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QSR Feature
A Different Message
Subway franchisees sue over advertising and marketing plans.

It’s not unusual for a franchisor and a franchisee to disagree on the best approach to marketing and advertising. After all, two things critical to both parties—money and image—are involved.

What causes a few restaurant industry experts to pause, however, is when the conflict boils over in a brand that has posted double-digit sales increases, successful (read: memorable) ad campaigns, and steady unit growth.

Therefore, the industry is watching for developments in a case filed in June on behalf of 10,000 Subway franchisees through the Subway Franchisee Advertising Fund Trust. The trust filed its case in Connecticut against Doctors Associates. It seeks to block Doctors Associates and founder Fred DeLuca from “seriously diminishing the control and protection that Subway franchisees currently have over where and how their advertising contributions are spent on advertising and marketing programs that help grow the business.”

In short, the franchisees contend any changes to the 1990 agreement between Doctors Associates and the Trust would erode the control and protection the franchisees have over where their money goes.

“While we respect our founder’s vision, and regret the need to resort to legal action, the fact is that franchisees have helped build that vision into what it is today,” says Tom Seddon, the trust’s chief executive officer. “Franchisees are owed the right to control their own assets, as promised when the trust agreement was signed.”

Commenting when the case was filed, Seddon said it was a mystery to the trust why the brand would want to tamper with an agreement that has helped spur record growth and sales. The case contends that what Doctors Associates wants is unilateral control over advertising and marketing and how the money is spent. A Subway spokesman said brand officials wouldn’t comment on the case beyond saying that it hopes for an amicable resolution.

There is no rule—or even trend—on who holds the reins on marketing and advertising, says Darrell Johnson, president of FRANdata, which researches the restaurant industry. Some brands split control evenly; others weigh heavily on either the side of the franchisor or the franchisee. Any model can be successful, given the right context and execution.

For instance, two extremes in the industry are KFC, part of YUM! Brands, and Quiznos. They’ve succeeded in growing sales and solidifying the brands’ images, but the input from the franchisor and the franchisee come from two spheres.

KFC’s advertising fund is managed by a national co-operative with 17 voting members; 13 are franchisees, with the franchisor contributing the remaining four. KFC franchisees are obligated to a 2 percent contribution from gross revenue to the ad fund each month. Decisions on that ad co-op, which is dominated by franchisees, must be made by at least a two-thirds vote.

Quiznos is almost completely controlled by the franchisor, with no franchisee advertising council. Franchisees pay a 4 percent marketing and promotion fee. The marketing fund isn’t audited, therefore audited financial statement are not available to franchisees. Affiliates administer and control the fund.

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