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To Pacify Irate Franchisees, Franchisers Extend Services

February 24, 1995

Every three or four months, William F. Leahey would spend about 10 hours preparing promotional mailings to some 2,500 customers. The Raleigh, N.C., print-shop franchisee hated trying to fit the tedious work into his schedule.

Now his franchiser, AlphaGraphics Inc., handles the task. ``One of the things I look for in a franchise is to make my life easier,″ says Mr. Leahey. ``This makes my life easier.″

The shifting of the mailings burden resulted from changes in Mr. Leahey’s contract with AlphaGraphics, and it illustrates how the big franchiser is trying to improve its relationship with franchisees. In giving franchisees more service and more rights, the company is addressing a major problem in the franchise field: disgruntled franchisees.

These increasingly militant business owners contend that they get ``one-sided″ franchise contracts. AlphaGraphics, based in Tucson, Ariz., is one of the few major franchisers so far to respond by thoroughly revising its contract. If its approach catches on, it could alter the relationship of other franchisers and franchisees.

AlphaGraphics, which is 40 percent-owned by R.R. Donnelley & Sons Co., Chicago, had many unhappy franchisees. Critics say that it is still far from perfect but concede _ and the company agrees _ that the changes benefit both sides.

With more than 330 franchised outlets, the chain had systemwide sales of $195 million last year, a 16 percent rise from the previous year. Average sales for U.S. stores at least one year old rose 18 percent to $745,000 in 1994 from $635,000 in 1993. That is largely because franchisees must pay much more attention to business planning to get certain benefits in the new contract, says AlphaGraphics Chairman Michael B. Witte. The contract also has incentives that encourage the franchiser to help franchisees. ``We’ve created a market economy inside AlphaGraphics,″ Mr. Witte adds. ``That has forced us to be a lot better.″

Like other franchisers, AlphaGraphics licenses out its name and business format in return for fees and royalties. Opening a franchise usually costs $250,000, and sometimes much more.

In the revised contracts, which the company started using in 1992, franchisees gain in several areas. For example, it is now much easier for them to leave the system without inviting a costly court battle. Any franchisee now can pay for what amounts to a no-fault divorce. The cost is never more than the equivalent of three years’ royalties. ``Divorced″ franchisees are free to keep their customers and compete with AlphaGraphics.

AlphaGraphics’ royalty rates, formerly fixed, now ride a sliding scale linked to volume. Joe Schwartz, a 40-year-old franchisee in Monmouth Junction, N.J., says the change is saving him about $2,000 a month _ which helps him spend more on advertising and equipment.

In addition, the franchiser can no longer decide by itself how every penny of royalties will be used. Instead, 25 percent of royalty fees are set aside to pay for services of each franchisee’s choosing, such as help from computer consultants _ or Mr. Leahey’s promotional mailings.

For their part, franchisees accept strict obligations. To get 25 percent of the royalties back in service credits or cash, for example, franchisees must keep current with royalty payments, submit monthly financial statements and prepare annual budgets. ``It’s very difficult to help franchisees improve their business unless you have timely financial statements,″ Mr. Witte says. Some 92 percent of franchisees now comply with reporting rules, twice the former level, he reports.


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