Thursday, October 20, 2005

BK, franchisee group reportedly sever ties

A dispute between Burger King and an organization representing most of its franchisees could prove a boon to McDonald’s and the other major competitors, a restaurant analyst alerted clients after the stock market closed today. Buckingham Research Group’s Mark Kalinowski did not reveal the nature of the conflict. Nor was he specific about the extent of the possible impact.

But www.franchiselawblog.com reported this afternoon that BK headquarters had apparently severed ties with the National Franchise Association, the group that briefly snared attention when it filed and then dropped a lawsuit against McDonald’s earlier this year. The suit had alleged that the No. 1 burger chain should be held accountable for BK’s loss of customers during a Monopoly-themed promotion that McDonald’s marketing affiliates were caught rigging several years ago. BK’s management team had not supported the NFA’s action, which sought $500 million in damages from the chain’s arch-rival.

Dow Jones reported today that BK had sent a letter to NFA at the end of September, alerting the group that contact would be minimal moving forward because the organization was unwilling to support the franchisor’s marketing programs. Some reports have indicated that NFA represents as much as 90% of BK's domestic system.

The Dow Jones story, as posted on www.cattlenet.com, said the NFA had sent a 12-page response to BK president John Chidsey last week. The article quoted NFA president Daniel Fitzpatrick, the CEO of franchisee Quality Dining, as saying in the letter that BK's home office had misconstrued some healthy discussion about the chain’s direction. Quality Dining itself operates several chains, including Grady’s American Grill, Spageddies, and Papa Vino’s. It’s also a Chili’s franchisee.

Kalinowski’s heads-up to customers was e-mailed after regular business hours for Burger King's Miami headquarters.

3 Comments:

Anonymous Anonymous said...

I am new to bloging, but not new to this situation. I have worked both for and with BK and its franchises for over 20 years, and have seen it all...

The situation between the franchisees and the corporation have been strained at best ever since the sale of the company to Grand Metropolitan many years ago. Having an ownership structure where a large, international company with many divisions (all of which are standard corproate structures)owns an entrepreneurial company that is over 90% franchised, is extremely tough. Whereas the parent is expecting people to do exactly what they mandate, in an environment like BK, it is many times difficult to get franchisees to agree on the color of the sky, much less more involved issues such as marketing, operations, development, etc.

This is why there has always been a revolving door in the CEO position at BK, because needing to satisfy a parent company with specific expectations, and to have to cajole, threaten, woo, etc. a highly organized and powerful franchise community, is too much work and tends to burn out folks quickly.

Recently, with the fire-sale of BKC to the Texas Pacifc Group, a highly experienced, top flight group, with limited foodservice background, I think the NFA had expectations that they would have a very influencial voice within the halls of power; what they failed to understand is the fact that, unlike Grand Met or Diageo (the former British owners), Texas Pacific was not into holding BKC as a revenue source for a larger global business, but as an investment that they expected a strong return on, either from revenues, or from the asset valuation and profit an IPO would generate.

With Texas Pacific inthe midst of positioning BKC for an IPO next spring, I think that they feel if they jettison the relationship with the NFA, and try to appeal to the franchisees directly, through either financial incentives for new development, or other acts of flexibility, they can drive the NFA out; get back some level of control; and get new franchisees into the system that are not involved with the NFA, then their IPO will go smoother and more successfully.

It is a very gutsy move, and one that could work, or blow-up in their faces...it remains to be seen. The franchisees have been put upon with many ill-advised programs, ranging from the new signage and building design program, which cost millions and added nothing to the bottom line; the multiple wimpy marketing programs since the loss of Disney; and the over-development of the system in the 1990's, which cost hundred of millions of dollars in development costs & lost sales due to cannabilization.

There is plenty of blame and bad blood on both sides of the story, and it is a crime, since the concept is still strong, and could have been as large as McDonald's were it not for these continuing issues over the past almost 30 years.

They need someone to be a peacemaker between the parties...someone not associated with either, which can mediate disputes, before this is going to work out right for everyone.

Hope this is informative, cause it is the truth as I see it!

BK Insider>>>>

October 25, 2005 at 11:41 AM  
Anonymous NRN SHOW TEAM said...

Recently we were visited by executives from the parent company of Carvel, the one-time poster-concept for franchisee-franchisor strife. At one point the ice cream chain consisted of 900 units. Then, after the founder died, new owners started selling products in supermarkets throughout franchisees' supposedly exclusive territories, and war erupted. The system was losing stores at a rate of about 60 a year.

Now, under the ownership of a company led by veterans of hotel franchising, the system is back in a growth mode, and we no longer hear the buzz of discontent that made Carvel a frequent focus of stories in Nation's Restaurant News. It took awhile, but the strife was allayed, and a new harmony seems to prevail. In short, even the bitterest franchisee-franchisor relations can be improved, if a spirit of collaboration and compromise can be fostered. As you said, a peacemaker is needed.

If relations go the other way and a power struggle erupts, it will be especially disappointing because Texas Pacific seemed to embody a fresh, somewhat brash and certainly open-minded approach to managing its holdings. These were the non-conformists who took an airline no one else could make work, and found the way to re-invigorate it. The final decison to buy BK was reportedly based on a pig-fest by senior TP management--guys with stratosphere incomes, basing a billion-dollar-plus deal on what they thought of Whoppers and chicken nuggets. One of the principals had the Rolling Stones play at his birthday party.

If they allow relations to fester into strife, they'll be no different in that respect than Grand Met or even Pillsbury.

One question you didn't address in your comments: Texas Pacific has emerged as a co-bidder for Dunkin' Brands, the parent of Dunkin' Donuts, Togo's and Baskin-Robbins. How do you think an acquisition of those brands would affect relations with BK franchisees?

In any case, thanks for your insights.

October 26, 2005 at 6:30 AM  
Anonymous Anonymous said...

Sorry I did not respond earlier...again, still new to this blogging stuff!
Since the group that bought Bk also has ties to Dominos, and I have seen no connections or attempted connections to merging those groups, I do not know how the situation would change with Dunkin-Baskins. However, after considering your comments, I can see a crazy concept of Texas Pacific and Bain attempting to create another YUM brands, where they could combine BK, Dominos, Baskins, Togos, and Dunkins into a new entity. None of the brands really cross each other on concept, and a combined entity that shared operations, development, marketing, etc. would save millions in G & A.
Even if it was all except Dominos, it would still be an interesting combined group, that might be easier to sell as an IPO because of the multi-brand diversity.

To a VC, this is all just a lot of pieces on a chess board to move around. But to the franchisees of these concepts, there is a lot more at stake. I wonder if a VC like Texas Pacific or Bain have quite figured out yet the tremendous difficulties in trying to play their chess game in this kind of reality.

Remains to be seen...if you want to talk live about this, leave a contact number here and I will call.


Thanks!

November 21, 2005 at 12:58 PM  

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