Burger King-franchisee relationship disintegrates further
November 17, 2009
Burger King franchisees have been upset with their franchisor over a number of issues in the last year, from controversial advertising and falling sales to required late night hours, a plan to divert money from the soft drink rebate fund and most recently the decision to add the Double Cheeseburger to the dollar menu — a move franchisees voted down this summer.
The move prompted the National Franchisee Association, which represents more than 75 percent of BKC franchisees, to file suit against the company earlier this month, arguing the company doesn't have the right to mandate maximum pricing. Burger King responded, saying the suit is without merit, citing a court ruling that affirmed Burger King Corp.'s right to set pricing for its value menu program.
Now, franchisees have taken the dispute a step further, sending a letter of their complaints to BKC's board of directors, according to a story in The Miami Herald. In the letter, franchisees asked the board to help repair the company's relationship with its franchisees and to address the challenges resulting from the management's "comprehensive failure ... to develop a competitive menu necessary for our business to be successful."
From The Miami Herald:
"Your management team has pushed the franchise community to the brink,'' said the letter signed by 27 franchises, including the NFA board and the heads of 21 regional franchisee associations. "We are taking this extraordinary and historic action to communicate our concerns directly to the board.''
Burger King management issued a statement to The Miami Herald that reiterated claims made in the company's recent earnings call that the $1 double cheeseburger is performng well in the markets where it's offered.
From The Miami Herald:
"BKC takes great pride in our franchise system and the actions we have taken to enhance our competitive position,'' the statement said.
Impact on credit?
Burger King North America president Charles Fallon warned franchisees the suit could have an unintended effect on their credit. Fallonsaid in an e-mail to a group of franchisees that the negative publicity resulting from the suit is bad for business and could lower stores' value, according to a story on Nasdaq.com.
From Nasdaq.com:
"Bankers, landlords, suppliers and potential new franchisees are watching and listening--potentially leading to less lending, at higher rates and increased equity participation."
He also warned that the disagreement could lead to lower prices per store if a franchisee decided to sell.
Many franchisees say they can't turn a profit on the $1 Double Cheeseburger, which typically ranges from $1.89 and $2.39, depending on the market. But some say the lower priced burger is necessary to compete with McDonald's.
From Nasdaq.com
Analysts have been closely analyzing the success of the double cheeseburger promotion, gauging the effect it has on traffic and profit. Matthew DiFrisco, analyst at Oppenheimer & Co., believes the offer is profitable and necessary to attract customers.
Of greater concern is discontent among franchisees, which could potentially hamper strategic moves by the company to win customers.
"With the battle for market share well under way, flexibility is important," DiFrisco said in a research note. McDonald's "strong relationship [with its franchisees] gives it an advantage in this regard."
