Monday, March 29, 2010

"Taco Bell" Franchise Terms (Hide The Napkins?)

Did you know that the franchisee agreements for many famous fast food chains are actually quite onerous? Working as a teenager at both 7-Eleven and Carl's Jr. over 20 years ago, I got my first inside exposure to this and was very surprised by it. I've remained intrigued by this ever since, especially because so many TV commercials for fast food over the years have gone to extreme lengths to portray an insouciant, and even "saucy," public image.  And yet the the underlying business terms are pretty hard core.

This morning I stumbled upon a 2 minute You Tube video (embedded below) of a guy summarizing the current franchisee terms for new Taco Bell restaurants. Taco Bell's parent company, Yum Brands, has a standard franchise agreement that apparently requires each new franchisee to open at least three restaurants to start, all at once.  The required capital investment to open each one is estimated to be between $1.3 to $2.4 million. (So that's $4 million-$7. 5 million right out of the gate.)  There's also a one-time franchise fee of $45, 000, apparently, payable to Yum Brands.  Then each franchisee must pay Yum Brands an annual royalty equal to 5.5% of gross revenues at each store every year, as well as an annual "advertising fee" of a further 4.5% of gross revenue per store for the duration of the 20 year franchise agreement.  To top it all off, these agreements are not commonly renewed by Yum Brands, apparently, at the end of their terms.  After 20 years has passed, if these Taco Bells are still successful, Yum Brands may make franchisees offers ("they can't refuse"?) to buy the successful restaurants from the franchisees, under threat of unilaterally terminating the franchise agreement entirely.  (I wonder how generous those proposed terms are?)

All of this reminded me of a 1977 court case that I studied in law school many years ago. The case was complicated (you can read the entire, lengthy judgement by the Fifth Circuit Court of Appeals HERE), but basically Kentucky Fried Chicken (or, "KFC") sued a company that was making boxes and napkins and other supplies for KFC restaurants without authorization and selling them to franchisees across the country.  What the case revealed was that KFC's franchise agreements required its franchisees to buy all these supplies exclusively from a company owned by KFC.  This requirement irked many KFC franchisees, apparently, because they thought the prices they were being charged for these supplies were way too high. This provision in their franchise agreement, therefore, essentially allowed KFC to unmercifully gouge its franchisees in an ongoing way, they argued. 

I have no idea if this is still happens 30 years later.  But KFC is now owned by Yum Brands, too. Ever since I studied this case in  law school over 15 years ago, I thought I understood better why some fast food places rationed out their paper napkins and straws in this bizarrely parsimonious way.

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