Franchises Revisited

Las summer I brought you the story of Burger King’s ongoing war with its own franchise holders, in a post I called The Trouble With Franchises. The issue, in case you’ve forgotten, is that Burger King wanted its franchise holders to participate in a national $1 promotional price for the double cheeseburger product, which would be the subject of television, print and Internet advertising. The franchisees were resisting the program because, on average, it costs them roughly $1.10 to make a double cheeseburger, which turns the entire product into a loss-leader for them – without actually costing the company itself anything. The company had put the subject to a vote, only to have the franchise holders vote it down. They attempted a second vote, with voting conditions rigged to make it harder for the franchise holders to vote “no” the second time, but the vote still failed. So the company did the logical thing and just went ahead with the promotion anyway, figuring that the franchise holders would have to go along with it once the television ads started to run…

It’s an impossible situation for the franchise holders. If they go along with the promotion they’ll be losing money on every double cheeseburger they sell, and there’s no limit on these things – nothing to keep an entire college football team from coming in and ordering ten of them for each player, or 550 of the things, every one at a loss, for example. But if the franchise holders refuse to honor the promotion, they will be in the position of having to telling paying customers that they can’t have special promotional price from the television ad, thus violating both the First and Second Laws of Business in one simple statement. Nor can they just explain the situation and try to get the customers’ sympathies; most fast-food consumers will not know the difference between corporate advertising and local franchise holder economics, or care if they did. So the franchise holders have done the only logical thing: they’re suing the parent company…

As reported by the Associated Press through the St. Petersburg Times, The National Franchise Association (which represents about 80% of the Burger King franchise holders) has filed suit in Federal court, claiming that the promotion will cost them a fortune and contending that the parent company’s franchise contract does not allow it to set maximum menu prices in the first place. The parent company, in turn, is claiming that the case is without merit because an earlier court decision ruled that the company can require franchise owners to participate in “value-menu” promotions. It remains to be seen how the court will interpret this new case, and the contract it is based on; if the contract specifies that the franchise owners must produce the promotional items but does not specify participation in a pricing scheme (or control of menu prices) then the franchise holders may have a case. Otherwise, they will probably be treated to another iteration of the advice that just because you don’t like what your contract is telling you, that doesn’t mean you can just ignore it…

In the long run, the franchise holders may have to accept the situation, eat the loss on each burger, and try to make up the difference on soft drinks and other menu items with huge markups. But even if the company does triumph in court, I think we case safely assume that Burger King franchises just got a lot harder to sell – and probably won’t sell for as much, assuming that the prospective franchise owner has been following this case. Which may turn out to be an example of the company winning the battle – but ultimately losing the war…