Late night with the King
Franchisees sue over extended hours
Burger King started requiring franchisees to stay open until 2 a.m. some nights to keep up with competitors, but franchisees are balking—and some have filed suit.
Late-night hours may be good for owls and David Letterman fans, but they're not necessarily good for fast-food restaurant franchisees or their employees.
That, at least, is according to a lawsuit against Burger King. A group of influential franchisees – including two owners in the BK Hall of Fame, one of whom is an ex-executive of the company – filed the lawsuit in late July, seeking to change Burger King's recent requirement that stores stay open until 2 a.m. on weekends.
Perhaps as important: The lawsuit has the backing of the National Franchisee Association, the group of organized Burger King franchisees.
Their goal is to make the late-night requirement optional, as it is with competing franchises such as McDonald's. "This is being imposed as a mandate and requirement on franchisees, rather than a suggestion or a recommendation, as is typically done with places such as McDonald's, Wendy's or Taco Bell," said Robert Zarco, the Florida-based franchise attorney leading the case.
Burger King first extended its "Competitive Hours" requirement in 2007 when it made franchises stay open until midnight. This year, it extended the hours further, requiring that they stay open on Thursdays, Fridays and Saturdays until 2 a.m. as of June 1. The restaurants also had to start opening at 6 a.m.
Yet, according to the lawsuit, most franchisees have signed agreements that state their hours of operation as 7 a.m. to 11 p.m. The additional hours violate that agreement, Zarco said. "Burger King has failed to specifically reserve the rights under its franchise agreements to require the franchisees to work hours which are longer than those set forth in the contract," Zarco said. He said changing the hours of operation amounted to a contractual change – as opposed to, say, Burger King requiring franchisees to add a sandwich – and thus franchisees needed to approve the change.
Burger King disagrees. The Florida-based company wouldn't comment specifically about the suit, but in a statement said that, "Burger King Corp. is confident that it has the right to set required hours of operation under its franchise agreement." In the statement, the company added that the extended hours "enable us to effectively compete in the quick-service restaurant industry."
Numerous QSRs have been extending their hours to capture business from snacking diners, many of which are in fast-food restaurants' core segment of young men.
Dennis Lombardi, restaurant consultant with Ohio-based WD Partners, said that, by extending hours, restaurants are leveraging their fixed costs to bring in additional revenue. A restaurant doesn't pay any additional rent, for instance, to stay open a few more hours. Thus, he said, the extended hours can be more profitable. "It's one of the things that restaurant chains do to increase unit economics through existing stores," Lombardi said. "It's more beneficial to franchisees. It requires less infrastructure to do than building more stores."
Lombardi said it also serves a competitive purpose. If, say, Burger King is open until 2 a.m., that may keep a snacking diner intent on Burger King from going to McDonald's or Taco Bell instead – which could result in a switch in overall brand loyalty, notoriously fickle in the QSR business.
In addition, he said the excess hours could take time to become a hit with consumers; so additional revenues and profits may take time to materialize. "The consumer isn't going to instantly know or react to the fact that Burger King is open until 1 a.m., and even if they know, that doesn't necessarily change behavior patterns," he said.
Phone calls to two of the franchisees in the case weren't returned. A third, Robert Furman, refused comment. "I have a big dog," he said of Zarco, "so I let him do the barking."
Zarco said that the latest and the earliest of the extended hours – from 1 a.m. to 2 a.m. and 6 a.m. to 7 a.m. – are frequently big money losers for many of the franchisees, who take in as little as $5 in revenue during those periods.
"It's true that keeping units open longer would be financially beneficial to Burger King corporation because Burger King gets a percentage of royalties, advertising and rent fees based on gross sales, regardless of cost or expenses incurred by the franchisee to remain open," he added. "However, the franchisees are subsidizing Burger King's financial gain."
Zarco insisted that the lawsuit isn't just about money. Safety is a concern. Violent crime is an increasing problem at fast-food restaurants – 28 employees were killed at a fast-food restaurant in 2006, according to the Bureau of Labor Statistics, up from 24 the previous year – though still lower than the 33 who were killed at full-service restaurants.
"What the franchisees are looking for here is that Burger King withdraw its mandate and requirements and simply establish a policy that would suggest or recommend to its franchisees, whether in their own market, the business is feasible on safety and economic grounds to remain open beyond the hours of 7-to-11," Zarco said.