Planning Ahead: Coronavirus and Managing its Impact on Franchise Operations
By: Peter Viitre and Jason Brisebois
COVID-19, or the 2019 novel coronavirus, has been dominating news cycles since the beginning of 2020. Considering the interconnectivity of the global economy, analysts are predicting that the virus will have a profound impact on every facet of day-to-day business activities, and the franchising industry is no exception. Franchise operations in China have already seen severe disruptions, with many foreign franchisors having shut their doors at multiple franchised locations as a result of the outbreak.[1]
Beyond the obvious risks the coronavirus poses to human health and well-being, the virus also has the potential to severely disrupt franchisors’ and franchisees’ operations alike. As Papa John’s International Inc. (the parent company of the “Papa John’s” pizza franchise) succinctly noted in its Form 10-K annual report on February 26th, “[i]nfections may become more widespread, including to other countries where we have operations, and travel restrictions may remain or worsen, all of which could lead to lower sales, widespread store closures or delays in our supply chain, which could have a negative impact on our business and operating results”[2]. Although Canadian-based franchise operations have not yet seen disruptions of this severity, the virus’ growing footprint in Canada could soon make such disruptions a reality.
The coronavirus has the potential to negatively impact customer traffic to brick and mortar franchised locations, while also interfering with every facet of franchisor and franchisee operations, including supply procurement, logistics, staffing, and beyond. It will likely also see customers continue to trend even further towards “stay-at-home” online services, including delivery services such as Uber Eats or Grubhub[3], assuming, of course, that drivers are available and restaurant have staff willing and able to work.
In response, franchisors should be proactively preparing a coronavirus response plan and beginning to implement additional procedures in order to protect their customers, staff, franchisees, and brand. In particular, franchisors should consider taking the following steps to help minimize potential business disruptions and losses:
Keep franchisees and corporate store managers up to date: A franchisor should ensure that it is keeping its unit franchisees and corporate store managers informed as to developments relating to the coronavirus, any impacts it is having on the system and its own operations, and any potential future disruptions it may have on product offerings, the system’s supply chain, and the business of individual franchisees. Ongoing communication will allow the franchisor to reassure its franchisees that it is monitoring the situation and taking proactive steps to protect franchisee interests. As part of these communications, and in order to manage franchisee expectations, the franchisor should ensure that it is being forthcoming with its franchisees as to challenges being faced by the system and potential issues on the horizon. Franchisees can also be expected to surface with their own approaches to how they believe they should be responding to local conditions. The franchisor should be flexible in how it assesses and addresses such input given franchisees’ independent obligations.
Impose enhanced cleaning protocols on franchisees: Every franchisor, especially those in the food and hospitality spaces, should revisit its operations manuals with respect to ongoing cleanliness standards currently imposed on franchisees and/or issue special instructions. It should increase the frequency and thoroughness with which franchisees are required to clean their outlets, with special emphasis placed on kitchens and food preparation spaces (where applicable), high-traffic areas, and frequently touched surfaces, such as doors and doorknobs, countertops, railings, tables, chairs, menus, touchscreens, washrooms, and POS systems.
Franchisees should ensure that their employees are complying with all health and hygiene standards, including regular and rigorous hand washing.
Assess core suppliers and vendors and arrange alternative supply sources: Some Canadian businesses are already experiencing supply chain disruptions, especially those that purchase key supplies and goods from vendors based in China, Italy, or South Korea. It is necessary to remain in constant contact with core suppliers and vendors to assess their current status, whether these suppliers and vendors are expecting any disruptions that may impede their ability to meet the franchisor’s demands, and whether it is possible to address any supply bottlenecks or shortages before they have a substantial impact on the franchisor’s operations. Key suppliers and vendors, especially in the food, retail, and hospitality spaces, should be required to demonstrate that they have implemented additional health and safety measures concerning their own operations to assure the safety of products being provided to franchisees for resale. When possible, alternative suppliers should be sourced and crucial materials and products should be stockpiled to ensure continuity of business.
Assess whether current contracts contain force majeure provisions: Many contracts will contain force majeure provisions, which typically excuse one party from completing its obligations under the contract as a result of a listed event. Such listed events often include war and unrest, but often also reference global health issues or contain general language that cover such events. Key contracts need to be assessed to determine whether a force majeure provision is present, whether its scope addresses this issue, and whether there is any risk of the other party exercising such provision to excuse its performance under the contract. Contracts for upcoming franchisor conferences should be reviewed to determine any rights and obligations upon which these contracts can be cancelled by either party.
Review current lease agreements: A review should be made of all lease agreements for corporately-owned and sub-leased franchised locations to assess the parties’ rights and obligations in light of the coronavirus. Many commercial leases will afford landlords special powers in light of a public health emergency and the franchisor should consider whether these landlords may have the ability to take any action that may disrupt the franchisor’s business or the business of its franchisees.
