Burger King Dollar Double Cheeseburgers

In 2009, the National Franchise Association (NFA) filed a lawsuit against Burger King Corporation (BKC) over the pricing of products on its value menu, and specifically its $1 double cheeseburger promotion. The NFA is a group that represents more than 80% of Burger King Franchise owners.

Here are excerpts from the Associated Press[1] report on the case:

The National Franchise Association, a group that represents more than 80 percent of Burger King's U.S. franchise owners, said the $1 promotion forces restaurant owners to sell the quarter-pound burger with at least a 10-cent loss.

While costs vary by location, the $1 double cheeseburger typically costs franchisees at least $1.10, said Dan Fitzpatrick, a Burger King franchisee from South Bend, Ind. who is a spokesman for the association. That includes about 55 cents for the cost of the meat, bun, cheese, and toppings. The remainder typically covers expenses such as rent, royalties and worker wages.

"New math, or old math, the math just doesn't work," Fitzpatrick said.

Burger King justified the move by stating that the company needs to remain competitive in a tough economic environment:

Restaurants, especially fast-food chains, have been slashing menu prices because of the poor economy. Executives hope the deeply discounted deals will bring in diners who are spending less when they eat out or opting to stay home altogether.

When the $1 double cheeseburger was announced this fall, analysts said it could increase restaurant visits by as much as 20 percent. But despite that boost, a Deutsche Bank analyst said as much as half of the gain recorded from increased traffic could be lost because customers were spending less when they ordered food.

Burger King Franchisees pay a royalty to Burger King that is typically equal to 4.5% of revenues for the store.

The lawsuit alleges that the value menu restriction illegally sets a maximum price for the Burger King franchises, and that Burger King is not acting in "good faith" by forcing franchises to sell a product below its cost. The case was filed in U.S. District Court in South Florida.

[1] 'Food Fight: Burger King Franchisees sue chain over $1 burger promotion' Ashley M. Heher, Associated Press, USA Today, Nov. 12, 2009.

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QUESTIONS FOR DISCUSSION

1)Do you support the idea that Burger King Franchises are losing money by selling $1 double cheeseburgers?

2)What are the relevant costs to a franchisee of selling a double cheeseburger?(hint: components of total costs)

3)What other factors would you consider, as a franchise owner, in making the decision of selling double cheeseburgers at a loss?

4)Is there an opportunity cost that exists given this "forced sales price"?

5)(a)What is the ultimate goal of a BK franchisee? (b) How do they strategically align with BK Corporate's goal? (c) Do you have any suggestions about better metrics or practices to use in managing the business to avoid such lawsuits?