Friday Rant: Burger King's Feudal Franchising — Good Marketing or Dumb Pricing?

According to yesterday's Wall Street Journal, Burger King, of Burger King Holdings Inc., is embroiled in a battle with its franchisees over loss-leader marketing of "its two beef-patty sandwich [which] the burger chain is insisting be sold for no more than $1 -- in line with other items on its 'Value Menu'. Burger King franchisees are upset by this, claiming that they lose money at this price." Loss-leader marketing can be an efficient strategy; it is probably most well-known in grocery-store retailing, where customers are drawn to the store by below-cost pricing on a specific item, and then while there typically buy other, profitable, items as well. But it's also been cynically said of loss leaders that "they lose a few cents on each item but make it up on volume."

According to SlashFood.com, "The [BK] saga started back in July when franchisees turned down an initial plan to sell the double cheeseburgers for a buck due to worries that another $1 offering could cause more customers to trade down from higher priced menu items. This forced the chain to devise a mail-out coupon campaign for $1 double cheeseburgers to nearly 80 million households nationwide. Then in September, the King overruled the franchisees by nixing the coupon campaign and forcing the $1 promotion to be put on the in-store menu anyway." SlashFood reports this failed process has led "the National Franchise Association … which represents 80 percent of all Burger King franchise owners in America [to file suit against BK,] alleging that the Whopper chain doesn't have the power to set price ceilings on choice menu items." According to the WSJ, "the court has yet to rule on Burger King's request to dismiss the case."

The decision to spend on a franchise is not small fried potatoes. According to the FAQ sheet available for download from the the franchising section of the Burger King web site, The minimum financial requirements to start as a Burger King franchisee are "$1.5 million net worth and $500,000 liquid assets available to invest for one restaurant. Financial requirements may be substantially higher, depending on the transaction" (emphasis theirs). In addition, according to the FAQ, BK currently is only looking for those interested in multi-unit franchises, so this cost is multiplied.

As for start-up costs: "The range of costs to develop a new restaurant will depend on the restaurant location and other factors, such as geographic and building code requirements, site availability, building size etc. On average, development costs can range from $1.2 million to $2.2 million for a typical ROC 40 or ROC 60 type restaurant."

Suffice it to say that those who own BK franchises have more than grease in the game -- in addition, they must pay for BK branding and recover all other costs from in-store revenue.

"Value Meals" are not like video-game consoles sold below cost to profit on software, or razors given away to sell the blades; they're one-off bargains. It's absurd to force retail franchises to lose on a high-volume item without proving the efficacy of doing so with a well planned, transparent go-to-market strategy. Not only does BK appear to lack one, it prefers to treat their franchisees like ground beef, rather than letting them sell it for a profit.

William Busch

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