Question

Burger King Case Study - Burger King Dollar Double Cheeseburgers

Berger King Dollar Double CheeseburgersRecently, the National Franchisee 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 burgers 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 franchises to sell a product below its cost. The case was filed in U.S. District Court in South Florida.

Issues:

•      What are the relevant costs for pricing a double cheeseburger in the promotional sale? What are the relevant costs that need to be identified for profitable pricing?    Identify them. How would franchisee costs be affected by an increase in volume sales? Do the franchisees estimates make sense to you? Would they “lose” money by selling Dollar burgers at $1.00?

•      Are there other factors that need to be considered in assessing the impact of the sale on the revenues, costs, and profits to Burger King and to the Franchises?

•      Are there any opportunity costs that need to be factored in to the impact of the pricing change? Please quantify.

•      The national price cut was put in place because of the recession. Do you agree that this was the most effective way to stimulate sales? Would it be effective to run a nonprice campaign? A coupon campaign? Why or why not?

•      Governance issues: What is the goal of a Burger King franchise? What is the goal of Burger King Corporate? Are these goals aligned and if not what are your expert recommendations?

Q2. You are research manager for a large professional association. Currently your association offers members unlimited access to a number of benefits including (a) research studies and content, (b) member contact lists, and (c) discounted conference attendance, all as part of one annual membership fee. Your association is considering offering a new package of service in which the existing services would be offered in three tiers of membership levels with different packages of benefits included respectively in each tier. For example, Tier 1 would include general web site access plus member contact lists; Tier 2 would include Tier 1 and research studies and research content; and Tier 3 would include Tier 2 plus discounted conference fees.

Develop a brief research proposal discussing the research problem and your recommended study framework and methodology. Discuss your rationale and explain why your proposed method is superior to other approaches. Consider the following outline/template to summarize your response:

• Research Problem – What do you need to find out?
• Proposed framework and methodology – What data and methodology would you propose?
• Rationale for your methodology (why is it a superior approach?) – Explain why you propose this approach.

Answer 1

1.National Franchise has a valid lawsuit that claims Burger king franchises are losing money by selling S1 cheeseburgers.The merits of case are:

*Not all franchise owners would see an increase in volume significant enough to cover fixed costs such as rentals and worker wages

* The rentals and worker wages at each location are different.Burger king franchises in a location with high rental and high wages are likely to suffer losses and unable to recover the lost centres in the promotion

* The royalty charged is fixed 4-5% and does not vary from location to location.This means despite how traffic or low burger king customers in a location the royalty percentage remains fixed

* Gains due to increased traffic via promotion are mostly lost due to lesser revenue or lesser amount of orders (Analyst report)

2 .The relevant costs to a franchise are:

· Material cost – Cheese, Bun ,meat – 55 cents

· Wages of workers

· Rental of location

· Royalties to be paid – 4-5% - 4 to 5 cents per dollar

3. The factors considered by Burger king to justify promotion are:

        * Slow economy – people have lesser spending power and promotions may entire them to spend

        * Competitive market – Market is highly competitive and other fast-food outlets are dropping menu prices. The franchise would find difficult to survive if customer traffic wont increase

        * Increased customer traffic can increase revenues

4. Yes S1 cheeseburger can be considered as an opportunity cost . when the customer traffic increases it is a high, possibility that once a customer visits the franchise they will simply not restrict their order to S1 Cheeseburger .There a high chances multiple items may get ordered which generate revenue for the franchise at a better profitability.

However, as described in case the economy is going through a rough phase and even though traffic increases, it still does not cover the cost associated with the cheeseburger.