Assess whether product offerings should be altered: In light of potential or realized supply chain disruptions, as discussed above, every franchisor should assess whether its current roster of product offerings will be impacted by the coronavirus’ emergence. Supply shortages and other disruptions may mean that it is no longer viable to offer certain menu items (for restaurant and hospitality franchisors), or other items or services. If so, the ramifications of such alterations and the necessary adjustments that will need to be made to complimentary business efforts (such as product marketing and logistics) must be considered. Moreover, services and product delivery systems may also be impacted – Starbucks and Tim Hortons have already curtailed the use of reusable coffee cups; such safety measures should be immediately adopted by restaurant and hospitality franchisors.[4]
Assess core staff needs: Franchisors and franchisees alike should assess staffing levels in light of potential wide-scale absences. Businesses should ensure that essential staff positions are backed up by designated alternate staff members and franchisors and franchisees should emphasize that any staff members feeling unwell should remain at home and should avoid the businesses’ offices and operations. Franchisors are, however, reminded to consider the risks of any attempt to directly manage, schedule, direct, or otherwise control the employees of their franchisees to avoid joint employer liability, and to consult counsel where appropriate.
Assess employee travel: Franchisors should assess whether work-related employee travel is critical to the business’ operations. All work-related employee travel that is not essential to the franchisor should be curtailed, particularly to virus hotspots, which presently include China, Italy, and South Korea. Employees returning from coronavirus hotspots should monitor themselves for any signs of illness for at least fourteen days following their return. Franchisors should also closely monitor governmental updates regarding the status of the virus and abide by all guidance provided. Finally, the necessity of franchisee meetings and conferences should be reassessed on a case-by-case basis.
Assess and enhance franchisor employees’ ability to work remotely: In the event that employees are quarantined or otherwise are unable to make it into the office, a franchisor should ensure that it can provide its essential employees with the tools to be able to work remotely. The coronavirus may have a severe impact on employee mobility, which will require franchisors to equip their employees to work from home in order to minimize potential disruptions to operations.
Franchisors should bear in mind that employees who are working remotely are an attractive target to hackers and other malicious actors, as the business’ information technology security may be weakened by the dispersed nature of the employees and their reliance on personal equipment. This adds further impetus for businesses to begin contemplating remote work and its implications as soon as possible.
Review and reassess business interruption and other insurance coverage: Franchisors should review their current business interruption insurance policies to assess their ability to file claims as a result of virus-related business interruptions. In addition to business interruption insurance, franchisors should also review other active insurance policies, such as directors’ and officers’ insurance and general liability insurance, among others, that may be implicated by complications caused by the coronavirus. It is crucial that franchisors understand the extent of their current coverage, any weaknesses in their coverage that should be addressed, and what their options are in the event of business disruptions or other adverse events.
Crisis management plans: Now is a good time to test the performance of your organization’s crisis management plan. Franchisors should practice how the system would address and respond to a potential crisis, including related to health emergencies. At a minimum, in light of the current situation, the plan should be reviewed, updated, and circulated across the system to ensure all parties understand what their obligations are under the plan.
Although the risk the coronavirus poses to business is severe, franchisors should avoid taking any premature drastic actions that may adversely impact their businesses and those of their franchisees. Measured and proactive steps, such as those explored above, can allow the franchisor to minimize potential coronavirus risks to its business in the interim while a better understanding of the true nature and severity of the virus is sought.
Peter Viitre, CFE, Sotos LLP
Peter Viitre is a partner with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is also chair of the firm’s corporate department, and head of the firm’s home services and retail franchise practice areas. Peter has been recognized by Chambers Canada, Canadian Legal LEXPERT Directory, Who’s Who Legal, and Best Lawyers in Canada as a leading Canadian franchise law practitioner. Peter can be reached directly at 416.977.7754 or pviitre@sotosllp.com.
Jason Brisebois, Sotos LLP
Jason Brisebois is an associate with Sotos LLP in Toronto, Canada’s largest franchise law firm. He is head of the firm’s personal services franchise practice area, and practices business law with a focus on franchising, licensing, and distribution. Jason can be reached directly at 416.572.7323 or jbrisebois@sotosllp.com.
[1] Nicholas Upton, “Market effects from coronavirus are minor, so far”, Franchise Times (19 February 2020), online: <http://www.franchisetimes.com/March-2020/Market-effects-from-coronavirus-are-minor-so-far/>.
[2] Papa John’s International, Inc, Form 10-K for Fiscal Year Ended December 29, 2019”, United States Securities and Exchange Commission (26 February 2020), 19, online, EDGAR: <https://www.sec.gov/ix?doc=/Archives/edgar/data/901491/000155837020001393/pzza-20191229x10kcbc0c2.htm>.
[3] Paul R La Monica, “Coronavirus is helping Netflix, Amazon and other ‘stay at home’ stocks”, CNN Business (2 March 2020), online: <https://www.cnn.com/2020/03/02/investing/coronavirus-stay-at-home-stocks/index.html>.
[4] Pete Evans, “Fears of coronavirus contamination prompt coffee chains to temporarily ban reusable mugs”, CBC News (5 March 2020), online: <https://www.cbc.ca/news/business/starbucks-mugs-coronavirus-1.5486559>.