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DENVER – There is a battle erupting between Indianapolis and Denver, and it is not about the Colts and Broncos starting a new football season. The scrimmage is between Indiana-based Steak ‘n Shake and Colorado franchisee developers over who has the control to set menu pricing in their restaurants.
“This is but the tip of the iceberg for Steak ‘n Shake and its controversial business practices,” the attorney for the franchisees stated in an interview last week. Scott Kannady of Brown & Kannady said three other franchisees in Pennsylvania, Georgia and Missouri filed separate federal lawsuits last April in Indianapolis regarding the chain’s pricing policies. One hundred Steak ‘n Shake’s units out of the chain’s 500-plus restaurants are franchised.
Kathryn and Larry Baerns, with son Christopher, began operating their two stores in Centennial and Sheridan in late 2012. Their 20-year franchise agreement allowed them to open eleven more restaurants by 2022.
When the Baerns began raising their prices, ignoring Steak ‘n Shake’s distributed menus with its $4 meal promotions, corporate headquarters stepped in. The restaurant chain put the franchisees on notice that they would be terminated if they did not comply with corporate mandates on pricing. The Baerns ignored the warnings, stating they could not survive financially under the company’s set pricing. They contend the disagreement is about autonomy.
Steak ‘n Shake terminated the franchise agreement in early July, but the Baerns continued to operate their two popular restaurants, using company trademarks and signage. Steak ‘n Shake Enterprises, owned by San Antonio-based Biglari Holdings, immediately flexed its muscle. In-house counsel Tonya Sallee, with the help of attorney Frederic “Ric” Cohen of Cheng Cohen in Chicago, filed a lawsuit on July 19 in U.S. District Court in Denver in order to stop their restaurant operation under the family-owned Control, LLC.
“I am very confident they won’t be able to stop the franchisees and we will stay open as a Steak ‘n Shake franchise into the foreseeable future,” attorney Kannady told The Denver Post last week. Corporate headquarters did not respond to requests for an interview. In the chain’s lawsuit, they state they want the franchisees to “de-identify” from the company name, stop using logos and menus, and repaint and change the exterior and interior.
Steak ‘n Shake also asserts that the Baerns raised their prices up to $2.29 more than the chain’s mandated price allowed on certain items, and they did not offer Steak ‘n Shake’s $4 menu promotion. The franchisor claims in court documents that the special menu deal is what “helped it through a rough economic patch when it was losing $100,000 a day.”
Franchisees filed their response to the lawsuit, alleging Steak ‘n Shake has pushed them to the brink of failure, because it costs more to operate in Denver than elsewhere. They also state in their complaint that the franchisor made a number of misrepresentations about the potential success of the business, which they had invested more than $350,000. Now the Baerns claim they were misled by the company and their efforts to succeed are thwarted because of Steak ‘n Shake’s “iron-fisted requirement of uniform pricing.”
The Denver-based franchisees claim in their lawsuit that the company’s initial projections were for net profits in Denver to exceed 21 percent per location, an estimate later changed to say Denver locations should "easily achieve" more than 25 percent. They were told those profits would fuel development of the additional locations required under their agreement. The Baerns claim their problems began early on when they realized sales projections of more than $2 million annually were only half that amount. They contend food costs were deliberately understated. Not only was it 20 percent higher, they claim labor costs were also double the projections.
The franchisor has refused to answer any questions about the litigation.
John A. Gordon of Pacific Management Consulting group, a chain restaurant analyst, has studied restaurant franchisor pricing practices in similar circumstances, and has this point of view. "Virtually all US restaurant franchisors allow for pricing variability to meet market conditions and do not mandate pricing. The United States is way too diverse in demography, competition, and cost to build and operate for forced store pricing to work, today.” He said forced pricing would have been a 1960s era strategy.
Ed Shanahan, executive director of the Dunkin’ Donuts independent franchisee association recently said in an OpEd piece for DDIFO, “Without knowledge of all the details – or passing judgment on the merits – we thought it a perfect reminder that franchise relationships can get complex and both parties must make open, honest communication and good faith high priorities. They may not prevent disagreements, but are excellent ways to avoid costly and troubling litigation. It’s a good illustration of why we’re pushing fair franchising legislation.”
Previous litigation surrounding Steak ‘n Shake pricing policies
Steak ‘n Shake setting prices for its franchisees is an issue challenged by a franchisee in the past. In Stuller, Inc. v. Steak N Shake Enterprises, a federal appeals court found that the franchisor would likely violate the terms of its franchise agreements by enforcing a mandatory pricing policy on its restaurant owners. The court upheld an injunction that prohibited Steak ‘n Shake from terminating a franchisee for refusing to adopt the chain’s specified prices.
|Stuller v SNS Nixon Peabody Narrative Sept 2012.pdf||273.84 KB|
|SNS answer to PSPC complaint may 2013.pdf||47.78 KB|