The Double-Edged Sword of Franchising

The basic model of franchising is that a company sells franchise rights to someone and that party then opens a franchise and gives a predetermined portion of revenue back to the company that issued the franchise.

The Whopper

The Whopper

In simple terms, it’s kind of like outsourcing your business expansion. You don’t have to hire employees or pay for their benefits, you just get a cut of their sales.

In many franchise models, the franchiser offers guidance, training and some rules of operation that the franchisee must follow. Where this can get tricky is if the franchiser, someone like Burger King, wants to institute across the board rule changes that franchisees don’t want to follow.

And that’s when lawsuits arise and that’s what exactly is happening with Burger King. Several franchisees have sued Burger King over the years. Some have sued because they wanted to raise prices. And now many are suing because they are fighting a rule change by Burger King that calls for all stores to stay open until 2 a.m. Thursday through Saturday from the current 11 p.m. BKC is doing this to keep up with McDonald’s and Yum Brand (KFC and Taco Bell), which went to late-night (all day) hours several years ago.

This spells trouble for Burger King for two reasons.

Analysts often point to the difference in operating hours that Burger King has from its competitors as a reason that it should grow as it opens for more hours per week. So if the move to open for more hours is slowed down by lawsuits then it will hurt Burger King’s sales growth potential in the eyes of analysts.

And Burger King is dependent on franchisees as 10,000 of its 11,600 stores worldwide are franchises. So if these lawsuits are successful it could affect more than 90 percent of its stores.

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