Franchising | November 2010 | By Daniel P. Smith

Lessons Learned

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The Dairy Queen Case:
The Necessity of Modernization?

As International Dairy Queen pushed for a 21st century image, longtime franchisees pushed back.

While Dairy Queen pledged that its modernized DQ Grill and Chill concept would revitalize the chain’s dated image and increase profits, many franchisees expressed concern over store conversions, purchasing restrictions, and enforced sales of ice cream cakes and hot dogs of a certain brand.

Both sides appeared to have legitimate and rational arguments. Corporate claimed that it needed to rejuvenate its look and operations to maintain a relevant standing in the quick-service arena, while franchisees, particularly single-unit operators already doing strong business, expressed concern that the investment would fail to yield a profitable return.

By early 2008, the lingering tensions turned into litigation when owner associations with members in 10 states brought suit against Dairy Queen, claiming that they were being forced to accept the unproven new concept—at a cost of $275,000–$450,000—or lose their franchises.

Dairy Queen, however, contended that no one was being forced to change to another concept, let alone one that had limited viability. Additionally, Dairy Queen countered that the required modernization existed as a standard feature of most contracts and that the investment was capped to protect franchisees.

A Lesson Learned:
“Franchisors desiring to make changes to their systems by asking their franchisees to make significant additional capital expenditures are best served by answering the ‘why are these expenditures necessary and appropriate’ question of their franchisees. Not with a ‘because we can’ response, but rather with a ‘because this investment will likely give you a reasonable return on your investment’ response backed up with the results of successful testing of the proposed capital expenditures at the store level. Absent that testing and successful ROI experience, franchisors should make the business decision to not try and impose such capital expenditures on their franchisees, even if their lawyers advise them they have the legal right to do so.”
Minneapolis-based attorney
J. Michael Dady,
a franchise law specialist
The Burger King Case:
Dictating Franchisee Life

Over the last decade, franchisee-franchisor relationships have been particularly tense at Burger King, as the Whopper purveyor has found itself on the defendant side of a number of franchisee-generated lawsuits.

In 2008, several franchisees filed an amended lawsuit—following the earlier dismissal of a similar claim—protesting Burger King’s mandate to extend operating hours. In addition to being prohibited by the franchise agreement, which plaintiffs said allowed for reducing operating hours but not extending them, 57 Burger King franchise-agreement holders said the extended operating hours were both costly and risky for staff. Burger King held firm, saying it had the right to demand stores be open a minimum number of hours.

One year later, in the spring of 2009, Burger King encountered another legal tussle when 850 Burger King franchisees representing about 6,300 outlets sued Burger King corporate, Coca-Cola, and the Dr Pepper Snapple Group. Franchisees claimed that Burger King was withholding restaurant operating funds that came from Coke and Dr Pepper and were traditionally earmarked for store repairs. Burger King dismissed the lawsuit’s merit, contending that the company had the right to reallocate funds from the soft-drink suppliers as it deemed fit.

The courtroom battles didn’t end there, however.

By November 2009, Burger King was again a target when its franchisee association filed suit charging that the company’s $1 double cheeseburger offer, a promotion that drew the ire of operators earlier in the year, was forcing franchisees to lose money. The suit held broad implications for a quick-service world running toward value offerings in a sagging economy: Could a franchisor force a franchisee to sell product below cost?

Burger King again planted its feet, claiming that it had the right to require Value Menu program participation. Later, a leaked e-mail from Burger King executive Charles Fallon surfaced, in which Fallon warned operators that the negative publicity would only harm everyone’s business value.

A Lesson Learned:
“Franchisors are best served by collaborating with their franchisees to arrive at pricing programs that make sense for the franchisor, the franchisees, and the consumers—i.e., prices that provide high-quality goods and services at a fair price to the consuming public while at the same time allowing the franchisees the opportunity to make a reasonable profit for providing these goods and services.”
J. Michael Dady

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