Fast Food Nation: What The All-American Meal is Doing to the World (14 page)

TODAY IT COSTS ABOUT
$1.5 million to become a franchisee at Burger King or Carl’s Jr.; a McDonald’s franchisee pays roughly one-third that amount to open a restaurant (since the company owns or holds the lease on the property). Gaining a franchise from a less famous chain — such as Augie’s, Buddy’s Bar-B-Q, Happy Joe’s Pizza & Ice Cream Parlor, the Chicken Shack, Gumby Pizza, Hot Dog on a Stick, or Tippy’s Taco House — can cost as little as $50,000. Franchisees often choose a large chain in order to feel secure; others prefer to invest in a smaller, newer outfit, hoping that chains like Buck’s Pizza or K-Bob’s Steakhouses will become the next McDonald’s.

Advocates of franchising have long billed it as the safest way of going into business for yourself. The International Franchise Association (IFA), a trade group backed by the large chains, has for years released studies “proving” that franchisees fare better than independent businessmen. In 1998 an IFA survey claimed that 92 percent of all franchisees said they were “successful.” The survey was based on a somewhat limited sample: franchisees who were still in business. Franchisees who’d gone bankrupt were never asked if they felt successful. Timothy Bates, a professor of economics at Wayne State University, believes that the IFA has vastly overstated the benefits of franchising. A study that Bates conducted for a federal loan agency found that within four to five years of opening, 38.1 percent of new franchised businesses had failed. The failure rate of new independent businesses during the same period was 6.2 percent lower. According to another study, three-quarters of the American companies that started selling franchises in 1983 had gone out of business by 1993. “In short,” Bates argues, “the franchise route to self-employment is associated with higher business failure rates and lower profits than independent business ownership.”

In recent years conflicts between franchisees and franchisors have become much more common. As the American market for fast food grows more saturated, restaurants belonging to the same chain are frequently being put closer to one another. Franchisees call the practice “encroachment” and angrily oppose it. Their sales go down when another outlet of the same chain opens nearby, drawing away customers. Most franchisors, on the other hand, earn the bulk of their profits from royalties based on total sales — and more restaurants usually means more sales. In 1978 Congress passed the first federal legislation to regulate franchising. At the time, a few chains were operated much like pyramid schemes. They misrepresented potential risks, accepted large fees up front, and bilked millions of dollars from small investors. The FTC now requires chains to provide lengthy disclosure statements that spell out their rules for prospective franchisees. The statements are often a hundred pages long, with a lot of small print.

Federal law demands full disclosure prior to a sale, but does not regulate how franchises are run thereafter. Once a contract is signed, franchisees are largely on their own. Although franchisees must obey corporate directives, they are not covered by federal laws that protect employees. Although they must provide the investment capital for their businesses, they are not covered by the laws that protect independent businessmen. And although they must purchase all their own supplies, they are not covered by consumer protection laws. It is perfectly legal under federal law for a fast food chain to take kickbacks (known as “rebates”) from its suppliers, to open a new restaurant next door to an existing franchisee, and to evict a franchisee without giving cause or paying any compensation.

According to Susan Kezios, president of the American Franchise Association, the contracts offered by fast food chains often require a franchisee to waive his or her legal right to file complaints under state law; to buy only from approved suppliers, regardless of the price; to sell the restaurant only to a buyer approved by the chain; and to accept termination of the contract, for any cause, at the discretion of the chain. When a contract is terminated, the franchisee can lose his or her entire investment. Franchisees are sometimes afraid to criticize their chains in public, fearing reprisals such as the denial of additional restaurants, the refusal to renew a franchise contract at the end of its twenty-year term, or the immediate termination of an existing contract. Ralston-Purina once terminated the contracts of 642 Jack in the Box franchisees, giving them just thirty days to move out. A group of
McDonald’s franchisees, unhappy with the chain’s encroachment on their territories, has formed an organization called Consortium Members, Inc. The group issues statements through Richard Adams, a former McDonald’s franchisee, because its members are reluctant to disclose their names.

