McDonald’s “Dollar Menu.” Subway’s “$5 Footlong.” Quiznos’s “Million Sub Giveaway.” As the U.S. tries to climb out of the recession, these bargain fast-food meals have become familiar subjects of TV ads and radio jingles — and for many consumers, they are some of the best food values around.

But few of the hungry diners who bite into those discounted subs and burgers realize that their cut-rate meals can be a flashpoint between big fast-food companies and the franchise owners who operate local stores. The promotions are typically decreed by company headquarters, hoping to lure in customers and fend off the competition.

These days, however, some franchisees say the costs of offering these deals are too high — and worse, that penny-pinching consumers drawn by promotions are skipping full-price extras that typically help offset the low margins of the discounted items.
Doni Pitchford, a Subway franchisee in Jamaica, N.Y., says she ran into this issue in February when headquarters unveiled a new pastrami sandwich at New York-area stores. To promote the new menu item, the company issued coupons for a free sandwich — with no purchase necessary.

Even though Subway supplied Pitchford’s store with slices of pastrami, she was responsible for picking up the rest of the tab. The cost of the bread, cheese and other condiments amounted to about $1.50 to $1.75 per sandwich, she estimates, and that didn’t include the added labor expense she took on just to meet the throngs of customers that gathered in her 1,300-square-foot store.

Making matters worse, the two boxes of pastrami Subway sent Pitchford ran out in just two hours. “When I ran out of pastrami, we couldn’t accept coupons anymore. Then our customers got mad,” she says. “I don’t mind my food costs going up as long as I’m increasing sales. But these people were coming in just for the coupons… It was a nightmare,” she says. After giving away 120 sandwiches (half of which were made with her own supply of pastrami) over the two-hour period, she estimates having lost roughly $500 on the deal. Subway spokesman Mack Bridenbaker, says that although they encourage franchisees to take part in promotions like this one, participation is voluntary and Pitchford could have opted out.

The tension over the recession-driven deals highlights one of the conundrums franchised businesses like fast food must grapple with. By providing a standardized product backed by big national or even global brand advertising, the mother-ship corporation provides franchisees with a way to start a business with a brand that customers already know and trust. But, in return, franchisees must be willing to abide by certain rules and demands from headquarters. That adherence to the home office’s policy is critical to the entire approach since it provides the consistency to customers that assures them that a Burger King Whopper in Olean, N.Y., will taste just like one in Tempe, Ariz. — even if the stores are run by completely different owners.

That means toeing the line on big regional or chainwide promotions — even those that cut way into margins on the discounted items. Normally, these promotions can act like a loss leader. But now cash-strapped consumers are often less willing to shell out for extras like French fries and fountain drinks — items which traditionally receive a lofty markup, says Evan Hackel, a franchise management consultant in Reading, Mass. And that has resulted in some hefty losses for franchise owners.

Yet despite the money-losing proposition, many franchise owners feel they have little choice in the matter: If they forgo the promotion, they risk a backlash from their customers — and from headquarters. “It’s kind of like your arm is twisted into participating,” says Romil Patel, a Baskin Robbins franchise co-owner in Milwaukee.

Read More at: Wall Street Journal