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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