The fast food chains are periodically sued by franchisees who are upset about encroachment, about inflated prices charged by suppliers, about bankruptcies and terminations that seemed unfair. During the 1990s, Subway was involved in more legal disputes with franchisees than any other chain — more than Burger King, KFC, McDonald’s, Pizza Hut, Taco Bell, and Wendy’s combined. Dean Sager, a former staff economist for the U.S. House of Representatives’ Small Business Committee, has called Subway the “worst” franchise in America. “Subway is the biggest problem in franchising,” Sager told
Fortune
magazine in 1998, “and emerges as one of the key examples of every [franchise] abuse you can think of.”

Subway was founded in 1965 by Frederick DeLuca, who borrowed $1,000 from a family friend to open a sandwich shop in Bridgeport, Connecticut. DeLuca was seventeen at the time. Today Subway has about fifteen thousand restaurants, second only to McDonald’s, and opens about a thousand new ones every year. DeLuca is determined to build the world’s largest fast food chain. Many of the complaints about Subway arise from its unusual system for recruiting new franchisees. The chain relies on “development agents” to sell new Subway franchises. The development agents are not paid a salary by Subway; they are technically independent contractors, salesmen whose income is largely dependent on the number of Subways that open in their territory. They receive half of the franchise fee paid by new recruits, plus one-third of the annual royalties, plus one-third of the “transfer fee” paid whenever a restaurant is resold. Agents who fail to meet their monthly sales quotas are sometimes forced to pay the company for their shortfall. They are under constant pressure to keep opening new Subways, regardless of how that affects the sales of Subways that are already operating nearby. According to a 1995 investigation by Canada’s
Financial Post
, Subway’s whole system seems “almost as geared to selling franchises as it is to selling sandwiches.”

It costs about $100,000 to open a Subway restaurant, the lowest investment required by any of the major fast food chains. The annual royalty Subway takes from its franchisees — 8 percent of total revenues — is among the highest. A top Subway executive has acknowledged
that perhaps 90 percent of the chain’s new franchisees sign their contracts without reading them and without looking at the FTC filings. Roughly 30 to 50 percent of Subway’s new franchisees are immigrants, many of whom are not fluent in English. In order to earn a decent living, they must often work sixty to seventy hours a week and buy more than one Subway.

In November of 1999, Congressman Howard Coble, a conservative Republican from North Carolina, introduced legislation that would make franchisors obey the same fundamental business principles as other American companies. Coble’s bill would for the first time obligate franchise chains to act in “good faith,” a basic tenet of the nation’s Uniform Commercial Code. The bill would also place limits on encroachment, require “good cause” before a contract can be terminated, permit franchisees to form their own associations, allow them to purchase from a variety of suppliers, and give them the right to sue franchisors in federal court. “We are not seeking to penalize anyone,” Coble said, before introducing his plan for franchise reform. “We only seek to bring some order and sanity to a segment of our economy which is growing and may be growing out of control.” Iowa adopted similar franchise rules in 1992, without driving Burger King or McDonald’s out of the state. Nevertheless, the IFA and the fast food chains strongly oppose Coble’s bill. The IFA has hired Allen Coffey, Jr., the former general counsel of the House Judiciary Committee, and Andy Ireland, a former Republican congressman who was the ranking member of the House Small Business Committee, to help thwart greater federal regulation of franchising. While in Congress, Ireland had criticized franchisees who sought legal reforms, calling them “whiny butts” who came running to the government instead of taking responsibility for their own business mistakes.

After congressional hearings were held on Coble’s bill in 1999, the IFA claimed in a press release that federal regulation of franchising would interfere with “free enterprise contract negotiations” and seriously harm one of the most vital and dynamic sectors of the American economy. “Small businesses and franchising succeed by relying on marketplace solutions,” said Don DeBolt, the president of the IFA. Despite its public opposition to any government interference with the workings of the free market, the IFA has long supported programs that enable fast food chains to expand using government-backed loans.

