, 2012 - Categories: Franchising
This corporate exercise is perpetually performed by franchisors to insulate their core brand from future risks. Meanwhile, consumers are oblivious about the myriad of corporate entities and rigid structure comprising a franchising system. The silent and seamless cooperation between franchisors and franchisees is the back bone to rapid growth and success of a franchising system. Nevertheless, as history has shown, great strengths have the potential to become great weaknesses. The silent nature of the franchise partnership is precisely what places franchisees in grave danger when their franchisors go off script. If an owner or executive of a franchising business makes controversial statements in public, those statements can have a ripple effect across the franchise system, as angry consumers who wish to boycott the particular brand do not discriminate between franchisor and franchisee operated enterprises.
Chick-fil-A experienced this after its president Dan Cathy stated the company strongly supports the biblical definition of the traditional family, thereby being in opposition of same-sex marriage. Naturally, given today’s hypersensitive socio-political climate, controversy ensued, embroiling Chick-fil-A in one of society’s most contentious issues. The immediate negative effect to the Chick-fil-A brand was obvious. A New York based market research firm estimated that Chick-fil-A’s perception rating declined by 25 percent soon after the story broke. Supporters of the LGBT movement picketed Chick-fil-A restaurants. The company lost some of its marketing deals and business partners. Chicago mayor Rahm Emanuel, Boston mayor Thomas Menino, and other politicians pounced on the opportunity to speak out in opposition to the restaurant. And, of course, many news organizations covered all of the juicy, flame broiled Chick-fil-A controversy in primetime.
While it is clear that any corporation could be negatively affected by the public actions of its leadership, the potential damage to investors in a franchise system is unique from that of shareholders in publicly traded companies. In publicly held corporations, shareholders are chiefly concerned about the overall health of the enterprise, as risks are diversified and gains and losses are shared proportionately. Whereas, when franchisees invest their life’s savings into a franchise, they are heavily dependent on both the success of their individual store and the perceived goodwill of the franchisor’s brand within the franchisee’s individual market. This phenomenon explains the contrast between the reactions of investors in large, non-franchising companies such as Starbucks, Microsoft, and Amazon, to that of franchisees in Chick-fil-A regarding publicly expressed positions on same-sex marriage made by executives of their respective companies.
Starbucks is a quick service restaurant perfectly akin to Chick-fil-A, and Starbucks’s leadership has made a number of statements that openly express the company’s support of same-sex marriage. During a shareholder meeting, investors in the coffee giant merely posed questions as to the economic consequences of such statements, but there were no reports of Starbucks shareholders actively contradicting the company’s stance or expressing fear of possible repercussions.
In the Chick-fil-A scenario, some franchisees were eagerly giving interviews to local and national media, and posting ads on social media websites disassociating themselves from the beliefs of Dan Cathy. One franchisee even enrolled his Chick-fil-A as a sponsor of a pride fest in New Hampshire. Meanwhile, other franchisees refrained from distancing themselves from Cathy, likely because their customer demographics dictated that their restaurant would be better suited if it were tacitly aligned with his comments. These contrasting responses demonstrate the divergent interests of franchisee business owners operating underneath the same brand.
Amidst the controversy there was some reprieve from the storm provided by former Arkansas Governor Mike Huckabee’s Chick-fil-A Appreciation Day. Huckabee and other conservative politicians encouraged people who stood for the biblical definition of marriage to patronize Chick-fil-A in support of their cause. The company stated that it achieved record sales during the event but did not release any store or region specific information. Although Chick-fil-A has over 1,600 locations throughout America, the restaurant chain is deeply rooted in traditionally conservative states; therefore, it is not hard to determine by location which franchisees likely benefited from the Chick-fil-A Appreciation Day wave of conservative support and which franchisees did not. In fact, if the company tracked the locations that did not receive a boost in sales during the Chick-fil-A Appreciation Day, that list would likely encompass the franchisees that were most negatively affected by Dan Cathy’s statements, because the respective markets are probably split along the same socio-political fault lines.
