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business newsBurger King's $1 Double Cheeseburger Fight Continues
By
Justin Rohrlich
May 07, 2010 3:25 pm
It's hurt sales and angered franchisees. Will next month's addition of ribs to the menu be the chain's salvation?
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Angry franchisees, who operate 90% of all Burger King locations, voted against selling the sandwich for $1 twice before BK executives in Miami overrode their wishes and made it a mandatory menu item.
Burger King attorney Michael Joblove argued, “We're responding to the competition. Everyone is out there with $1 products.” (Competitors including McDonald’s (MCD), Wendy’s (WEN), Taco Bell (YUM), and Sonic (SONC), among others, do all offer food for a dollar.)
“This suit is about more than the $1 double cheeseburger,” Kristi Keith, a spokeswoman for Burger King’s National Franchisee Association tells Minyanville. “This suit is about who has the right to set maximum prices on products.”
Whomever has that right, ultimately -- Burger King says it does under the terms of its franchisee agreement, while the franchisees disagree -- there’s no question that selling double cheeseburgers for $1 was not generating sufficient profit margins for the nine out of 10 BK restaurants that are not company-owned.
Joblove contended that margins on the $1 double cheeseburger amounted to approximately 40%.
But, according to franchisee Dan Fitzpatrick, that’s not so.
Fitzpatrick claims that, between the price of ingredients -- $0.55 or so for meat, bun, cheese, lettuce, and tomato -- and rent, labor costs, and royalties paid to the parent company, each $1 double cheeseburger is a money-loser.
“You could conservatively indicate that it costs us between $1.10 and $1.15 per double cheeseburger that we sell with all of our fixed and variable costs being covered," he told Nation’s Restaurant News. "So when your revenue is only a dollar, it’s pretty clear that we’re not making money.”
If Burger King’s latest 10-Q, filed April 30, is to be believed, it’s not so, either. The document points out that “Negative comparable sales growth in the US and Canada of 4.6% (in constant currencies) for the nine months ended March 31, 2010, was driven by lower levels of guest spending due to value promotions in the US, such as the $1 double cheeseburger promotion.”
Further bolstering the franchisees’ position, the promotion also didn’t act as a loss-leader. Burger King CFO Ben Wells said on an earnings call last week that, while the $1 double cheeseburger deal ran, the average check dropped 5%, while purchases off the value menu increased to 20%, up from 12%.
This is likely why Burger King’s third-quarter same-store sales profits declined 13% even though customer traffic was up.
There’s also the question of what an ongoing feud between franchisees and the parent company means for the health of the brand.
“It’s never good for fast-food chains when franchisees revolt,” independent trader and Minyanville contributor Jeff Macke says. “It has an effect across an entire spectrum of issues, from advertising budgets all the way down to consumer perception.”
However, come May 17, there may be a flicker of light at the end of the tunnel for Burger King franchisees.
As first reported by Pork Magazine last year, BK will be rolling out fire-grilled pork ribs, which are expected to be one of the chain’s most profitable products ever.
The ribs will reportedly unseat the Steakhouse XT burger’s position as the chain’s profit leader, which threw off $2.99 per sandwich after food and paper costs.
They were developed in conjunction with the National Pork Board and are “full-muscle” bone-in St. Louis-style ribs prepared in a new, proprietary broiler, which Burger King spent four years developing.
Four years may seem like a long time, but the appliance has been described by CEO John Chidsey as “game-changing.”
Which should please Burger King franchisees -- not to mention connoisseurs of full-muscle, bone-in St. Louis-style ribs cooked in game-changing broilers.
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