Wednesday, October 22, 2014

Fast Food Schooling: Worse Than You Think

It's fairly routine to draw parallels between what is happening in education and what has happened in the rise and growth of the fast food industry. But if you have not been paying attention to what's been happening in the fast food sector, let me show you how that's even worse news than you thought.

For a full rundown, check out this article in Washington Monthly by Josh Friedman. "Big Whopper Economics" is depressing reading, not just for people in the industry, but for those of us working in sectors that want to imitate the fast food biz.

Turning the screws.

1997 was marked by two pieces of case law that made life as a franchisee particularly miserable.  

Queen City Pizza vs. Domino's Pizza determined that reversed previous decisions on the issue of lock-in. Lock-in requires franchisees to abide by any and all requirements written into their franchise, including the requirement to buy supplies from the parent company at whatever price the parent company charges.

State Oil Company vs. Khan found that franchisors could put ceilings on what prices could be charged.

So if the McBig Burger main office declares that A) you must buy the fixings for the Greaseburger Max from them for $2.00 per unit and B) you must sell the Greaseburger Max at $1.00 per unit, you have no legal recourse. You must sit there and eat the loss.

But wait! Free market forces!!

Freedman hears you. But bad franchisors have not gone out of business, and they don't necessarily care if their franchisees fail. The default rate for the beloved Cold Stone Creamery was over 42%. Submaker Quiznos had 39% of its franchisees with small business loans were in default in 2012. Quiznos kept selling franchises even though they knew they had oversaturated the market had a 40% failure rate.

According to Freedman, analyst Richard Adams of Franchise Equity Group estimates that one in four McDonalds are not profitable. This is why it does you know good to picket your local McDonalds and demand the owner raise his workers' wages. Your local McDonalds owner probably can't afford to eat at his own restaurant, either. The probable profit margin of most fast food franchises is about four to six percent.

“The corporations set wages by setting everything but wages,” notes Jack Temple, a policy analyst with the National Employment Law Project. Individual franchisees cannot shift money from other costs to pay for higher wages because they do not control what is left.

So can we just go picket exclusively at the fast food places that are owned by the parent corporation instead of local franchisees? Well, about that...

How the industry has been restructured.

Remember how Freedman said that the parent corporation doesn't care if its franchisees fail? That's because they've found other ways to make money.

One of his examples is Burger King. Since 2009, the parent company has sold off over 1,000 of its restaurants. "This has reduced Burger King's revenues but raised its net earnings." The company behind Applebee's and IHOP now owns only about 1% of the restaurants in the chains.

The parent corporations have adopted a strategy of "de-risking"-- they no longer face any of the risks of running a restaurant, but are actually in the business of collecting licensing fees and selling supplies to franchisees (who, remember, have no say, no power to negotiate, what any of those charges might be.) The risk hasn't been eliminated-- it's simply all been placed on the local franchisee.

With the chains primarily focused on financial engineering and no longer in the business of running their own stores, the interests of the franchisor and franchisee quickly diverge in ways that hurt everyone in the industry except those at the very top. As a former Burger King supplier noted in an interview with the popular franchisee blog BlueMauMau, “The cost of goods … and what the specs are get to be less important if you don’t have a dog in the operational part."... In this model, the role of big business is not to create a symbiotic relationship with franchisees and their employees, but rather to extract as many economic rents, or unearned gains, as possible. 

And if they actually go under and shut down (or, as one devastated Quiznos franchisee did, commit suicide), well, for the time being, they aren't much harder to replace than a burger wrapper.

Who would approach an entire industry with such a destructive approach that shows regard for neither the actual purpose of the business or the live human beings who are being ground up and bled dry? You'll never guess.

Okay, you probably will guess.

Says Freedman, "More than seventy chain restaurant brands are now owned by private equity firms."

Burger King has been passed from firm to firm (including Bain Capital) and is now held by some special investment magic trick called a special purchase acquisition company. That parent group of Applebee's and IHOP is called DineEquity.

Yes, it's the hedge fund crowd, once again displaying their willingness to trash absolutely everything as long as they get a good ROI. And that's why reading this article made my blood run just a bit chill.

Because these guys learn, and they have far better learning transfer than many of my students. They learned from the fast food lessons of the seventies and eighties-- turn all of your high-skills jobs into low-skills jobs so that you can lower wage costs and churn and burn staff at will. Standardize your product so that any shmoe can produce it, and ramp up the marketing so that people will line up to receive a mediocre (but consistent) product.

Could these new lessons be coming to education, too?

How would it look? Push the charter operation biz down onto local operators. Lock them into contracts that required them to get all their supplies from the main office-- maybe even the very buildings they occupy. Control all of their financial inputs and outputs so that the school may or may not struggle, but the investors will always get their share. Do not worry about how successful the charter is-- just how well it's pumping money back to the main office.

Does any of this sound familiar?

1 comment:

  1. It should be pointed out that the Hechinger Report is primarily funded by corporate education reformers.