For more than three decades the fast food industry has used the
Small Business Administration (SBA) to finance new restaurants — thereby turning a federal agency that was created to help independent, small businesses into one that eliminates them. A 1981 study by the General Accounting Office found that the SBA had guaranteed 18,000 franchise loans between 1967 and 1979, subsidizing the launch of new Burger Kings and McDonald’s, among others. Ten percent of these franchise loans ended in default. During the same period, only 4 per-cent of the independent businesses receiving SBA loans defaulted. In New York City, the SBA backed thirteen loans to Burger King franchisees; eleven of them defaulted. The chain was “experimenting,” according to a congressional investigation, using government-backed loans to open restaurants in marginal locations. Burger King did not lose money when these restaurants closed. American taxpayers had covered the franchise fees, paid for the buildings, real estate, equipment, and supplies.

According to a recent study by the Heritage Foundation, the SBA is still providing free investment capital to some of the nation’s largest corporations. In 1996, the SBA guaranteed almost $1 billion in loans to new franchisees. More of those loans went to the fast food industry than to any other industry. Almost six hundred new fast food restaurants, representing fifty-two different national chains, were launched in 1996 thanks to government-backed loans. The chain that benefited the most from SBA loans was Subway. Of the 755 new Subways opened that year, 109 relied upon the U.S. government for financing.

THE FRANCHISE AGREEMENT THAT
Dave Feamster signed in 1984 gave him the exclusive right to open Little Caesars restaurants in the Pueblo area. In addition to the franchise fee, he had to promise the company 5 percent of his annual revenues and contribute an additional 4 percent to an advertising pool. Most Little Caesars franchisees have to supply the capital for the purchase or construction of their own restaurants. Since Feamster did not have the money, the company gave him a loan. Before selling a single pizza, he was $200,000 in debt.

Although Feamster had spent four years in college at Colorado Springs, less than an hour away, he’d never visited Pueblo. He rented a small house near his new restaurant, on a block full of steelworkers. It was the sort of neighborhood where he’d grown up. Feamster expected to stay there for just a few months, but wound up living there alone for six years, pouring all his energy into his business. He opened the restaurant every morning and closed it at night, made pizzas, delivered pizzas, swept the floors, did whatever needed to be done. His lack of experience in the restaurant business was offset by his skill at getting along with all sorts of different people. When an elderly customer phoned him and complained about the quality of a pizza, Feamster listened patiently and then hired her to handle future customer complaints.

It took Feamster three years to pay off his initial debt. Today he owns five Little Caesars restaurants: four in Pueblo and one in the nearby town of Lamar. His annual revenues are about $2.5 million. He earns a good income, but lives modestly. When I visited a Colorado Springs restaurant operated by a rival pizza chain, the company flew in a publicist from New York City to accompany me at all times. Feamster gave me free rein to interview his employees in private and to poke around his business for as long as I liked. He says there’s nothing to hide. His small office behind the Belmont store, however, is in an advanced state of disarray, crammed with stacks of sagging banker’s boxes. While his competitors use highly computerized operating systems that instantaneously display a customer’s order on TV monitors in the kitchen, Feamster’s restaurants remain firmly planted in the era of ballpoint pens and yellow paper receipts.

Feamster has established strong roots in Pueblo. His wife is a schoolteacher, a fifth-generation native of the city. His community work occupies much of his time and doesn’t seem driven by publicity needs. He donates money to local charities and gives speeches at local schools. He pays some of the college tuition of his regular employees, so long as they maintain a 3.0 grade average or higher. And he recently helped organize the city’s first high school hockey team, which draws players from throughout the district. Feamster paid for uniforms and equipment, and he serves as an assistant coach. The majority of the players are Latino, from the sorts of backgrounds that do not have a long and illustrious tradition on the ice. The team regularly plays against high schools from Colorado Springs, which have well-established hockey programs. The Pueblo hockey team has made it to the playoffs in two of its first three seasons.

Despite all the hard work, the future success of Feamster’s business is by no means guaranteed. Little Caesars is the nation’s fourth-largest pizza chain, but has been losing market share since 1992. Hundreds of
Little Caesars restaurants have closed. Many of the chain’s franchisees, unhappy with the company’s management, have formed an independent association. Some franchisees have withheld their contributions to the chain’s advertising pool. Feamster feels loyal to the Ilitch family and to the company that gave him a break, but worries about the reduced spending on ads. Even more worrying is the recent arrival of Papa John’s in Pueblo. Papa John’s is the fastest-growing pizza chain in the United States, adding about thirty new restaurants every month. In the fall of 1998, Papa John’s opened its first unit in Pueblo, and the following year, it opened three more.

