Loyalty Programs for Franchisees

 In Business Law

Like many Canadians, I go to Tim Hortons on a regular basis and was intrigued when they recently unveiled their new loyalty program. Free donuts and coffee for buying the same items I would have already bought? Sign me up! While customers were excited with getting free items, the owners of some stores were a little less enthused. As you may have seen in the Ottawa Citizen , Tim Hortons franchisees were concerned that the new program was actually hurting their revenues since the discounts (e.g. giving away free items) were not being offset by increased traffic and sales. While there are many benefits to being a franchisee, such as brand recognition and the expertise of those working in the head office, this situation illustrates one potential downside: the amount of control a franchisor has.

In franchise agreements, there are certain ongoing obligations that franchisees have to the franchisors in terms of how to operate the business. For example, the franchisor will often be able to dictate how the products are prepared, what suppliers can be used, and when a location needs to be updated with new signage. In addition to these restrictions, most franchisees will also be obligated to comply with certain marketing requirements set out by head office. This can include participating in certain promotions (such as buy one, get one free) or accepting certain coupons (e.g. 20% off your next purchase).

In the case of Tim Hortons franchisees, their franchise agreement likely has provisions requiring them to participate in certain marketing programs, including the new loyalty program or other promotions put in place by head office (like Roll Up the Rim to Win®), even if they hurt profits and the franchisees disagree with them. Also, not only can franchisors dictate the marketing programs in place, they can also restrict any individual marketing a franchisee may want to do for their specific location. In most franchise agreements, any marketing done by the franchisee (e.g. flyers, promotions, radio advertisements, etc.) must be approved by the franchisor. So, if the franchisee feels that a certain type of marketing would benefit their location and the franchisor disagrees, the franchisee would not be allowed to proceed.

As indicated above, owning a franchise has numerous benefits. However, not having control over every aspect of the business can be frustrating for franchisees and is something to consider when deciding whether to be a franchise owner.

This blog post was written by Jason Peyman, a member of the Real Estate and Business Law teams.  He can be reached at 613-369-0376  or at jason.peyman@mannlawyers.com.

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