Burger King Sues Franchisees Who Didn't Upgrade POS

Fearing it would lose control over all of its franchisees, Burger King has now sued hundreds of its franchisee stores because they missed a chain deadline for purchasing new POS systems. The litigation highlights—albeit acrimoniously—a difficult franchise IT issue: Chains mandating equipment investments that most franchisees believe do not benefit them enough to merit the cost.

One key issue that both sides are arguing is timing. Some of the franchisees have argued that Burger King is being punitive by moving so quickly. They are pointing out that the chain's deadline was Dec. 31, 2009, and that the lawsuits started being filed within a few days of the deadline passing.

Burger King argues that it has been extremely patient, having informed its franchisees of the POS upgrade rule back in April 2008--giving the stores a rather generous 20 months to arrange for and make new POS purchases. Indeed, Burger King is saying that it was even willing to give franchisees more time if they needed help raising the money, as long as they were truly trying to follow corporate's edict.

From the franchisee's perspective, this Burger King move came on top of some non-IT moves that were seen as unprofitable, such as a recent $1 cheeseburger promotion that some stores said lost them money.

From a legal contract perspective, Burger King seems to have a strong case, given that the franchisees signed contracts that pledged they would abide by the chain's equipment requirements.

The POS systems cost between $18,000 and $35,000 per store, according to a Dow Jones story. "Asking a franchisee to spend that type of money on technology is hard enough. But forcing them is asking for problems," said Todd Michaud, vice president of IT at Focus Brands, which owns Carvel, Cinnabon, Schlotzsky’s, Moe’s Southwest Grill and Seattle's Best Coffee. (Michaud is also StorefrontBacktalk's Franchisee Columnist.) "The POS provides data that is critical to most of the functional areas of the brands. But, in my experience, many franchisees do not leverage the data or the power that the system provides. If the franchisee does not get the value out of the system (real or perceived), there is bound to be a standoff, and legal issues like this are an unfortunate result. I am pretty impressed that [Burger King] gave them 20 months notice to make the change. That is a really long time. Plenty of time to depreciate/write-down the asset value."

Michaud argues that the franchisee's perspective is also legitimate. "Having a massive chain, getting everyone on the same system is extremely difficult. It could take years to deploy a system. You can easily get into a Golden Gate Bridge scenario where, by the time you are done painting it, it's time to start again," he said.

All in all, though, Michaud said that the chain simply had no choice but to stand firm. "I'm sure that the business case needs 95 percent of the stores to be on the system for it to deliver the value. When franchisees hold out--regardless of their issues with the double cheeseburgers--it makes (Burger King) upset," he said. "They are left with very few options other than suing [the franchisees] or shutting them down."Michaud added that a chain needs to treat all of its franchisees fairly, which sometimes means punishing those who fall out of line.

"I think that BK is doing the right thing. It wanted a brand standard, had the contractual right to do so, gave [franchisees] plenty of notice and then held them accountable for doing it," Michaud said. "If they don't sue these franchisees, then all of the others that spent the $25k on a new POS get really pissed at BK. 'Well, I should have held out just like them.' Then the next time, there are more franchisees who hold out, and then more, and then more. The brand has to have a backbone and stand up and support its standards. If it doesn't, franchisees start to exploit that fact."

In a recent Business Management profile of Burger King CIO Taj Rawal, the CIO painted the POS standardization project as one of his earliest and most critical mandates. "In many ways, the register in the restaurant is the key piece of equipment for us and yet, until January 2006, we had no companywide standard as to what register or system should be used," Rawal said. "We've now established the very first standard POS across the company and the franchise restaurants and we are in the process of migrating to that standard. As a brand, we're more than 40 percent moved over to the new POS and have set Jan. 1, 2014, as the date by which all restaurants must be on that new system."

The lawsuit, filed in federal court in Florida, said that "in April of 2008, (Burger King) issued and communicated to defendants its 2009 POS Technology Policy, which required defendants to purchase and install certain POS systems by Dec. 31, 2009. The POS systems are a critical component in the operation of Burger King restaurants and the Burger King system. For example, the POS systems will provide a consistent base of information allowing for better product sales analysis and more effective product and promotion activities."

The lawsuit added that Burger King had been rebuffed in "repeated demands for compliance with this deadline."

Is this an instance of IT not sufficiently making a case to the franchisees of the new system’s benefits? Most purchases like this one only deliver return on the investment over an extended period and across a huge number of stores. Given the specific franchisee situation with Burger King, it might indeed be the case that these particular POS systems might have been an expense that the stores couldn't justify.

The contract language is presumably clear that franchisees must abide by corporate equipment edicts, but is there a limit? What if the chain declared that all counters must now be made of gold? What if it required every store to put in place a T3 connection? Or what about a sweetheart deal that required the purchase of a server from one vendor that was massively overcharging? The franchisees will likely argue that this particular mandate was unreasonable and that the current economy makes it unrealistic. Of all the IT challenges with franchisees, unfunded mandates in a down economy are among the least popular.