The fate of Dave Feamster’s restaurants now depends on how his employees serve his customers at every meal. Rachel Vasquez, the manager of the Belmont Little Caesars, takes her job seriously and does her best to motivate crew members. She’s worked for Feamster since 1988. She was sixteen at the time, and no one else would hire her. The following year she bought a car with her earnings. She now makes about $22,000 a year for a fifty-hour workweek. She also receives health insurance. And Feamster annually contributes a few thousand dollars to her pension fund. Rachel met her husband at this Little Caesars in 1991, when she was a co-manager and he was a trainee. “We made more than pizza,” she says, laughing. Her husband’s now employed as a clerk for an industrial supply company. They have two small children. A grandmother looks after the kids while Rachel is at work. At the back of the kitchen, inside a small storage closet, Rachel has a makeshift office. There’s a black table, a chair, a battered filing cabinet, a list of employee phone numbers taped to a box, and a sign that says “Smile.”

Fourteen of Feamster’s employees meet at the Belmont store around seven o’clock on a Tuesday morning. Feamster has tickets to an event called “Success” at the McNichols Sports Arena in Denver. It starts at eight-fifteen in the morning, runs until six in the evening, and features a dozen guest speakers, including Henry Kissinger, Barbara Bush, and former British Prime Minister John Major. The event is being sponsored by a group called “Peter Lowe International, the Success Authority.” The tickets cost Feamster $90 each. He’s rented a van and given these employees the day off. He doesn’t know exactly what to expect, but hopes to provide a day to remember. It seems like an opportunity not to be missed. Feamster wants his young workers to see “there’s a world out there, a whole world beyond the south side of Pueblo.”

The parking lot at the McNichols Arena is jammed. The event has been sold out for days. Men and women leave their cars and walk briskly toward the arena. There’s a buzz of anticipation. Public figures of this stature don’t appear in Denver every week. The arena is filled with eighteen thousand people, and almost every single one of them is white, clean-cut, and prosperous — though not as prosperous as they’d like. These people want more. They are salespeople, middle managers, franchisees. In the hallways and corridors where you’d normally buy hot dogs and Denver Nuggets hats,
Peter Lowe’s Success Yearbook
is being sold for $19.95, “American Sales Leads on CD-Rom” is available for $375, and Zig Ziglar is offering “Secrets of Closing the Sale” (a twelve-tape collection) for $120 and “Everything of Zig’s” (fifty-seven tapes, four books, and eleven videos) for the discount price of $995, thanks to “Special Day of Seminar Pricing.”

Peter Lowe has been staging these large-scale events since 1991. He’s a forty-two-year-old “success authority” based in Tampa, Florida. His parents were Anglican missionaries who gave up the material comforts of their middle-class life in Vancouver to work among the poor. Lowe was born in Pakistan and educated at the Woodstock School in Mussoorie, India, but he chose a different path. In 1984 he quit his job as a computer salesman and organized his first “success seminar.” The appearance of Ronald Reagan at one of these events soon encouraged other celebrities to endorse Peter Lowe’s work. In return, he pays them between $30,000 and $60,000 for a speech — for about half an hour of work. Among those who’ve recently joined Peter Lowe onstage are: George Bush, Oliver North, Barbara Walters, William Bennett, Colin Powell, Charlton Heston, Dr. Joyce Brothers, and Mario Cuomo.

Rachel Vasquez can hardly believe that she’s sitting among so many people who own their own businesses, among so many executives in suits and ties. The Little Caesars employees have seats just a few yards from the stage. They’ve never seen anything like this. Though the arena’s huge, it seems like these fourteen fast food workers from Pueblo can almost reach out and touch the famous people who appear at the podium.

