Burger King Holdings (BKC) typically has to fight off chief fast food rival McDonald’s (MCD) when it comes to prices and promotions. But recently MCD stock has taken a back seat to inner struggles at BKC as Burger King franchisees fight corporate BK execs over a $1 double cheeseburger promotion. The disagreement got legal late last year via a lawsuit on behalf of Burger King franchisees that went all the way to a federal court in Miami.
But late last week, this food fight was decided when a judge ruled recently that Burger King management has the right to dictate value meal pricing to franchisees. This comes as good news to consumers, but leaves a bitter taste in the mouth of store owners who say they make mere pennies in profit for each sandwich sold at this price.
“There is simply no question that Burger King Corp. had the power and authority under the Franchise Agreement to impose the Value Menu on its franchisees,” wrote Judge K. Michael Moore in his ruling.
Burger King stock seemed to get a boost from the news, moving up even on a down day for the broader market today.
Fast food restaurants have engaged in plenty of promotional stunts over the past several months to woo cost-conscious consumers as the recession has eroded consumer spending. McDonald’s is rolling out a summer promotion featuring $1 McDonald’s soft drinks. Wendy’s/Arby’s Group (WEN) finally rolled out an Arby’s value menu this spring featuring items for as little as $1. BK is rolling out a low-priced Burger King brunch menu in test markets. Even Denny’s (DENN) has gotten in on the act with a Denny’s value menu featuring items like all-you-can eat pancakes for $2.
This court victory is validation for Burger King’s low-cost focus, and should continue to keep traffic strong. However, the complaint of franchisees about the meager profits from low-priced items has its merits. On April 29, Burger King reported fiscal third-quarter earnings results showing profits sank 13% year-over-year. The company can sell as many burgers at cost that it wants, but in the end BKC needs to be making money to succeed in the fast-food business.
It’s worth noting that the judge stopped short of dismissing the franchisee association’s lawsuit entirely, leaving the door open for continued challenges to the $1 double cheeseburger mandate. But if franchisees and Burger King management know what’s good for them, they’ll spend less energy on this lawsuit and more energy on boosting BKC stock through stronger sales and profits.
As of this writing, Jeff Reeves did not own a position in any of the stocks named here.
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