Weighing in on the BK $1 Double Cheeseburger Battle

January 28, 2010

photo: roboppy, flickr

The conflict between Burger King and its franchisees over the $1 Double Cheeseburger is as hot as the restaurants’ flamebroilers. I’m glad I was neither one of the corporate folks selling in this program, nor one of the franchisees who feel it’s being forced upon them. Having worked on corporate marketing and finance teams earlier in my career, I know the drill well. And I’m not surprised to see this age-old, stereotypical thinking and behavior playing out yet again.

It’s classic. Franchisees tend to view corporate as a bunch of eggheads who are out of touch with actual customer behavior, ignorant of franchisee costs and life in the trenches. They resent that royalties are based on sales rather than profit – the top line vs. the bottom line. Meanwhile, corporate employees tend to see franchisees as reactive and unwilling to invest in marketing that will grow their businesses.

Whether the stereotypes contain a grain of truth or not, the reality is that better data and thorough analysis could snuff this inferno.

The debate has centered on the issue of the $1 price point for a double cheeseburger, yet the program’s true impact hinges on much more. Regardless of whether franchisees lose or gain money at $1, the success of the program should be based on detailed analysis of sales and customer behavior. Is traffic increased over the long haul? Are higher-margin items being sold in greater quantity along with the double cheeseburgers? Are customers refusing to purchase items once they return to their regular prices? What are the short- and long-term gains of the program? Do those gains outweigh the cash lost in price-cutting?

Ron Ruggless covered this topic in the November 30 issue of Nation’s Restaurant News, “BK suit highlights franchisee friction.” Franchisee Dan Fitzpatrick states “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.” Fitzpatrick’s accounting is curious.

The cost of serving a double cheeseburger should reflect the meat, cheese, condiments, bun, wrapper, and even a napkin. Items such as labor, utilities, and insurance are fixed costs, and won’t change unless a promotion requires hiring additional staff. If the lights are already on, the flamebroilers are fired up, and the crew is at work, I say you account for these costs at the end of the month and year to accurately assess your costs and profits. It’s unlikely that Burger King locations are adding staff due to an item’s placement on the $1 menu.

I’m not saying that a complete profit picture — including utilities and the rest — is unimportant. It’s critical. It’s just not fair or logical to add them until the program is over. Once we know the quantity of each item sold, fixed costs can be allocated accurately.

I don’t know the exact cost of a double cheeseburger – based on Ruggless’ reference points for everyday pricing between $1.89 and $2.39, I’d venture to say that it’s closer to $1.00 than $.50, so placing the item on the $1 menu indeed yields a low margin. Even so, the point of the promotion is to boost overall sales and profit. Both franchisee and franchisor must look beyond the stereotypes and judge a discount program holistically.

It’s a lot to ask that franchisees and franchisors work together harmoniously, but it’s worth keeping in mind the following: franchisees should understand that their goals and the franchisor’s are more often than not the same – increased profitability for both, based on maximizing store revenue and therefore, profit. Franchisors should attempt to walk in the franchisees’ shoes and seek to understand true item and store profitability — including proving their understanding of the long-term impact of cutting prices on customer behavior. If this happened more often, perhaps the need for lawsuits would be minimized.

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