Burger King Dollar Double Cheeseburgers

Recently, the National Franchise Association (NFA) filed a lawsuit against Burger King
Corporation (BKC) over the pricing of products on its value menu, and specifically its $1
double cheeseburger promotion. The NFA is group that represents more than 80% of
Burger King Franchise owners.

Here are excerpts from the Associated Press1 report on the case:

The National Franchise Association, a group that represents more than 80

percent of Burger King's U.S. franchise owners, said the $1 promotion forces
restaurant owners to sell the quarter-pound burger with at least a 10-cent loss.

While costs vary by location, the $1 double cheeseburger typically costs

franchisees at least $1.10, said Dan Fitzpatrick, a Burger King franchisee from
South Bend, Ind. who is a spokesman for the association. That includes about 55
cents for the cost of the meat, bun, cheese and toppings. The remainder typically
covers expenses such as rent, royalties and worker wages.

"New math, or old math, the math just doesn't work," Fitzpatrick said.

Burger King justified the move by stating that the company needs to remain competitive
in a tough economic environment:

Restaurants, especially fast-food chains, have been slashing menu prices

because of the poor economy. Executives hope the deeply discounted deals will
bring in diners who are spending less when they eat out, or opting to stay home
altogether.

When the $1 double cheeseburger was announced this fall, analysts said it could
increase restaurant visits by as much as 20 percent. But despite that boost, a
Deutsche Bank analyst said as much as half of the gain recorded from increased
traffic could be lost because customers were spending less when they ordered
food.

Burger King Franchisees pay a royalty to Burger King that is typically equal to 4.5% of
revenues for the store.

The lawsuit alleges that the value menu restriction illegally sets a maximum price for the
Burger King franchises, and that Burger King is not acting in “good faith” by forcing

1
‘Food Fight: Burger King Franchisees sue chain over $1 burger promotion’ Ashley M. Heher, Associated Press,
USA Today, Nov. 12, 2009.
1
franchises to sell a product below its cost. The case was filed in U.S. District Court in
South Florida.

Case Questions ( Minimum of 3 pages 1.5 space Time New Roman )

1. As “experts in managerial economics”, do you support the idea that Burger King
franchises are losing money by selling $1 double cheeseburgers?
2. What are the relevant costs to a franchise of selling a double cheeseburger?
3. What other factors need to be considered in making this decision?
4. There an opportunity cost that needs to be factored in?
5. What is the goal of a Burger King franchise? What is the goal of Burger King
Corporate?