On the face of this situation, it appears that some franchisees legitimately could argue that they suffered financial damages due to Dan Cathy’s public, religious statements, and that Chick-fil-A should compensate them because Cathy knew he had a reasonable duty to protect their business interest when acting on the company’s behalf. However, in law and in life, there are always exceptions to the rule. Here, the notable exception is notice.
The operation of a notice exception is most easily illustrated in the homeowner liability context. For example, virtually every state in the U.S. has laws governing injuries to visitors in the homes of its residents. Homeowners have a legal duty to protect their visitors from reasonably known dangers within the home. But homeowner liability can be nullified in virtually every situation where the visitor is given proper notice of a potential danger in advance of any incidents. The reasoning behind the notice exception is that once a visitor becomes reasonably aware of the risk, they can freely decide how to proceed and should no longer be able to look to the homeowner for damages from any resulting injury.
The same holds true in the Chick-fil-A situation. It would be understandable if franchisees were totally blindsided by Dan Cathy’s comments, but nothing could be further from the truth. Before they purchase a franchise, Chick-fil-A franchisees receive ample notice that the company is and always has been rooted in the Christian faith and operates on biblical principles. S. Truett Cathy, founder of Chick-fil-A, maintains that franchisees don't have to be Christians to work at Chick-fil-A, but he asks that they base their business on biblical principles because those principles work. A Forbes.com article even playfully described Chick-fil-A as a cult because it found its practices to be a little odd and extreme vis-a-vis its competitors.
Chick-fil-A's corporate mission, as stated on a plaque at company headquarters and often by S. Truett Cathy, is to glorify God. It is the only national fast-food chain that requires all of its locations to remain closed on Sundays. Company meetings and retreats include prayers, and the company encourages franchisees to market their restaurants through church groups. They screen prospective operators for their loyalty, wholesome values, and willingness to buy into Chick-fil-A's Christian credo.
The company requires applicants for operator licenses to disclose marital status, number of dependents, and involvement in social, church, and professional organizations. S. Truett Cathy believes that if a man can't manage his own life he can't manage a business, and thus family members of prospective operators are often interviewed so the company can learn more about the candidates and their relationships at home. Fifty employees and one franchisee grew up in one of 13 Christian foster homes in the U.S. and Brazil run by a nonprofit organization Chick-fil-A funds, the WinShape Foundation. Sixteen others were in Sunday-school classes Cathy teaches at First Baptist Church in Jonesboro, Ga.
From a business standpoint, the most obvious of Chick-fil-A’s Christian practices is the company’s mandate for all locations to be closed for rest on Sundays. It does not take a certified forensic accountant to understand that Chick-fil-A and its franchisees have foregone millions of dollars over the years in observance of this blatantly Christian tradition. Yet, franchisees made the decision that it was well worth investing in a Chick-fil-A franchise nonetheless. This is likely because even withstanding the “short week” disadvantage, Chick-fil-A remains the second largest quick-service restaurant chain in the nation based on annual sales, operating at an average of $2,500,000 in sales per unit.
Looking back on all that has taken place since Dan Cathy’s comments on same-sex marriage somehow created a firestorm, it is likely that Chick-fil-A conducted a cost-benefit analysis of the situation and made some determinations. The company has since stated that its tradition is to treat every person with honor and respect regardless of their belief and sexual orientation, and that going forward they intend to leave the policy debate over same-sex marriage to the government. It has been reported that the company has also decided to discontinue its donations to anti-gay marriage activists groups, but that has yet to be confirmed. Nevertheless, given that Chick-fil-A has no real reason for concern about its ability to weather this socio-political storm due to its proliferation in conservative regions, and that the Cathy family will obviously maintain its biblically based views and corresponding activism, it is reasonable to conclude that while the company might not make many more socio-political statements, it will definitely continue mixing religion with the foundation of its franchise system because it works. And any franchisees that do not share that vision cannot cry foul in times of tribulation, as they had full notice of Chick-fil-A’s Christian tradition from the moment each franchisee arrived on the scene.