BURGER KING: Is BK Punishing Franchisees With Lawsuits?

Every kingdom divided against itself is brought to desolation. Matthew 12:25

Last November, Burger King’s National Franchise Association, a group that claims to represent more than 80 percent of Burger King’s U.S. franchise owners, sued the parent company, alleging that Burger King Corporation was forcing them to price products below their cost.  (Read:  BURGER KING Franchisees Sue Over $1 Cheeseburgers)

The dispute arose specifically over Burger King’s promotion of $1 cheeseburgers that, franchisees allege, cost owners $1.10 each.  In the bitter dispute, franchisees argue that Burger King does not have the right to set maximum menu prices.  The franchisor alleges it has the right to require participation in mandatory promotions.

This month, Burger King has fired off a number of lawsuits against some of its own franchisees for not complying with a mandatory cash register upgrade by the deadline of December 31, 2009.  Some named in the latest suits are outspoken critics of the franchisor and participants in the $1 Cheeseburger lawsuit.

According to a story on FOX Business, some franchisees claim that Burger King is targeting franchisee dissenters to punish them and send a message.  From the Fox story:

“This is about getting even because we did not roll over on the dollar double cheeseburger,” said one franchisee named in a suit who declined to be named for fear of further retaliation. “This is about showing who the big boss is.”

Is Burger King Out to Crush Franchisee Dissent?

Critics of the franchisor point out that the POS (point-of-sale) lawsuits are “particularly confrontational.”  Lawsuits of this kind are usually preceded by default notices issued by the franchisor that give the franchisees a time period (usually 30 days) to “cure” the default  before further legal remedies are sought.  With slumping sales and the country in a recession,  it seems a bit harsh for Burger King Corporation to go right to litigation over a required investment of $18,000 and $35,000 per store.  That certainly indicates that retaliation may be a motive for the hard line the franchisor is taking.

Burger King Corporation does not exactly have an pristine reputation when it comes to handling dissent.  Remember a couple of years ago when BK marketing and PR execs were exposed for planting spies and leaving slanderous shill comments against leaders of the Coalition of Immokalee Workers because they were demanding fair pay for tomato workers?  In an embarrassing incident, it was revealed that a Burger King VP had been using his young daughter’s AOL account to slander the group’s leaders in online forums, as I recall.  That revelation, and another involving BK infiltration into the non-profit group in order to undermine their protest, ended with Burger King publicly giving in to the non-profit groups demands – and the resignation of the VP.

Or are Uncooperative Franchisees to Hurting Themselves?

On the other hand… Burger King and its supporters contend that uncooperative franchise owners are undermining the franchisor’s efforts to upgrade and improve both the BK marketing program and store sales.  According to the Fox article,

The new system would let the company cull real-time sales data to help with marketing and pricing actions, a capability that has left Burger King at a disadvantage to chief rival McDonald’s Corp. and other restaurant chains. At stores that have already installed the new platforms, Burger King says the new platform has also helped schedule employee hours more efficiently, keep track of inventory and reduce theft.

So why would franchisees – who profess to be deeply concerned about managing costs and tracking profitability – drag their feet in adding tools their competitors already have?

Burger King also contends that franchisees are undermining the brand and hurting themselves with the $1 Cheeseburger lawsuit.  The $1 Cheeseburger, BK contends, is a loss leader item designed to drive traffic & raise customer counts.

Once the $1 Cheeseburger deal brings customers is in the door, they contend, the franchisee can upsell them higher margin products like soda and fries.  Unless, of course, the franchisee is too preoccupied suing its franchisor.

Can the Burger King-dom Become a Democracy? Should it?

Franchisees claim that Burger King Corporation is more concerned with putting on a show for Wall Street, and driving up its stock price, than the profitability of the franchisees whose investments built the chain and fund its massive advertising budget.  They are sending a message that they are not afraid to break ranks and go public with their unhappiness if the franchisor refuses to respect their concerns (they twice voted against the $1 Cheeseburger promotion).

Burger King Corporation, on the other hand, seemingly is trying to send a message to both its franchisees and investors that it will maintain a strong leadership role and do what it believes is necessary to compete in the marketplace.  The King-dom is not a democracy, so it seems, and franchisee refusal to make the changes necessary to effectively compete will not be tolerated.

Burger King seems to be engaged in a classic franchisee/franchisor stand-off that, if not resolved soon, could be threaten the investments of all involved.

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BURGER KING Franchisees Sue Over $1 Cheeseburgers

Burger King’s National Franchisee Association filed a lawsuit this week against the franchisor over the $1 Double Cheeseburger promotion.

Last summer, Burger King franchisees twice voted against the $1 double cheeseburger promotion.  Despite clear objections, Burger King forced all franchisees to sell its double cheeseburger for $1, starting in October.

The suit was filed in U.S. District Court in Miami.  In it, the franchisees allege that the Burger King franchise agreement does not give BK the authority to “dictate maximum pricing.”

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Burger King Franchisees Stand Up For Their Rights… & Profit Margins

Burger King’s National Franchisee Association represents more than 80 percent of U.S. Burger King franchisees.  They reportedly filed the lawsuit only after their attempts to negotiate with the franchisor were unsuccessful. They are asking the court to acknowledge that the right to set prices rests with BK franchisees, not Burger King corporate.

According to a story in the Miami Herald:

Franchisees argue that Burger King is using the promotion to boost sales to satisfy Wall Street investors at the expense of franchisees’ profits. The company’s most recent earnings report showed a 6 percent drop in profits, a 5 percent decline in revenue and a 4.6 percent fall in sales at stores open in North America more than a year.

Based on numbers Burger King provided to franchisees, the company projects that the double cheeseburger will lead to a 5 percent increase in restaurant sales. That will translate into an increased bottom line profit of $365 per restaurant based on $105,000 in sales, according to the analysis.

But financial models run by one Illinois franchisee… suggest that the bottom line impact for restaurants would be a loss of between $489 and $930 depending on the percentage of total sales generated by the value menu.

Stifel Nicolaus restaurant analyst Steve West agrees with franchisees that it is a dangerous move for Burger King.

“They’re going to pressure margins and lower their average check,” said West, who in September downgraded Burger King’s stock to a “hold” rating.  “If you don’t get enough sales, you’re shooting yourself in the foot. History has shown that this doesn’t work.”

Some argue that deep discounts like $1 Double Cheeseburgers are a necessary evil in the current economy.  However, McDonald’s stopped selling its double cheeseburger for $1 because of profit margin concerns at the end of last year.  And nothing irritates franchisees – who pay royalties on their gross sales, not their profit – than a franchisor who acts indifferently toward their bottom line.

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BURGER KING Franchisees Sue Over $1 Cheeseburgers

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