Dollar Menu Items Highlight Franchisee Risks

Posted November 29, 2010 in Uncategorized by Arthur Buono

Dollar menu items may be a hit with fast-food fans, but not fast-food franchisees. A failed lawsuit by Burger King franchisees against the restaurant giant shows one of the risks of franchising a business. A federal judge said the parent company had the absolute right to tell its franchisees what to charge for a double cheeseburger.

     
  • Franchisees sued Burger King over $1 double cheeseburger pricing
  • Franchisees claimed to lose 10 cents on every double cheeseburger
  • As franchisee your control over how to run the business is limted
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Economic Interests Can Diverge in Franchising

The franchisees sued Burger King to have a say in menu pricing. They claimed it cost them $1.10 to sell a $1.00 double cheeseburger. Burger King said it was acting in the franchisees’ best interests in setting the price, and argued regardless it had the right to set the price, not the franchisees. If you’re considering buying any franchise, you’ll want to consider this point carefully.

In theory the interests of a franchisor and franchisee are roughly aligned toward overall success of the business. If franchisees are successful, they’ll buy more units, growing the business. Others will want to become franchisees too, growing the business further.

In the short term at least, incentives can diverge. A typical franchise agreement calls for the franchisee to pay a royalty of a percentage of revenue, not profits. A franchisor may have an incentive to increase revenue – sales of double cheeseburgers, for example – in the short term. If it promotes this goal by making franchisees slash prices and increase volume, the franchisees may suffer in the short term.

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