Richard Gibson at the Wall Street Journal writes that the price of a double cheeseburger is generating a lot of heat among Burger King franchisees.
In an ongoing dispute that could affect how the nation’s hundreds of franchise organizations set prices, the burger chain is insisting that its two beef-patty sandwich be sold for no more than $1—in line with other items on its “Value Menu.”
But the company’s franchisees claim that at that price, they lose money.
Although the loss on each sandwich may only be a few cents, a typical restaurant might sell several hundred of the burgers each week.
Most franchisees are following orders for now, but the National Franchisee Association for Burger King, which represents restaurant operators across the U.S., filed a lawsuit last fall in U.S. District Court in Florida, asserting that the company’s franchise agreements don’t allow it to dictate prices.
Burger King, a unit of Burger King Holdings Inc., Miami, says it sees the value promotion as key to competing effectively in the current consumer environment. Franchisees who ignore its pricing instructions “may be declared in default of their franchise agreement,” the company says.
The court has yet to rule on Burger King’s request to dismiss the case.
A ruling that’s favorable to Burger King could embolden other franchisers to mandate prices. Many franchisees have long regarded their power to set prices as testament to their independence.
Burger King’s arch rival, McDonald’s Corp., faced a similar issue in 2008, when its franchisees rebelled against a $1 double cheeseburger. The matter was defused when the fast-food giant removed one of the sandwich’s two slices of cheese and renamed it the McDouble, cutting the cost of ingredients.
It used to be that franchisers weren’t allowed to impose maximum prices, says Francine Lafontaine, who teaches the economics of franchising at the University of Michigan’s Stephen M. Ross School of Business. But a 1997 Supreme Court case involving a Chicago service station dealer and his gasoline wholesaler opened the door for the practice.
Still, many have chosen not to do it, and left in place boilerplate franchising agreements that don’t include pricing requirements, says Ms. Lafontaine.
Burger King’s franchisees say they usually get the chance to sign off on price changes, and that they’ve twice rejected a $1 double cheeseburger. Burger King confirms that it previously didn’t dictate prices on individual items, though it did require a $1 maximum price on Value Menu items.
The company won a separate case in 2008 requiring franchisees to offer the Value Menu, which is core to its efforts to attract price-conscious consumers.
A company might choose to set prices if it thinks the stores are charging so much that its royalties—and its reputation—are being diminished. But most companies don’t like to rile their franchisees, experts say.
“When you’re talking about changing something as key to a business as what do I charge for my goods, that becomes an issue,” says Michael Seid, a franchise consultant in West Hartford, Conn. Franchises often provide guidance as to how prices should be set, rather than flat-out rules, he says.
Read more at: Wall Street Journal