Burger King Dollar Double Cheeseburgers

Recently, 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 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.

Questions:

1. Analyze the merits of the National Franchise Association’s lawsuit claiming that the Burger King franchises are losing money by selling $1 double cheeseburgers.

2. Identify the relevant costs to a franchise of selling a double cheeseburger?

3. What are the factors Burger King considered to justify its $1 double cheeseburger promotion?

4. Is the $1 double cheeseburger promotion an opportunity cost for the Burger Kings’ franchise owners?

5. What is the goal of a Burger King franchise? What is the goal of Burger King Corporate? Are both their goals aligned?

6. If you believe that the fundamental problem is that incentives are misaligned, what would be your recommendation to realign them?