BURGER KING Franchisees Sue Over Forced Discounting

Franchisors:  If you want to invoke the wrath of your franchisees, here are a couple of tips.  First, come up with a promotion that boosts top line sales at the expense of your franchisee’s profits.

Second,  proceed with said promotion despite the formal objections of your franchisee association and the fact that your direct competitor tried – and abandoned – the same promotion last year.

According to a story on Unhappy Franchisee, that’s exactly what Burger King did with the $1 Double Cheeseburger promotion they forced their franchisees to implement beginning last month.  Unsurprisingly, Burger King’s National Franchisee Association filed a lawsuit this week against the franchisor.

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Burger King Franchisees Want it Their Way… Profitable

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.

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.”

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.

Are deep discounts like $1 Double Cheeseburgers are a necessary evil in the current economy?  Some would say yes.  However, McDonald’s stopped selling its double cheeseburger for $1 because of profit margin concerns at the end of last year.

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