Chains, franchisees square off over discounted menu items

Chains, franchisees square off over discounted menu items


By RON RUGGLESS

(July 27, 2009) The recession-driven rush to grease sales with promotions and value deals is leading to mounting frictions between franchisors and franchisees.

Brands such as Burger King, McDonald’s, Quiznos, Subway, Popeyes and KFC all have recently found themselves working to restore the delicate balance between the franchisor’s need to drive traffic and the franchisee’s need to protect margins.

Burger King recently battled franchisees over plans to offer a $1 double cheeseburger.
Most recently, Burger King franchisees in mid-July twice rejected plans by Burger King Corp. to offer a $1 double cheeseburger that could square off against value items from quick-service competitors. The Miami-based franchisor eventually capitulated, deciding to offer the value item with a coupon program planned for August.

“It’s a challenge for any franchisor to push through a promo that cuts at franchisee’s profit margins,” said Lorne Fisher, chief executive and owner of Fish Consulting Inc. in Hollywood, Fla., whose clients include a number of restaurant and retail franchisors.

Communication from both parties is key to dissipating such tensions, Fisher said.

“From our experience, it is important to quantify the benefits to the franchisee to ensure they understand the value despite the cut in margin,” Fisher said.

“Whether the increase comes in consumer traffic, average check size or brand awareness, the franchisor must be able to present the tangible benefit to sell the promotion successfully and maximize the system’s participation,” he said.

Quiznos is among the franchisors that have run into conflict with franchisees this year. The Denver-based franchisor encountered wide pushback from franchisees over the $5.29 sandwiches it had hoped to give away in its “Million Sub Giveaway.” McDonald’s franchisees reportedly expressed concerned over the national introduction of the premium Angus burger in early July, while some Subway franchisees were upset by the chain’s ongoing “$5 Footlong” promotion.

Tempers also flared at both Popeyes and KFC over one-day product giveaways that found many franchisees emptying their larders as cash-strapped consumers rushed in for free goods. KFC’s high-profile marketing boost from Oprah Winfrey exacerbated the situation.

Burger King on July 14 reached detente with its franchisees when it said it would beef up the promotion of its $1 Whopper Jr. and feature the double cheeseburger in an August coupon offer.

“Burger King Corp. remains fully focused on its value offerings and delivering value for the money to its guests,” the company said in a statement. “As such, many product and menu options are always in development and under consideration.”

The company added, “BKC will also be deploying traffic-driving national coupons to nearly 80 million households during this time period with almost $50 in savings per coupon booklet.”

A spokeswoman added: “The direct-mail coupon book includes a $1 double cheeseburger offer from Burger King restaurants, and with more beef than a similar sandwich from McDonald’s, the offer will represent motivating affordability to burger lovers nationwide.”

McDonald’s replaced its double cheeseburger that had been on its Dollar Menu with the McDouble, above, which has only one slice of cheese.
Rival McDonald’s raised the price of its double cheeseburger from $1 to $1.19 late last year amid rising costs and franchisee complaints that a profit could not be made on the item. The double cheeseburger was replaced on the Dollar Menu with the McDouble sandwich, which contains two patties but only one slice of cheese.

Joe Buckley, an analyst with Bank of America-Merrill Lynch, said in a report that franchisee tension stemming from an ongoing soft-drink contract dispute could be a roadblock for Burger King as it seeks to add value offerings to drive traffic.

“We are concerned that the lack of alignment between Burger King and its franchisees could complicate efforts to turn sales,” Buckley said in downgrading the stock to “neutral” from “buy.”

The economic downturn has only served to heighten franchisee-franchisor tensions. Analysts said low-margin promotions in flush times could be a “loss leader,” drawing in customers who may buy additional, more profitable items to raise the check average. However, as patrons cut back on those extras, the “loss” loses its “leader,” and the franchisee is left holding the bag.

McDonald’s recent introduction of both the new coffee line, of which both the iced and hot mocha are being offered for free on Mondays through Aug. 3, and the new premium Angus burger have raised the eyebrows of franchisees. They have expressed concern that McDonald’s is trending too far away from its value focus and placing too much strain on franchisee operations.

In an April survey of McDonald’s franchisees by former stock analyst and independent researcher Mark Kalinowski, one unidentified McDonald’s franchisee called the Angus burger “another poor-margin item.”

However, Danya Proud, McDonald’s senior manager of U.S. communications, said many franchisees’ concerns were allayed.

“The franchisees told us they couldn’t get it in their restaurants quickly enough,” she told Nation’s Restaurant News earlier this month. “I think people misconstrued things. During the early stages of the test we were using a slightly bigger burger that would have required new equipment. But we went to slightly smaller burgers that can be prepared on existing grills.” —rruggles@nrn.com