“You are the elite of America,” Brian Tracy, author of
The Psychology of Selling
, tells the crowd. “Say to yourself: I like me! I like me! I like me!” He is followed by Henry Kissinger, who tells some foreign policy anecdotes. And then Peter Lowe’s attractive wife, Tamara, leads the audience in a dance contest; the winner gets a free trip to Disneyland. Four contestants climb onstage, dozens of beach balls are tossed into
the crowd, the sound system blasts the Beach Boys’ “Surfin’ USA,” and eighteen thousand people start to dance. Barbara Bush is next, arriving to “Fanfare for the Common Man,” her smile projected onto two gigantic television screens. She tells a story that begins, “We had the whole gang at Kennebunkport…”

When Peter Lowe arrives, fireworks go off and multicolored confetti drops from the ceiling. He is a slender, red-haired man in a gray, double-breasted suit. He advises the audience to be cheerful, to train themselves for courage, to feed themselves with optimism, and never quit. He recommends his tape series, “Success Talk,” on sale at the arena, which promises a monthly interview with “one of the most successful people of our time.” After a short break, he reveals what is ultimately necessary to achieve success. “Lord Jesus, I need You,” Peter Lowe asks the crowd to pray. “I want you to come into my life and forgive me for the things I’ve done.”

Lowe has broken from the Christianity of his parents, a faith that now seems hopelessly out of date. The meek shall no longer inherit the earth; the go-getters will get it and everything that goes with it. The Christ who went among the poor, the sick, the downtrodden, among lepers and prostitutes, clearly had no marketing savvy. He has been transfigured into a latter-day entrepreneur, the greatest superstar salesperson of all time, who built a multinational outfit from scratch. Lowe speaks to the crowd about mercy. But the worship of selling and of celebrity infuses his literature, his guest lists, his radio shows and seminars. “Don’t network haphazardly,” Peter Lowe preaches in his $19.95
Peter Lowe’s Success Yearbook
. “Set goals to meet key people. Imagine yourself talking to them. Plan in advance what questions to ask them… When there is an important individual you want to network with, be prepared to say something insightful to them that shows you’re aware of their achievements… Everyone loves to receive a present. It’s hard to be resistant or standoffish to someone who has just given you a nice gift… Adopt the attitude of a superstar… Smile. A smile tells people you like them, are interested in them. What an appealing message to send!” These are the teachings of his gospel, the good news that fills arenas and sells cassettes.

As the loudspeakers play the theme song from
Chariots of Fire
, Lowe wheels Christopher Reeve onstage. The crowd wildly applauds. Reeve’s handsome face is framed by longish gray hair. A respirator tube extends from the back of his blue sweatshirt to a square box on his wheelchair. Reeve describes how it once felt to lie in a hospital bed
at two o’clock in the morning, alone and unable to move and thinking that daylight would never come. His voice is clear and strong, but he needs to pause for breath after every few words. He thanks the crowd for its support and confesses that their warm response is one reason he appears at these events; it helps to keep his spirits up. He donates the speaking fees to groups that conduct spinal cord research.

“I’ve had to leave the physical world,” Reeve says. A stillness falls upon the arena; the place is silent during every pause. “By the time I was twenty-four, I was making millions,” he continues. “I was pretty pleased with myself… I was selfish and neglected my family… Since my accident, I’ve been realizing… that success means something quite different.” Members of the audience start to weep. “I see people who achieve these conventional goals,” he says in a mild, even tone. “
None of it matters
.”

His words cut through all the snake oil of the last few hours, calmly and with great precision. Everybody in the arena, no matter how greedy or eager for promotion, all eighteen thousand of them, know deep in their hearts that what Reeve has just said is true — too true. Their latest schemes, their plans to market and subdivide and franchise their way up, whatever the cost, the whole spirit now gripping Colorado, vanish in an instant. Men and women up and down the aisles wipe away tears, touched not only by what this famous man has been through but also by a sudden awareness of something hollow about their own lives, something gnawing and unfulfilled.

Moments after Reeve is wheeled off the stage, Jack Groppel, the next speaker, walks up to the microphone and starts his pitch, “Tell me friends, in your lifetime, have you ever been on a diet?”