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Shakey's franchisees to reject company's amended contract

Shakey's franchisees have accused an officer of Shakey's Inc. of violating the company's 1980 franchise contract terms. They also say Shakey's newly proposed franchise contract doesn't benefit franchisees and that it will be rejected.

February 3, 2003

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Tensions have erupted again between Garden Grove, Calif.-based Shakey's Inc., and franchisees of its 61-store Shakey's pizza brand.

Franchisees are accusing Shakey's Inc. of attempting to negotiate unique contracts with individual franchisees rather than a single agreement through the Shakey's Franchised Dealers Association (SFDA). According to SFDA president John McNulty, the group's 1980 franchise contract makes the franchisee group the sole negotiating body for any contract with Shakey's, and forbids all individual negotiations.

Additionally, at an Oct. 22 meeting in Los Angeles, franchisees formally will reject an amended franchise contract offered to 17 franchisees by Shakey's in late August. On Oct. 15, the SFDA called a special meeting, also in Los Angeles, to discuss the proposed changes. The group deemed the amendments beneficial only to Shakey's and voted unanimously to reject them.

The conflict marks the latest chapter in an ongoing struggle between Shakey's franchisees and the chain's Singapore-based parent company, Inno-Pacific Holdings. The firm purchased Shakey's in 1989 when the chain's U.S. store numbers totaled nearly 450. Unit counts have dwindled steadily in the 22 years since as franchisees, frustrated by poor field and marketing support and royalty mismanagement, chose not to renew contracts.

Inno-Pacific did guide the expansion of Shakey's to more than 400 stores operating in the Far East, but it gradually sold those interests there to offset its diminishing returns in its U.S. operations.

One-on-one strategy

According to McNulty and one additional SFDA representative, 17 franchisees, whose contracts are near expiration or have expired, received on or near Aug. 25 a 12-page list of amendments to the current contract, which was written in 1980. Both representatives also say that at least three franchisees have been approached individually by Shakey's interim chairman and CEO, Wong Chin-Yong, to negotiate new contracts.

Chin-Yong has served in that role since last June, when Sean Flynn, Shakey's 13th president in 22 years, resigned for undisclosed reasons. Chin-Yong also is managing director and CEO of Inno-Pacific Holdings.

McNulty, who is a one-store franchisee in El Monte, Calif., said Chin-Yong's maneuvers are clearly outside the boundaries defined in the 1980 contract.

"These franchisees were told they'd get a better offer if they worked straight with Chin-Yong," said McNulty. "We also understand that multiple promises have been made to multiple franchisees, and these are promises we know would be in conflict with existing agreements."

Operator Chuck Wilburn of Redlands, Calif. warned that any attempt by Shakey's to negotiate individual contracts will be resisted.

"We're totally rejecting that tactic and we're not going to let them get away with it," said Wilburn, who was chosen at the Oct. 15 meeting to be the SFDA's liaison for all future contract negotiations. "Our group has made a commitment to negotiating this contract as a group only."

McNulty said he has made multiple attempts to discuss the SFDA's concerns with Chin-Yong, but that his invitations to meet were ignored or declined.

Additionally, he said the SFDA has received no documents from Shakey's Inc. detailing its proposed amendments to the 1980 contract. Were it not for franchisees sending him copies of the proposed amendments, McNulty said neither the SFDA nor franchisees whose contracts are not currently up for renewal would be aware of the amendments.

PizzaMarketplace attempted to contact Chin-Yong, who is currently in Singapore, through e-mail, but received no response. When contacted by phone, Chin-Yong's Los Angeles-based advisor, Bruce Thompsen, would not answer questions about contract negotiations, and said only Chin-Yong could do so. He also vehemently denied Chin-Yong has avoided contact with McNulty or any SFDA representative.

"Chin-Yong is absolutely available to anyone who makes a phone call, sends him a fax or letter or e-mail," said Thompsen. "They've turned that upside down and said he's not available."

Thompsen said Chin-Yong proved he was highly accessible to Shakey's franchisees when he met them during his U.S. visits this past summer. And while Thompsen said he attended many of those meetings, he wouldn't say whether those assemblies centered on negotiating individual contracts.

"I can't answer that question because I don't have an accurate statement for you," Thompsen said. "I don't want to give you a misstatement that would get printed and then all of a sudden we're in a major issue."

Contract amendments rejected

McNulty said that the SFDA has scheduled another meeting for Tuesday, Oct. 22, when the group will officially reject the proposed contract amendments.

McNulty said that both Chin-Yong and Thompsen were asked to attend, but that they'd received no response from either.

Thompsen told PizzaMarketplace he had no knowledge of the meeting.

According to Wilburn, the amendments include "some ridiculous demands that would change the 1980 agreement we have now. And when considered in the light in which (Shakey's) has performed in the past, it would be absolutely ridiculous for us to agree to any of this."

Regarding the amendments, a key area of concern, according to McNulty, was a poorly defined "in consultation process," a measure that allows the SFDA can approve or reject changes to the chain's system suggested by Shakey's Inc.

"These are the checks and balances for our contract, and we need them to keep things fair," said McNulty. "It's relatively uncommon to have something like this, but because of Shakey's past behavior, we've had to have it, and ours is relatively strong."

Even if the proposed amendments were acceptable, Wilburn added, franchisees are gravely concerned about Shakey's future under ownership of Inno-Pacific. Over the past decade Inno-Pacific has lost millions of dollars, and the Singapore tax authority said it owes millions more in back taxeson income gained from royalties generated by Shakey's Inc. in the U.S.

Inno-Pacific is contesting the assessment, claiming that income earned outside Singapore is not taxable in Singapore. But if it is forced to pay the taxes, the company admitted in an Aug. 28 management analysis, the "viability of the company would be in doubt."

The potential of belonging to a company in receivership, Wilburn said, is discouraging.

"We need to know whether we're going to be signing a contract with a company that might not even be there in the future," he said. "We have no idea who we'd be in contact with."

Franchisees also face further defections from their ranks if Inno-Pacific remains the owner. Randy Hill, president of Jacmar Corp., which operates 19 Shakey's in Southern California, said in April that his company will leave the Shakey's systemif Inno-Pacific owns the company when Jacmar's contracts expire in three years.

The loss of one third of the Shakey's system, Wilburn said, could signal its doom if a significant number of franchisees and/or new stores aren't added in the meantime to replace it.

"If the big guy is going to leave, what are we going to do?" he asked. "I know the Jacmar Group doesn't rattle sabers just to hear the clanging. If they go, we want an out. There's no point in staying."