Burger King Franchisees File Suit Over Ad Plan

(Monday, May 11, 2009) - A group representing Burger King Holdings Inc. (BKC) franchisees is trying to block plans by the parent company to divert rebates the store operators receive from buying soft drink syrup into a beefed-up national advertising budget.

National Franchise Association Inc., which represents over 75% of Burger King's U.S franchise operators, says that franchisees will lose out on hundreds of millions of dollars over the next decade as the parent company uses longstanding funds the operators had received for advertising.

The two complaints, filed in U.S. District Court, Southern California, on May 4, also separately name Coca-Cola Co. (KO) and Dr Pepper Snapple Group Inc. ( DPS) as defendants. The lawsuit is seeking class-action status.

Burger King is trying to tap up to 40% of the syrup rebate funds that all stores receive, in order to increase its national advertising presence next year amid fierce fast-food competition. The chain also has a host of products it plans to launch for a new batch broiler.

The lawsuit says the total money diverted will be $25 million in 2010 and almost $40 million a year until 2022, when National Franchise Association estimates the agreement between the company and drink suppliers will expire.

At issue is whether the parent company can control the use of money from a soft drink contract entered into between Burger King and the two drink companies in 1999. That contract was set to expire once all stores purchase a combined 600 million gallons of syrup, which the lawsuit says will occur in 2022.

Based on how much soft drink syrup each store purchases, the owner of the store received rebates for store repairs, equipment maintenance and local promotions. The store operators say they are the intended beneficiaries of the agreement and the parent company cannot "unilaterally strip" the stores of this funding without the franchisees' consent.

A spokeswoman for Burger King, Denise Wilson, says the company and their drink suppliers "have the right under their agreements to reallocate these funds, which will be used for marketing and other promotional purposes." She said the lawsuit is without merit.

Representatives for Coca-Cola and Dr Pepper Snapple weren't immediately available for comment.

Heated competition among restaurants, where struggling eateries are promoting value and introducing new products to attract customers, is leading to a surge in advertising dollars spent. TNS Media Intelligence recently reported that the restaurant industry was one of two categories that registered a significant boost in ad spending.

Burger King, which is known for offbeat and, at times, controversial advertising spots, recently landed a deal with Viacom Inc.'s (VIA) Paramount Pictures for summertime promotions tied to the movies "Star Trek," " Transformers: Revenge of the Fallen" and "G.I. Joe: The Rise of Cobra."

The chain, which trails McDonald's Corp. (MCD) in advertising muscle, is trying to rebound from a recent quarter where sales fell off more than expected.

Burger King shares fell 11 cents, or 0.6%, in early trading to $18.29 and are down 34% over the past year.

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